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The Microfinance: Theoretical Foundations and Evolutionary Tendencies Pasquale Stefanizzi, p.stefanizzi@economia.unile.it University of Salento, Italy

Abstract From the half of the last century, as a result of the strong impulse offered from the theoretical research and meaningful evidences of the empiricists, the biggest international institutions dealing with development have increased their interest towards this topic in consideration of the fact that microcredit and microfinance are useful instruments to fight poverty in the PVS. In Europe and in the western countries too, the interest has grown towards microfinance. In particular, the dilemma faced by the academic world, together with the facts that operate in the field, have contributed to considering the adoption of the theoretical models of reference to the different associate-economic contexts, going also beyond the borders of the PVS, strongly industrialized and that are in reality far from the standards of poverty of the countries in the south of the world.

Methodology In order to collocate this topic in the wider economic field, a review on the relation between the microcredit and the microfinance with the other economic-financial disciplines has been inserted. In particular, it is necessary to inquire the economic literature with reference to the following three aspects: • the birth and the development of traditional studies centred on the theory of the well-being economy that justifies the existence of capital assets transfer in favour of the underdeveloped countries, • the markets’ friction elements (Principal agency theory) that demonstrate the necessity of the participation of the intermediaries in the exchange of the capital assets, • the inability of the credit institutions to perceive and satisfy the requirements of the poor and the consequent birth of the informal finance as an alternative instrument in order to satisfy their necessities of credit. This research followed this methodology: - inserting the slight knowledge of microcredit and microfinance in the general economic theories, identifying their operating implications and the peculiarities of the institutions that adopt them in the enterprises, banking and financial management theories; - explaining the basic principles of the microcredit model used in the LDCs; - canvassing the elements of the widening micro credit services and the starting of microfinance initiatives1; - analyzing the international data that characterize the capacity of the phenomenon, not only in the LDCs but also in the industrialized countries. In the second part of the paper, in order to re-edit the data referring to the general course of the microcredit change rate, statistical tools have been used. I employed the annual variation rate of the microcredit programs in the world as the proxy of their growth speed and the relationship between the customers and the programs activated as proxy of the dimensional growth of the interventions; ultimately, the relationship between poor and customers has been calculated, in order to verify the attitude of the microcredit to satisfy the requirements of the poor and, therefore, if it constitutes really an instrument of fight to the poverty.

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Position of the Microfinance in the Economic Literature The Microfinance in the Theory of the Development Economy

There are different elaborations about microfinance in the scientific literature, because of the interdisciplinary nature of the topic, the financial grip interrelation between development and the real national economic growth (Gurley and Shaw, 1955 and 1967) and of the importance of the credit function for the attainment of the economic selfsufficiency of a country (the microfinance, in fact, is considered a useful instrument of fight to the poverty). The requirements necessary to the increase and he endogenous development of a LDCs are: • centrality of the asset’s domestic market; • strategies of the monetary market inner choices; • definition of the interest rate in relation with the effective money availability of a single nation (McKinnon, 1973). In order to identify the fields and the importance assumed by the microfinance in the break-out of the economic and social underdevelopment of a country, it’s useful to review the most important theoretical features of the economy of the development. The most important contributions in the economic literature have consequences that the monetary transfers, operating in the main world-wide organizations helping the development2, have produced in the economies of the unprivileged countries. When the aids are consider like a whichever exogenous increment of the national yield and, therefore, allot between the savings and the consumptions in reason of the liabilities of every country, it comes that: - The native saving are useless and negligible, - The development is strongly linked to the capital incomes from abroad and is inadequate in relation with the employed resources (Griffin, 1961 and 1970). Newlyn (1973) criticized the previous statements, on the base of the following observations: the capital income from abroad has remarkable multiplier effects on the internal revenue and, consequently, has positive recoils on the endogenous level of the savings; moreover, the possibility of berth the aids to precise investments are always underestimated. The so called duty-bound aids impose to a country to save a quota of the revenue growth higher than the bare tendency of a country to the saving. Moreover, the duty-bound aids are linked to an immediate use of the inner resources and, therefore, an eventual and limited worsening of the economic conditions of the objective country in favor of a development on the long period3. The use of the microfinance as an instrument of fight to the poverty showed, therefore, the importance of the local saving for the achievement or the failure of an aid program; theoretical evidences and empiricists have underlined that4: o The auto-development of the local intermediaries, through the mobilization of the inner resources, frees their activity from the resources of the international cooperation (auto-sustainability), o The adaptation of the credit in relation to the absorption abilities of the local entrepreneurial field concurs to exceed the problem of the surplus of the credit deriving from the one-sided intake of external aids, o Consequently, the intermediaries can run the best credit management and entrust the financing on the base of the merit system. There are also other interesting contributions beginning from the ascertainment that, although in the Sixties and Seventies there were satisfactory growth rates of the PIL in some LDCs, poverty didn’t diminish; this is the reason why the attention of the scientific community moved to the reasons that lead to the poverty and the contribution of the credit to its overcoming. In the Eighties, the Washington consensus strand developed; it is based on the Government behaviour approach, as a result of the following problems: 1. Public debt crisis and inability of the governments to respect the loan deadline, 2. The aids are not able to improve the living standards of the poor countries, 3. Soaring unfairness in the wealth distribution. The Government behaviour approach analyzes the effectiveness of the aids on the base of a rigorous analysis of the variable fundamental for the determination of the behaviour of the beneficiary governments (Heller,

