David Roodman strikes a balance in “Think Again: Microfinance,” a new article out this week in Foreign Policy. He gets to the bottom of five microcredit myths, which come from both supporters and detractors of microfinance.

With mobile money, Haitians are able to complete transactions like this one wirelessly. Photo: Karl Grobl for NetAid.

This article was republished by The Christian Science Monitor.

In Haiti, cash is escaping from wallets and savings accounts are breaking free from brick-and-mortar banks.

Two years after 2010’s devastating earthquake, mobile money has taken off in the island nation. While the country has seen setbacks in many areas and continues to struggle, one bright spot is the transformation of the country’s traditional banking sector. Physical banks were wiped away by the quake and subsequent hurricane, and a mobile banking network that uses cell phones has grown up in their place.

Toting your money around on a cell phone might sound scary, but for many Haitians it’s more secure than carrying around a wallet, which isn’t protected by a PIN. The handy infographic to the right shows how a mobile money transaction works.

How a mobile wallet transaction takes place in Haiti. Infographic courtesy Mercy Corps.

In the months following the quake, both Mercy Corps (our parent organization) and The Gates Foundation sponsored separate Haitian cell phone companies, Voilà and Digicel, to help mobile money take off, with the Gates Foundation offering monetary incentives for the first company to get a program off the ground and for continued improvements in order to get entrepreneurial engines revving.

For many Haitians, mobile money can open a door to personal choice. Mercy Corps has used mobile money to distribute food aid to families across Haiti and deliver payments from its cash-for-work programs. Instead of spending hours waiting in line for a cash payment or a food ration, Haitians receive a wireless money transfer on their phones once a month.

The technology holds promises for the future, too. Long-term, mobile money could be expanded so that it’s accessible to everyone for all of their personal purchases. Haitians could use mobile money to send remittances to family members in other parts of the country, according to AudienceScapes. And after visiting with Mercy Corps staff in Haiti in 2010, New York Times columnist Nicholas Kristof wrote about the way that mobile money is creating a way for the poor to save money like never before. Most banks won’t accept very small deposits, but now a mobile phone could double as a savings account. It could blow the microsavings sector wide open.

Mobile money could also help make Haitians healthier. Even before the earthquake hit, Haiti’s public health indicators were the worst in the Western hemisphere, according to the U.S. Department of State, and those problems were only compounded by the disaster. In Kenya, one of the first countries to adopt mobile money, customers can use it to pay - and save up for - health services. Expectant mothers use it to save for health care, and in rural communities Kenyans have used the service to pay for access to clean water, reports USAID. Looking forward, a mash-up of mobile health and mobile money technologies in Haiti could lead to new insurance plans and health voucher programs, according to Health Unbound.

With mobile money quickly gaining widespread use, the developing world is leaps ahead of the developed. Mobile money launched in Kenya in 2003, according to The National Archives, but Google Wallet’s similar service in the U.S. wasn’t released until September of last year and has yet to truly take off. Maybe it’s time for American company executives to start taking a few pointers from Haiti.

Village savings and loan schemes help the poor save in remote communities like this one in Malawi. Photo: Erik Mandell for MercyCorps

The world's poorest have long struggled to borrow. Now, an alternative microfinance model is also making it easier for poor people to save.

Microfinance institutions have provided lending services to millions of the world’s poor people for several decades. But loans must be paid back, and even traditional microlenders are hesitant to lend money to the poorest of the poor—including those living in some of the most remote and unpopulated communities. That’s where the model of village savings and loans associations (VSLAs) comes in, according to a recent Economist article.

The idea is simple: savings, rather than just borrowed money, is key to helping poor people become more stable and less vulnerable. Differing from the better-known Grameen Bank model of microfinance, which provides individual or group loans and operates on credit, a village savings and loan scheme allows a group of community members to pool their savings, lend within the group, and save the interest earned from the loans to disperse to members individually or use for community projects.

This model enables both borrowing capabilities and longer-term savings accumulation for both the group and its members.

CARE International, a humanitarian aid organization focused on fighting poverty, engineered the VSLA model in Niger in 1991. Today, CARE oversees village savings and loan associations in Ghana, Malawi and Uganda. Numerous other non-governmental organizations have promoted village savings groups that serve more than 4.6 million members in 54 countries.

