Microfinance has proved its value, in many countries, as a weapon against poverty and hunger. It really can change peoples' lives for the better -- especially the lives of those who need it most. This article demonstrates a new trend in developing countries: that microfinance institutions are beginning to report better returns on equity than large banks.




Port-au-Prince's Rue des Miracles, near Haiti's shuttered parliament, is usually bustling with activity in its fume-choked lanes. In 2004, though, the area seemed rather quiet. The street vendors who usually clog its sidewalks moved away in fear of the running gun battles between Haiti's police and gangs allied with ousted president Jean-Bertrand Aristide, which became an almost daily occurrence in the capital.

In his office at the Banque de la Republique de Haiti (BRH), Haiti's central bank deputy governor Philippe Lahens surveyed the situation in which the country was left when Mr. Aristide flew into exile, following an armed rebellion and massive street protests against his rule in February 2004.

"The central bank was in very bad shape after Aristide," Mr. Lahens says. Haiti had no net international reserves after Mr. Aristide, who had widely been accused of corruption, went into exile. The public deficit was 3% of Haiti's GDP and the government had defaulted on two separate contracts designed to provide the country with electricity, totaling $12m.

According to the Economist: "Microfinance offers all the transactions you would expect in any branch of finance: loans, deposits, money transfers, insurance. It is distinct only because it involves amounts of money so small that in the past conventional firms did not think them worthwhile. That is clearly changing."

Economy Improves

Now, a year and a half later, despite continuing violence, the interim government of President Boniface Alexandre and Prime Minister Gerard Latortue - which is in place until legislative and presidential elections are held this autumn - has managed to stabilize the situation somewhat. Haiti's net international reserves are about $80m and the rate of exchange has been stabilized at about 35-40 Haitian gourdes to the dollar. Although inflation is still about 22%, the Ministry of Finance and the BRH hope to bring it down to about 12% by the end of this month.

"I think the unique challenge for the central bank in Haiti is to obtain autonomy from the government," says Mr. Lahens. A series of Haitian despots have viewed the institution as little more than their private savings account and historically the bank has had difficulty in establishing a sustained path for the country's economic well-being.

"With this independence, we will be more at ease to provide transparency and more at ease with the government in terms of the everyday running of the bank, in terms of the interest rate, the rate of exchange and depreciation of the gourde and other areas," says Mr. Lahens.

Haiti is not an easy place in which to run a financial institution. With 80% of the population living in poverty and more than two-thirds of the labor force without formal jobs, the traditional means of lending and borrowing do not apply. This has resulted in the rapid growth of a microfinance industry that leapt from social experiment to profitable financial model in very short order.

Group Lending

Though Haiti had a long history of peasant co-operatives, the first institution to target this niche of the financial market on a mass level was the Fondasyon Kole Zepol bank (Fonkoze), literally translated as the shoulder-to-shoulder foundation. It was created in 1994 by a liberation theologian priest Jean-Marie Vincent (slain by gunmen that same year) and another priest, Father Joseph Philippe, during the turmoil of the military government that ousted Mr. Aristide for three years during his first term as Haiti's president. Recognized as a foundation by the Haitian government in October 1995, it opened its first savings accounts soon after.

"Microcredit is a critical anti-poverty tool -- a wise investment in human capital. When the poorest, especially women, receive credit, they become economic actors with power. Power to improve not only their own lives but, in a widening circle of impact, the lives of their families, their communities, and their nations." - Kofi Annan, Secretary General, United Nations.

Based on the group-lending model, Fonkoze has peer-group borrowing whereby a group of five individuals agree to cover each member for any amount loaned to the group as a whole. Many of the clients are ti machanns, the name Haitians give to the market women who swelter under the sun, selling their wares on the streets of the capital and elsewhere.

The sums are modest. Each member of a group of five is eligible to borrow 2500 gourdes (about $64) at first, gradually working their way up to 50,000 gourdes each (about $1282). The results are profound, says Anne Hastings, director general of Fonkoze, speaking to The Banker in the foundation's office in Port-au-Prince. "Fonkoze believes that everyone needs access to financial services," says Ms Hastings. "In Haiti, where the unemployment rate is so high, everybody has to be a microentrepreneur. Our ultimate mission is to empower the people who are the have-nots in this society so they can contribute to the economy and can improve their lives and their family's lives; it's providing financial services but also accompanying them as they struggle to make their way out of poverty."

Branching Out

Fonkoze has largely paved the way for Haiti's commercial banks to branch out into microfinance, and now the foundation has 24 branches around Haiti (including rural areas where it is the only bank for many miles) and 335 employees. It services 67,000 active savings accounts and has 25,000 active borrowers. Each year, 7000 to 8000 people graduate from the bank's basic literacy and business skills training programs.

"If you want to be profitable as a bank in Haiti, you have to very quickly adapt your product to the reality of Haiti and to the fact that Haiti is a poor country, with a lot of poor people," -- Pierre-Marie Boisson, President of the Administrative Counsel of Sogesol

Pierre-Marie Boisson, president of the Administrative Counsel of Sogesol, the microcredit unit of Sogebank, Haiti's largest, was initially met with incredulity when, in his previous role as the bank's chief economist, he tried to convince his colleagues of the necessity for Haiti's most venerable financial institution to reach out to this huge section of the Haitian market. "There was skepticism, definitely," says Mr. Boisson.

He helped to launch Sogesol in 2000 from his office in Petionville, an affluent suburb in the hills above Port-au-Prince that is, like much of Haiti, ringed by shantytowns. "I was able to show to the board the business side of it and how profitable it was," he says. When Mr. Boisson joined Sogebank in 1991, out of 400,000 depositors, fewer than 3000 people were eligible to borrow from the bank. Now Sogesol's 8,000 clients (7,000 microenterprises and 1,000 workers' credit portfolios) comprise a substantial part of Sogebank's 250,000 depositors.

Banking on the Poor

"The poor were very good credit subjects in the sense that, not only were they good payers, but also they had more per-dollar profit than their formal competitors because they had a very high turnover," says Mr. Boisson.

He sought and received technical assistance from the Action International microfinance network to help launch his project. The network also became one of Sogesol's main shareholders.

"The poor were better able to utilize a dollar lent to them than a big business. There was an opportunity that was not being met by the banking system," he says.

Following Sogesol's lead, Haiti's five other main banks - Unibank, Socabank, Capital Bank, Banque Populaire Ha'eftienne and the state-owned BRH - created microcredit ventures.

"If you want to be profitable as a bank in Haiti, you have to very quickly adapt your product to the reality of Haiti and to the fact that Haiti is a poor country, with a lot of poor people," says Mr. Boisson, as market women scatter from the driving rain beneath his office window. "That's why microfinance has become so very important."




Reprinted with permission from The Banker. Originally published September 5, 2005.

To read another Global Envision article about microfinance, see Macro Success through Microfinance.

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