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A Proposal For Sustainable Development Through Microfinance

1937 words - 8 pages

A Proposal for Sustainable Development through Microfinance

The following proposal synthesizes from the history of the microfinance industry, particularly its successes and failures, a model for developing a sustainable microfinance initiative. Central to this synthesis is the analysis of the strengths and weaknesses, challenges and opportunities, and characteristics of three well-managed microfinance institutions (“MFIs”): Grameen Bank (“Grameen”), Compartamos, and Friendship Bridge (“Friendship”). These analyses highlight the strategic leverage points – business strategies, organizational structures, financial reporting transparency, performance measurements, and organizational objectives – that determine the success of microfinance initiatives. These strategic leverage points, in turn, shape the framework for developing a prudent microfinance initiative.

Microfinance evolved from Muhammad Yunus’s poverty alleviation strategy of microcredit – providing small non-collateral short-term loans to the poor. In short, Yunus founded the microfinance institution Grameen Bank after a successful experiment of providing loans to poor women in Bangladesh revealed the poor are capable of repaying debt obligations at a high rate and can benefit from access to credit. The high repayment rate, approximately 98% according to Yunus, meant that a commercial bank could become financially sustainable while providing loans to the poor as a method of poverty alleviation. Furthermore, access to credit provide the poor with the capability to ascent from poverty. Grameen’s rapid success lead to the popularization of microfinance’s ability to alleviate poverty and, consequently, provides valuable insights in effective microfinance business strategies, organizational structures, performance measurements, financial reporting and organizational objectives. Furthermore, Grameen’s weaknesses and challenges – that led to its organizational restructuring from the Classic Grameen model to Grameen II juxtaposes divergent business strategies – provide valuable insights in developing a sustainable microfinance institution, organizationally and financially.

Grameen’s development goal – providing credit to poor women in order to break the intergeneration poverty cycle leading to social change and economic choices – provides the central framework for its business strategy and performance measurements. Specifically, Grameen established multiple loan products to address client specific needs, replicated the pressure to repay from collateral with group lending, developed a lending culture with its “16 Decisions”, and prioritized routine public meetings between loan officers and clients to establish a trusting relationship, ensure repayment, and provide business training services. In addition, due to the demand of its clients and to create a financially sustainable organization, Grameen became a special bank charter capable of providing savings in addition to its loan products. In...

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