While nonprofits promote the model, the groups themselves are internally managed. Unlike solely credit-based models, group members do not owe repayment to an external bank, but rather to their own pool. Group constitutions are established by members, outlining rules, interest rates, and how savings and interest will be shared. Sometimes transactions, debts and credits are written in basic ledgers, but some groups with no literate members rely on memorization, familiar to those with a culture of oral history, according to Hugh Allen, founder of VSL Associates.

Amid criticism of the effectiveness of traditional microfinance models, as we reported a few months ago, VSLA schemes offer a different path to poverty alleviation.

And for some of the world’s poorest, savings—not a loan— is the golden ticket needed for a better life.

Erik Mandell is a graduate of Middlebury College in Vermont. He is currently pursuing a master's degree in public administration and global leadership at Portland State. Read his other contributions to Global Envision.

Candles provide a light in the dark for those without access to electricity. Photo: Sara Y Tzunky

Is microfinance the solution to energy poverty? If partnered with renewable energy, it could prove to be true.

Energy poverty—a lack of access to electricity, fuel and more efficient cooking technologies—affects over two billion people, according to the United Nations' Rebeca Grynspan, making it a huge development priority.

Living without electricity simply makes you poorer. Kerosene lamps are expensive, ineffective and fill a home with hazardous fumes. But without a lamp, it's impossible to work or study after sunset. Cooking over an open flame pollutes the lungs and requires hours of wood-gathering, a huge loss of productive time. This is where simple solutions (like more efficient cookstoves) can yield huge impacts.

As a weak economy shrinks international funding pools, countries need to be increasingly wiser and more creative in their resource management. It’s worth noting that a lack of infrastructure presents the rare opportunity to build right the first time. By funding sustainable energy initiatives through microfinance, two things can happen: (1) Programs aiming to reduce energy poverty can work closely with locals and make more informed decisions by relying on indigenous knowledge; and (2) Money stays in the local economy, creating avenues for future investment and wealth generation.

Mercy Corps is combining these two endeavors to address energy poverty. The organization's Energy for All (E4A) program, funded by the European Commission, began in May 2011 in the country of Timor-Leste. It's primarily focused on lighting, cooking fuel needs and natural resource management. Because the population of Timor-Leste heavily relies on crops for fuel, food and income, they are especially vulnerable to shocks. Without access to energy, their problems are exacerbated, true for most poor people in developing countries.

Mercy Corps utilizes a market-driven approach to address energy poverty issues: By remaining external to the market, they strengthen the local economy and seek to create linkages where gaps in service exist. Simply donating materials or stoves undermines local businesses and acts as a disservice to the community. But upfront costs of adopting new technologies is often a major barrier, so Mercy Corps is partnering with microfinance institutions in Timor-Leste to initiate loans.

Mercy Corps' comprehensive survey compiled and assessed the needs of local households, to paint a clear picture of the specific needs and challenges of the community. The outcome is a program design that will implement solar power, improved cook stoves, seed storage and sustainable forestry initiatives.

And a performance tool developed by the Grameen Foundation, the Progress out of Poverty Index (PPI), will help local microfinance institutions determine whether the services they provide are effective or not.

Additionally, the E4A program is establishing alternative energy centers that will demonstrate their sustainable business models to the local market, with a special focus on rural off-grid areas.

I had the opportunity to visit Soft Power Health in Kyabirwa, Uganda, an organization testing an improved community cook stove. Access to a seemingly simple cook stove not only improves the health of the user but requires less fuel and reduces cooking time. By easing access to tools like this, the group is educating the surrounding community with hands-on instruction and use, the first step in technology adoption.

The concept of energy poverty received international attention last year when the UN announced that 2012 is the International Year of Sustainable Energy for All. They are seeking opportunities to scale up efforts that will achieve universal access to modern energy services. As part of the Millennium Development Goals, the UN has set a target date of 2030.

That's an ambitious timeline for getting electricity to everyone, and it's unlikely to happen without the for-profit sector. This makes it imperative that governments, lenders and non-governmental organizations implement market-based solutions that allow communities to lift themselves out of poverty through developing a robust local economy. Microfinance-backed renewable energy can be the first tool in this process.

Many organizations are taking the lead in implementing energy innovations where the need is great. What other programs and innovations d you know of that address the needs of people without energy access?

A foreign domestic worker looks after her elderly client. Photo: Jerry Wong (flickr)

From low-tech light bulbs in the Philippines to microfinance in Nicaragua, our team of young writers covered lots of ground this year.

