ANALYSIS:Cynicism may be growing in proportion to bank bailout but some institutions are helping to change lives – for the better – across the globe, writes MAIRÉAD O'REILLY
GIVEN RECENT events in the Irish banking world, many have been inclined to ask: are financial institutions there to serve us, or are we there to serve them?
But while Irish people have some justification in feeling aggrieved, in parts of the developing world a new type of financial institution is flourishing and winning legions of new customers. In these institutions, looking after clients’ needs is the founding principle, not just a throwaway line in a marketing blurb.
Microcredit, the brainchild of 2006 Nobel Peace Prize winner Professor Muhammad Yunus, provides tiny loans to some of the world’s poorest people, particularly women. Yunus’s Bangladesh-based Grameen Bank gives loans as small as €40 to people to start small businesses. Investing the money in a few chickens, a loom or a rickshaw can have a surprisingly huge impact on income and living standards.
Prof Yunus has described credit as a “basic human right” – one that gives people the means to lift themselves out of poverty by generating their own income rather than depending on charity.
India has seen its microfinance sector grow rapidly in the past few years. Bandhan, a Kolkata-based microfinance institution (MFI) set up in 2001, now has 2.8 million borrowers on its books.
“Seventy per cent of people in India cannot access formal finance services like credit, so poor people have long been dependent on traditional money lenders who charge exorbitant interest rates”, explains Chandra Shekhar Ghosh, founder and managing director of Bandhan.
“Some can charge 1 per cent per day or 15 per cent per week.”
With the goal of releasing people from the clutches of loan sharks, Bandhan lends directly to borrowers at reasonable interest rates. Collateral is not a requirement but borrowers form groups where peer pressure acts as a kind of tacit guarantor. Group members support and keep a check on one another, ensuring that as soon as the loan has been repaid, the group can qualify for another.
Bandhan’s objectives are greater than simply providing loans. With its NGO arm, funded by the microfinance section, it aims to stop the social and economic exploitation of women by helping them become financially independent.
“Women need this money to improve their income, to provide food, education and health support for their children,” says Bandhan founder Chandra Shekhar Ghosh.
Research also shows that lending to women rather than men has a greater impact on a family’s standard of living.
Alpana Saha is a typical Bandhan customer. She took out a loan of around 12,000 rupees (€200) to buy new equipment for her business – a tailor’s shop in one of Kolkata’s slums. Her income doubled from around 10,000 rupees (€170) to 20,000 rupees (€340) per month. She now employs five people and both her children are attending school full time.
And despite living on the breadline, women like Alpana Saha are proving, in banking jargon, to be very “creditworthy”. MFIs all over the world claim to have higher loan repayment rates than most commercial banks.
Yet as investors and commercial banks are beginning to tap into this lucrative market, is there a risk that the integrity of microfinance could be compromised, setting us up for “subprime, the sequel”?
Not so, according to Chandra Shekhar Ghosh, as long as MFIs stick to their founding principles.
“Despite the fact that microfinance is becoming more and more commercialised, at Bandhan we still continue to perceive our work as a social endeavour.”
Today, microcredit is a global phenomenon, with the model being replicated and adapted to suit almost every country. Ireland is no exception. Norma Smurfit is chairperson and founder of First-Step, a private not-for-profit company and the country’s only MFI.
“When we established First-Step in 1991, the economy was as grim as it is today,” she says. “At that time, we wanted to play a role in creating job opportunities for the unemployed.”
First-Step provides microcredit loans ranging from €5,000 to €25,000 to individuals looking to start, or expand, small and medium enterprises.
Its main target is people having difficulty securing finance from the traditional banking sector.
“All of our clients must have been refused by a financial institution. If it is bankable, we tell them to go with the bank,” says Pauline Irwin O’Toole, chief operations officer at First-Step.
First-Step’s client profile has changed radically over the last 18 months. Whereas previously they tended to generally fund craft, trade and service-based enterprises, they are now beginning to see many highly qualified professionals coming through their doors.
“It is a very lonely kind of place setting up your own business”, says Irwin O’Toole. “And you have to remember a lot of these people would have been refused by a bank so the self-esteem has already got a knock.”
From India to Ireland, it seems that the secret of microcredit’s success is the great emphasis placed on relationships between lender and borrower, and between the borrowers themselves.
“We create a close relationship with our clients which is why we have a good repayment rate. We know if there is a First Communion on or if they are having problems and might take a bit longer paying the money back,” Irwin O’Toole says.
Having previously worked in the commercial banking sector, she finds her current position hugely fulfilling. “It is a lovely feeling to be able to know you helped somebody and they are so incredibly grateful. They just feel ‘you helped me out, I don’t want to let you down’.”
Hardly the usual sentiments directed at Irish banks these days.
Journalist Mairéad O’Reilly recently travelled to Kolkata, India, assisted by funding from Irish Aid’s Simon Cumbers Media Challenge Fund.