Principled Practices in Microfinance

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CRS has a niche in the microfinance industry, but we can lose sight, from time to time, of why we do what we do. This guide reminds us of the bigger why. It has two purposes for two audiences: First, it is an attempt to get those who are consumed with the "here and now" to glance up and remember why we are in the business of microfinance. Second, it spells out to newcomers, or even seasoned practitioners new to CRS, the principles that guide our work.

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<ul><li><p>Principled Practicesin Microfinance</p><p>Kim Wilson</p><p>MICROFINANCE</p></li><li><p>Principled Practicesin Microfinance</p><p>Kim Wilson</p><p>Catholic Relief ServicesMICROFINANCE UNIT</p><p>2001</p></li><li><p>ii</p><p>Published By</p><p>Catholic Relief Services209 W. Fayette StreetBaltimore, MD 21201September 2001</p><p>Catholic Relief Services (CRS,) founded in 1943, assists the poor anddisadvantaged outside the United States. CRS works to alleviatehuman suffering, promote the development of people, and foster charityand justice in the world. CRS assists the poor solely on the basis ofneed, not creed, race or nationality, and maintains strict standards ofefficiency and accountability. CRS currently operates in over 88countries and supports microfinance activities in 33 countries.</p></li><li><p>iii</p><p>Acknowledgements</p><p>Catholic Relief Services gratefully acknowledges thesupport of the USAID BHR/PVC in the publication anddistribution of this guide under CRS/USAID Matching GrantFAO-A-00-99-00054-00. The views expressed in thisdocument are those of the author and do not necessarilyrepresent the views of USAID. This document may bereproduced without notification, but please give appropriatecitation credit to the author and to Catholic Relief Services.Comments are welcome and may be addressed to CRSMicrofinance or the author at .</p></li><li><p>iv</p></li><li><p>vForeward</p><p>What are we doing? </p><p>We go through big pieces of our day with incrementalprogress on our minds. We are intent on the details and gettingthem right; we can lose sight, from time to time, of why we dowhat we do. This guide was written to remind us of the biggerwhy. It has two purposes for two audiences:</p><p>First, it is an attempt to get those who are in the thick of the here and now to glance up and remember why we are in this business of microfinance. Second, it spells out to newcomers whether they be new Microfinance Fellows or CountryRepresentatives, or even seasoned practitioners new to CatholicRelief Services those principles that guide us.</p><p>It draws on the work of our partners, on CRS managementstaff and CRS technical staff. It also draws heavily ondocuments1 in Catholic Social Teaching and the CRS JusticeLens. </p><p>Kim WilsonSenior Advisor</p><p>Microfinance UnitSeptember 2001</p><p>1 The CRS Summary of Catholic Social Teaching (Baltimore:CRS, August 1997);The CRS Justice Lens (Baltimore:CRS, November 1999); and Larissa Fast,Janis Lindsteadt, and Andrea Scharf (ed.), Applying the Justice Lens toProgramming (Baltimore:CRS, July 1998).</p></li><li><p>vi</p></li><li><p>vii</p><p>Contents</p><p>Section 1: The Big Picture . . . . . . . . . . . . . . . . . . . . . . . . . . . .1The Purpose of Our Work: Mission and Principles . . . . . . . .3The Roots of Our Work: Catholic Social Teaching . . . . . . . .5</p><p>Section 2: The Microfinance Sector . . . . . . . . . . . . . . . . . . . .11The Microfinance Sector: History, Trends and CRS Niche . .13How We Operate: Proven Methods . . . . . . . . . . . . . . . . . .17</p><p>Section 3: The Six Microfinance Principles . . . . . . . . . . . . .25The First Principle: Serve the Poorest Clients . . . . . . . . . .27The Second Principle: Link Loans to Savings . . . . . . . . . .33The Third Principle: Use Solidarity Guarantees . . . . . . . . .39The Fourth Principle: Practice Participatory Management . .43The Fifth Principle: Invest in Scale and Self-sufficiency . . . .47The Sixth Principle: Plan for Permanence . . . . . . . . . . . . .53</p><p>Final Thoughts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .59</p><p>Cover Photograph: Kim Wilson</p></li><li><p>viii</p></li><li><p>Section One: </p><p>The Big Picture</p></li><li><p>2</p></li><li><p>3The Purpose of Our Work</p><p>Mission and Principles</p><p>MissionOur mission in microfinance comes from our Catholic social</p><p>mission: to serve our poorest clients, to honor the dignity of theirwork, to advance their work in relation to their community, and tostrengthen our partners who work with them.</p><p>Reflecting our agencys commitment tosocial justice, our goal in microfinance is toenable the self-employed poor, especiallywomen, to access reliable financial services.To further this goal, we have focused ontransforming viable microfinance activities intopermanent institutions. In doing so, weconnect those who operate at the fartherreaches of the economy to the enduringservices of the financial mainstream. </p><p>The Client</p><p>Terecia fries dough and vegetablesand other delicacies on her stoveon a sidewalk near BMMS, a ruralbank in Java. Throughout times of</p><p>political unrest, the fall of thecurrency, and scarcity of resources,Terecia has continued this humbleeconomic activity. Over the years,</p><p>she has managed to save $2,000, orabout five times her annual income.She deposits her savings in BMMS,now