Here's a rewind on the themes that struck the strongest chords with readers, and the money quote from each piece. As we head into 2012, odds are that these big ideas will keep resonating.

Lack of electricity is a huge barrier to overcoming poverty by
Megan Kelly, Feb. 10:

As long as those hundreds of millions remain in the dark, they will remain poor," and yet bringing electricity to areas that have none lacks global funding and attention. It's not even part of the Millennium Development Goals.

Megan made a sweeping case for attention to energy poverty, a theme we've continued to cover.

Microfinance isn't a magic bullet by Laura Mortara, Jan. 24:

And any situation involving loan and credit is dangerous, especially when people are allowed to borrow irresponsibly. The failure of microfinance in India is largely due in part to MFI's shifting their focus from non-profit to profit-making industries and the corruption that follows thereafter. In addition to this, microfinance in India expanded way too quickly without the experience or infrastructure to support it.

Laura rounded up the previous year's run of bad news about the microfinance sector with a wealth of links to the best coverage.

Used soda bottles light up the world, for free by Brynn Opsahl, Aug. 18:

A used plastic bottle filled with water and a touch of bleach is placed in a hole of a tin roof. For up to five years, 50 watts of light fill up the once-gloomy windowless shack any time the sun is out

Brynn's look at this shockingly simple, effective idea was one of several articles to land in the Christian Science Monitor as part of a partnership we forged with them this year.

Does China's rise mean U.S. decline? by Chris Sharp, Feb. 4:

According to a recent poll by the Pew Research Center, 44 percent of Americans believe China is already the world’s top economic power, compared to 27 percent who think it’s the U.S.

Chris's piece rebutted the popular cliche about China's looming global power, drawing on a post by Foreign Policy's Daniel Drezner to argue that the U.S.-China relationship is about interdependence, not domination.

The female remittance economy: A hidden global network of mothers and money by Eliza Slater, May 11:

Remittances are a significant part of an unofficial global aid network, worth $325 billion last year. That’s three times the size of official foreign development aid spending.

Eliza zoomed into the human scale of some staggering numbers, showing how shipping cash to one's relatives abroad has become, among other things, an important part of modern femininity around the world.

As we mentioned last week, Global Envision is planning some big new initiatives in 2012. Stay tuned—we're looking forward to talking with you about whatever comes next.

Muhammad Yunus, Bangladeshi Economist and founder of the Grameen Bank. Yunus is credited with popularizing the mircrofinance model. Photo: World Economic Forum(Flickr)

The 2011 Global Microcredit Summit convened last week in Spain amid growing concerns that microfinance might not work as advertised.

The Microcredit Summit Campaign promotes microlending to the world’s poorest familes—and especially to poor women--as a means of poverty alleviation. However, there is a growing global debate over whether microfinance actually lifts people out of poverty, as organizations such as The Microcredit Summit Campaign claim.

Critics point to India’s microcredit crisis and call it a myth that everyone desires to be an entrepreneur. As James Surowiecki argued in the New Yorker, “in any successful economy most people aren’t entrepreneurs--they make a living by working for someone else.” For many, a bank loan will be the best route out of poverty, particularly in the agricultural sector where that loan can help families increase their crop yield or add a new cow to the herd. But others are simply looking for a regular paycheck, like the millions of families making their way in urban area. Furthermore, as Interpress News Service reports, many borrowers feel that they have been taken advantage of by microfinance lenders that charge high interest rates for the small loans, without an additional suite of poverty-alleviation services (like providing business training and financial literacy workshops) to make the interest rate worth it.

Globally, microcredit still remains the most widespread tool in poverty alleviation programs, but more people are beginning to point to its weaknesses and suggest reforms. Others suggest a wider variety of programs aimed at increasing poor people’s incomes and job opportunities.

Microgrants serve the same populations as microfinance lenders, but fund projects that engage whole communities rather than individuals who are unlikely to generate jobs and alleviate pressing social problems. The microgrant accomplishes something different than microloans—social sector projects that benefit whole communities rather than single entrepreneurs or individual businesses, as Marcia DeSanctis reported in the Huffington Post. And microgrant projects are proposed and developed by local people who are intimately familiar with the conditions in the communities they live in—not by foreign "experts."

The global microfinance community is going through a transition as more and more researchers conclude that microcredit is not a ‘magic wand’ against poverty.