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1975); this analysis has the aim to promote the importance of the markets and prices liberalization, the subsidies removal and the promotion of the private entrepreneurship. In contrast with the post-Keynesian theory that considers the development as an automatic reaction to external stimuli, the growth of a country is interpreted like the result of the removal of ineffective and inefficient social structures. The most important international development associations, in primis the World Bank and the International Monetary Fund, started programs of structural adjustment and the aids typology. The Microfinance in the Financial Intermediation Theory

The microfinance finds valid theoretical foundations also and above all in the financial intermediation theory and, therefore, in the mastery that legitimate the existence of the financial markets and the intermediaries. If necessary, it is remembered that the informative asymmetries and the transaction costs generate inefficiency in the financial resources direct exchange between lenders and borrowers and justify the presence of dealer settled to the credit management. The microfinance institutions affected in evolutionary way regarding the classics credit outlines, succeeding in enter those poor countries and concurring with the so called active poor to obtain credit and to get a social redemption. The information is asymmetric when the important base of acquaintances is not shared between the individuals that participate to the exchange process that is when only a part of the interested agents (principal) has more information with respect to the rest of the participants (agent). The investor can also endure the ulterior risk of opportunistic behaviours (moral hazard)5 from the betterinformed counterpart that can , therefore, take advantage from this informative surplus. The negative effects of the informative asymmetry are amplified when the financing is demanded for new unforeseeable plans, since, in such case, only the entrepreneur knows the real risks and of the investments returns (Pagano and Panunzi, 1997). According to many scholars, the presence of informative asymmetries in the financial exchanges is a congenital phenomenon that derives from the natural availability of smaller information by the givers of resources regarding the beneficiaries (Mottura, 1991). The conclusion of the contract, moreover, does not determine the simultaneous symmetry of the information; the investor, in fact, remains, until the loan deadline, in the risk of discretionary and opportunistic behaviours from the best – informed counterpart. The asymmetry in the acquaintance can induce also the funds borrower abstaining from the exchange for because the so called adverse selection6 process and that, in conditions of appraisal inability of the activities, lead to the arrest of the market (Arrow, 1963; Akerlof, 1970 and Eisenhardt, 1989). All the burdens that a subject supports in order to carry out and to manage an exchange is called “transaction cost�, which is absent in a perfect market in which the actors of the demand and of the offer are rational, informed and are not exposed to risks; it is present, instead, in imperfect markets characterized by uncertainty and limited information and rationality. The most frequent expenses in the definition of the transaction cost are relative to the search of exchange opportunity, to the search/purchase of the information, to the appraisal of the reliability of the potential counterpart, to the different exchange opportunities assessment, to the exchange execution, the risk assessment and the exchange management (Boscia, 2002). The financial deepening theory, having reference to Gurley and Shaw, for the first time focused the attention on the nexus between the financial activity and the transaction and information costs, demonstrating that against costs equal to zero there are economic potentialities for the genesis of an indirect asset market. The total dimension of the financial phenomena and the articulation of the subject that concur efficient shapes of risk distribution are the base, moreover, of the economic development. Subsequently, also other authors have deepened the argument of the financial intermediation explaining that its existence is justified just with the necessity to diminish the transaction costs and, in particular, the costs of search contracting parties asserting that the banks can be considered like manufacturers of services finalized to the reduction of the transaction cost (Benston and Smith, 1976).

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The Evolution of the Informal Finance

The financial systems of the LDCs (in which the microfinance is been born and has been developed) preview the existence of a double structure of the credit circuit, which is based on the co-existence of the formal finance or institutional finance and the informal finance (Mauri, 1966). There is also the semi-formal field that comprises the informal institutions that are waiting for a public acknowledgment and all the transactions that involve at the same time the formal and the informal finance. The formal finance institutions existing in the LDCs, as well as those localized in the western countries, have the following characteristics: - they are subject to rigid rules of structural, prudence, informative vigilance and inspecting and to the supervision of the central bank (Viganò, 1996), - they follow the classic credit outlines, which count on the friction elements reduction in the financial resources exchange (informative asymmetries and transaction costs) through the levers: of the rise of the interest rate against the greater risks, of the emission of the reliability judgment on the base of the personal and patrimonial guarantees, of the standardization of the often inadequate credit tools with respect to the micro entrepreneur requirements. The informal finance7 is the “container” of the operators, of the intermediation operations and the non regulated and not controlled by the public rules markets. The informal finance activity is apart from the public legislation created to give the operators some guidelines; it follows, instead, the traditions and the customs recognized by the native environment and conforms to the typical cooperative behaviour of the LDCs (Adams and Fitchett, 1994). Among the actors of the informal finance there are all the individuals and agencies that, for different reasons, lead systematically financial intermediation activities or that offer financial and insurance services without having any preventive authorization or licence by the central bank and/or by other authorities and without being subordinated to the vigilance control by the competent organs; there are, moreover, the operators involved in simple mediation processes or the exchange operations (Karkal, 1967 and Krishnan, 1979). The target of the informal finance is into the marginal bands of the population that is those people which are not interested in the formal finance. For this reason some scholars consider the informal finance like the popular, spontaneous and creative answer to the inertia or the absence of the State, to the inefficiency of the monetary regulation, to the credit rationing and the iniquity of the formal finance (Shem and Alieno, 2001). The acting of the informal finance actors is based on the proofed outlines, on procedures consolidated during the years and on the reliability, meant not only as the ability to obtain the esteem of the counterpart, but also as the ability to preview and to estimate the behaviour of the third party (Mauri, 2000). Empirical facts demonstrated, moreover, that the women, usually excluded because of social and religious reasons from the active economic life, are instead the privileged customers of the informal finance. The objective of the credit risk control of every credit operation, in the informal finance (above all in the cooperative organizations) derives from the established long-lasting relationship with a narrow group of customers, that remains unchanged for years or, in some cases, for the entire duration of the activity. The organizational structure of the informal finance operators is complex and, at the same time, flexible since it is able to adapt itself timely to the local and international environmental changes; this kind of modifications are often due to the process and product innovation (new financial tools and new financial institution’s organizational orders) and are potentially in the position of being reflected positively on the community in which the operator of informal finance operates, determining the social-technological increase. The respect of the customary rules, acquainted by the entire community, generates, moreover, an exhaustive and rigid social control8 to advantage of the informal lenders (Mauri, 1986). The creation of new financial products is not derived by the imposition of models different from to the aboriginal situation; the information acquisition model, the bottom-up type, determines in fact the timely creation of tools derived from latent requirements of the customers and perceived by the informal field thanks to the continuous informative flow that alloy giver and assets borrower. The informal field quickly intercepted the important foreign currency monetary flows, deriving from the tourist field evolution and from the migrant living in the western

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countries. The fosterage and approval demands, however, are often oral; there are not papery modules to underwrite neither oppressive clause to read and to comprise (Holst 1985). Bank services do not exist, and the informal finance actors have to reach the borrower at home or at work or in the public square of the city. Against of that maximum discretion is granted of the operations and the needed amounts which, given to the customers typology (families and micro entrepreneurs) are usually modest. The loan concession, the reimbursement and the re-negotiation are flexible. It is also interesting to analyze the operators modus operandi in the informal finance for the informative asymmetries and the transaction costs reduction. In the informal finance the informative asymmetries are remarkably inferior with respect to the typical asymmetries of the informal intermediaries, because of the straits interpersonal relationships, the deep customer acquaintance the strict social sentences that characterize the informal financial markets (Sarker, 1999). The informal lenders prefer, moreover, to maintain the customer number stable, not only for the credit risk control, but also in order to avoid those informative asymmetries typical of the expansion activity. About the transaction costs, the level of the informal finance is lower than that of the formal operations (Mauri, 2000). The reasons must be attributed to the: - Different complexity of the financial technologies, - Simplification of the contracting procedures, - In-observance of many implementations of the formal finance, for example the payment of the tax burdens, unprofitable deposits in the central bank. The interaction between the transaction costs, the informative asymmetries and the credit rationing in the poor and decentralized markets provokes an ulterior disadvantage in the access to the credit by the active population lower levels. The possibility to fix lower values in the active interest rate levels by the public authorities (justified by the hypothetical will to facilitate the access to the funding system), compared with the markets, produces quantitative and qualitative credit rationing. The quantitative rationing is due to the insufficient gains offered on the deposits, and the following lower savings influx; the qualitative rationing depends on the quantitative rationing and on the resources allocation to advantage of few customers characterized by the solvency, to the detriment, therefore, of the micro entrepreneurs. The realization of the credit limitation happens, therefore, through the transaction costs translation from the giver to the funds borrower. The formal financial intermediaries, in front of the bonds that prevent diversification of the active interest rates politics, try to diminish this cost typology, to the detriment of those that bear down on the customers, reducing also the informative asymmetry and the credit risk. In other words, through the transactional costs, the banks erect barriers to the entrance to the less appreciated customers selecting therefore the customers (Mauri, 2000). