Nexus: Chapman's Journal of Law and Public Policy

In this economic meltdown and bailout season one forgotten segment of the world economy is the extreme poor and the issues and liabilities relating to their finances. This group may have fallen from topic of daily discussion but their affairs are concern to many economic NGO’s. Microfinance is used as a smaller scale village format of bailout in extremely poor regions in which credit is given to the community participants and thus by generating money and creating jobs the extreme poor are offered loans and relief. Microfinance is a form of outreach targeted towards villages or other groups of poor community based people by financing them to run businesses, engage in trade, production, agriculture and other possible means of generating income in the area. Bangladesh is a favorite destination for microfinancing NGOs. Microfinance services in Bangladesh have been successful with providing many households with credit. Currently approximately 1,200 microfinance institutions aid more than 13 million households across the nation. However, microfinance institutions are still criticized for their inability to reach the extreme poor. As the microfinance institutions grow in Bangladesh so does the population, therefore, it’s a constant issue of selecting the poorest segment of the society. It has also been argued that supply and demand are depth of the outreach problem, since microfinance service providers are not able to develop products flexible enough for the population and the extreme poor due to the lack of funds are not willing to obtain services due to its temporary nature of weekly savings and payments.

Concern is one example of a big NGO that supported microfinance projects for the extreme poor in the rural areas and urban slums of Bangladesh to achieve economic independence through empowering their own local organizations. Concern approached some developing new community based organizations with flexible savings schemes and credit for the extreme poor. Concern also applied the very successful Indian method in which the groups were eligible to obtain loans directly from a bank. Concern in partnership with Credit Development Forum, a national organization for microfinance organizations in Bangladesh, is working through more than 50 community based organizations. Through this projects many job opportunities have been created, outreach to extreme poor has become possible, and local capacity in the community has been increased.

However, there is major liability concern that NGOs involved in lending microcredit to the extreme poor use the funds given by the donors to invest in for-profit investment, thus mixing for-profit means and agents with non-profit business. While some have argued in favor of this process is widely believed to be unethical to see the poor pay for private profit. Because the microfinance system works through loaning to the poor the opportunity to charge interest creates the possibility for corrupt NGOs to take advantage of the poor in isolated areas. Thus there is a major issue of accountability involved.

References:

See generally Hassan Zaman, The Scaling-up of Microfinance in Bangladesh: Determinants, Impacts and Lessons. World Bank Policy Research Working Paper 3398, September 2004.

See generally Avrind Ashta, Mathew Bush., Ethical issues of NGO Principals in sustainability, outreach and impact of Microfinance: Lessons in governance from the Banco Compartamos IPO. A big scandal with a IPO and a Mexican microfinance company named Banco Compartamos as a secondary offering IPO where existing shares were sold at 12 times their book value. The increased book value was created by charging 86% interest rate to the poor through the microcredit project.