Check out what over five years of Kiva microlending looks like:

The video was put together by Kiva’s staff, who cleverly termed it “Intercontinental Ballistic Finance.” It’s pretty neat to see how microfinance can cross geographical and political borders to connect far-flung parts of the globe.

As time passes, you see that more and more parts of the world join in the lending game. And it’s not just the Western world; loans come from cities all over, including Singapore, Hong Kong, and Dubai. You can also see through the nifty color-coding system that the types of loans come in waves: the screen flashes blue, red, and sometimes it’s a multicolored hodgepodge.

Kiva Microfunds is an American non-profit organization that allows anyone to make microloans to entrepreneurs around the world. The loans are then repaid over time. Since its launch in 2005, Kiva has loaned $241,348,975 to 625,153 people in 60 countries, and its repayment rate is 98.86 percent, and The New York Times’ Nicholas Kristof included the organization in a 2010 list of the best ways that individuals can make a difference in the world.

Margo Conner is a senior at Lewis & Clark College in Portland, Oregon, majoring in international affairs. Read her other contributions to Global Envision.

This Sri Lankan woman was able to start a broom-making business with help from microfinance. Will the economic crisis limit these opportunities? Photo: Michael Foley: flickr

Microfinance institutions (MFIs) are going to be badly hurt by the global financial crisis. Or will they? Reports and opinions differ widely.

Some argue that the financial crisis has hampered small-scale lending.

One reason is that the value of local currencies are fluctuating too much, relative to more stable currencies like the U.S. dollar or Euro. Because of this, many MFIs are having to either seek new loans or convert existing loans into these "hard currencies." Over the course of these loans, many local currencies continue to devalue — leaving MFIs on the hook to make up the difference.

On top of this, interest rates on loans that MFIs need to fund their operations have increased. Survey findings reveal that 41 percent of MFIs are now taking loans at higher interest rates than before the economic crisis. Financial columnist Sarah Bauerle cites this as one of the crisis' "deleterious effects" on the microfinance industry.

Then there's the issue of available funds.

Roy Jacobowitz, managing director at the microfinance nonprofit ACCION International, says "a liquidity crisis is the very worst-case scenario for microfinance institutions."

Others say the credit crunch could actually be a good thing for MFIs, while some add that the funding spigot is still on.

"There is evidence that microfinance is resilient to global market movements, compared to traditional lending, as it falls outside of the mainstream economy. And there does still seem to be equity available for microfinance," says Mary Ellen Iskenderian, CEO of Women's World Banking.

Iskenderian cites India as an example, though it's worth noting that India is weathering the economic crisis incredibly well.

Investors are still banking on microfinance. The privately owned Oikocredit increased microfinance investment by 32 percent in 2008.

Muhammad Yunus, who pioneered microfinance in Bangladesh and won a Nobel Peace Prize for his efforts, remains optimistic. He said in October that he sees "good news in the middle of all these bad news: microfinance still works."

Lucy Conger's story "The Big-Country Enigma" examines why micro-credit has flourished in smaller countries like Peru and Bolivia while remaining somewhat small in scale in countries such as Brazil.

Does both over and under government regulation stand in the way to microfinance?

Business Week's "The Ugly Side of Microlending” presents a seemingly untold story regarding microfinance. Many (if not all) in the aid and development sector laud the triumphs of micro-credit for the world's poor; and, in truth it has been a driving force for positive change in a number of people's lives. However, when there is a profit to be made a variety of more unsavory business practices arise.

Keith Epstein and Geri Smith do a great job of investigating the variety of for-profit banks that operate within Mexico, painting a bleak picture for unsophisticated and largely uneducated borrowers. Drawn by lack of regulations and a government bogged down by corruption Mexican banks are charging anyway from 50% to 120% annual interest on loans.

So, what does that mean exactly? After a 104 week payment plan of $23 a month, an average borrower will end up paying more than double for a $1,100 Whirlpool refrigerator. What's more-- large corporations such as Wal-Mart are moving onto the scene, having obtained their Mexican banking license last year.

The flip side of microfinance is one that should receive more attention. With the advent of micro-credit to the world's radar screen one cannot blithely assume that all lending institutions are created equal. So what's the answer? More regulation? Increased education? I suppose one cannot discount that America has similar institutions-- the Pay Day cash lending services that frequently appear in strip malls often invite sharp criticism domestically. Either way—it seems clear that for profit banking institutions charging astronomical interest rates seem to be perpetuating the very poverty they are supposedly attempting to alleviate.