owned by Ukabima, a CRS</p><p>investment company in Indonesia.Terecia is now part of the financial</p><p>mainstream. She can access loans andcontinues to save in the rural bank. </p><p>STELLAREXAMPLE</p><p>Guiding PrinciplesAs part of an agency-wide program quality</p><p>agenda in 1997, CRS microfinancepractitioners came together to agree on sixguiding principles. These principles describethe common values underlying our currentprogramming and provide the foundation for future programming.In 1999, we updated these principles to reflect new lessons fromour expanding microfinance sector. The six principles are:</p><p>Serve the poorest clients. To forward the CRS goal ofadvancing social and economic justice, we shape our services toserve the poorest communities. Women make up the majority ofour clients, as they generally have the least means to supportthemselves and the least access to credit.</p></li><li><p>4Link loans to savings. Credit and savings are bothimportant means to finance the growth of economic activities.We connect the amount lent to the amount saved to help clientsbuild wealth as they borrow. </p><p>Use solidarity guarantees. Group guarantees replacecollateral as a means to secure loan repayment. Solidarityguarantees link new loans to the repayment of old loans. Agroup of clients guarantees the loans of fellow group memberswith the understanding that no one in the group will receive anew loan until all loans are repaid. This strategy keepsrepayment high.</p><p>Practice participatory management. Democratic processesare key to empowering the poorest in a community. Clients aredirectly involved in the design, management and administrationof the services they receive, from creating by-laws to voting onloan applications to choosing repayment schedules. In this way,CRS includes those most affected by decisions in the decision-making process. </p><p>Invest in scale and self-sufficiency. The investment that aprogram makes in research, design, staffing and training iscrucial to its success. Achieving scale (reaching at least 5,000clients per partner) advances our mission to serve the poor. Weachieve self-sufficiency through efficient operations and bycharging market rates of interest.</p><p>Plan for permanence. Prior to launching a new program,CRS plans how the program will evolve into a sustainableresource for the poor. Permanence may include creating a formalfinancial institution, helping our partners transform programs intospecialized microfinance organizations, or consolidating pilotactivities and integrating them into larger local entities.</p></li><li><p>5The Roots of Our Work</p><p>Catholic Social Teaching</p><p>CRS asks all practitioners to assess excellence in our work inrelation to the broad themes of justice and Catholic Social Teaching(CST). Below are highlights of key CST principles Option for thePoor, Human Dignity, Community, Rights and Responsibilities, theCommon Good, Subsidiarity, Solidarity, andStewardship and the ways in which the CRScommunity of microfinance practitioners hasagreed to honor them.</p><p>The Family</p><p>In Ethopia, a borrower who lost herhusband, her three sons and threesons-in-law in the war with Eritrea</p><p>inherited a family of 18 dependents.Because of war and massive famine,</p><p>she had few remaining means ofsurvival. Yet, through perseverance,</p><p>she was able to create a web ofentrepreneurial activities from</p><p>trading in baskets and grain alcoholto animal raising and managing herown kiosk that allowed her to send</p><p>all the children to school and toclothe and feed them. How did shedo this? Through microloans from</p><p>the diocese of Wenji, through steadysavings, even in times when saving</p><p>was difficult, and by buying her way,with her microloan, into various local </p><p>rotating savings groups.</p><p>STELLAREXAMPLE</p><p>Option for the PoorThis principle argues that those members</p><p>of society with the greatest needs require thegreatest response and attention. Moreover,this principle applies to women as a whole,since they are the victims of a long history ofbeing treated as second-class humans, andeven yet suffer discrimination as women. 2</p><p>CRS microfinance responds by focusingservices on women. Three reasons compel usto do so. First, women are the principalvictims of poverty. Of the 1.3 billion peopleliving on less than $1 per day, 900 million arefemale.3 Second, women increasingly head uppoor households and are often the solesource of support. Third, studies4 have demonstrated thatwomen are far more likely than men to channel increased</p><p>2 Judith A. Dwyer, The New Dictionary of Catholic Social Thought (CollegevilleMN:The Liturgical Press, 1994), 757.</p><p>3 Microcredit Summit, Meeting the Challenge of Reaching the Poorest: One Yearof the Microcredit Summit Campaign, June 1998.</p><p>4 See, for example: Report of the UN Expert Group on Women and Finance:Transforming Financial Systems (1994).</p></li><li><p>6income from their business activities into essential benefits fortheir spouses and children, including improved health care,housing, education and nutrition.</p><p>Human DignityEach individual is a person worthy of dignity and respect.</p><p>Ones dignity is not related to ones race, ethnicity, gender, age,nationality, physical abil i ty, rel igion,economic status or any other potentiallydiscriminatory factor. Rather, it is aninalienable right that has been granted tous by the very fact of our human nature.5</p><p>In microfinance, we respond bydignifying the poorest clients with theservices they need to grow theirbusinesses. CRS gives borrowers thesame respect a traditional bank gives acommercial customer. We treat ourpoorest borrowers as clients, worthy ofprofessional services and able to putfinancing to good use.</p><p>The Village</p><p>The Zadruga, a multi-ethnic villagebank project, has broken withtradition and shattered myths in</p><p>Bosnia. In the city of Kakanj, the bankmembers had come from widelyvarying backgrounds: some were</p><p>refugees or displaced persons, otherswere returnees from foreign lands,</p><p>and some were permanent residents.Working together, these womenfound that they could accomplish</p><p>great things with small loans. Theyalso reported that forming a Zadruga</p><p>provided a way for people of allreligious backgrounds to get together</p><p>for the betterment of all.</p><p>STELLAREXAMPLE</p><p>CommunityHuman beings can only thrive and achieve their full dignity</p><p>in community with other people. People see their individualdignity and equality expressed and confirmed in socialsituations and relations how they are treated by society, bytheir community, and by each other.6</p><p>In microfinance, we respond by delivering financial servicesthrough group-based means village banking, Grameen bankingand solidarity group lending. These group activities rely on andstrengthen the web of economic and social connections that bind</p><p>5 The CRS Summary of Catholic Social Teaching (Baltimore:CRS, August 1997), 2.6 Closely paraphrased from The CRS Summary of Catholic Social Teaching</p><p>(Baltimore:CRS, August 1997), 4.</p></li><li><p>7individuals to each other and to their communities. </p><p>Rights &amp; ResponsibilitiesCatholic Social Teaching understands</p><p>human rights as moral claims that eachperson is able to make on a variety of goodsand necessities because of his or her humandignity. 7</p><p>Among the six categories of inalienablehuman rights identified by CST, two stand outas particularly relevant to microfinance: theRight to Life, which includes the right to aworthy standard of living and EconomicRights, where individuals have a right tomeaningful employment.</p><p>In microfinance, we fully acknowledgeour responsibility not only to recognize therights of individuals but also to promote their rights and assistthem in the same pursuit of a full life. 8 We respond by grantingeconomic opportunity to clients through provision of importantfinancial services and by supporting the very work that clientsdeem most meaningful.</p><p>The Household</p><p>In Lebanon, brothers and husbandsinitially repudiated village banking,deeming it inappropriate for womenand forbidding their wives and sisters</p><p>to join. Now that the women areprospering, they see the importance</p><p>of the service. Husun Aloud, ahairdresser, says, I feel the social</p><p>impact on the relationship with mybrothers, most of whom are joblessand are turning to me for pocket</p><p>money. I am now feeling respected,and I am making an importantcontribution to the household.</p><p>STELLAREXAMPLE</p><p>The Common GoodThe common good is understood as the</p><p>total of all conditions necessary economic,political, material, and cultural which allow allpeople to realize their human dignity and reachtheir full human potential... The common goodis best protected when the rights of theperson are preserved and promoted, and it isthe state which should be responsible for theprotection of our basic human rights.9</p><p>The State</p><p>In Cambodia, Bosnia, El Salvador,Bulgaria, Senegal, Vietnam andother countries, CRS is playing a</p><p>major role in shaping judicial andlegislative reform as it pertains to</p><p>economic services for the poor andoppressed. New regulations to</p><p>capture savings, lower capitalizationrequirements for microfinance</p><p>institutions and eliminate interestrate ceilings can make the difference</p><p>between distributing temporaryeconomic charity and creating</p><p>lasting financial services for the poor.</p><p>STELLAREXAMPLE</p><p>7 The CRS Summary of Catholic Social Teaching(Baltimore:CRS, August 1997), 3.</p><p>8 Ibid., 4.9 Ibid., 6.</p></li><li><p>8In microfinance, we respond by viewing our local role inconnection with larger social structures. We advocate forsystemic change in legal, political and government policies tofoster the institutions we support. Our hope is that financialservices for the poor may find a permanent home within thegreater framework of the local sociopolitical environment.</p><p>SubsidiarityJust as it is gravely wrong to take from individuals what they</p><p>can accomplish by their own initiative and industry and give it tothe community, so also it is an injustice and at the same time a</p><p>grave evil and disturbance ofright order to assign a greater orhigher association to what lesserand subordinate organizationscan do.10</p><p>In microfinance, we respondby placing the power to makedecisions with those who are mostaffected by the consequences ofthose decisions. The villagebanking method, our preferredmodel, relies on the community todecide the composition of thevillage bank itself and the natureof its services. </p><p>Our preferred strategy fordelivering financial services to a</p><p>community is to continue working through local partners untilsuch time that the partner no longer requires our sup...</p></li></ul>

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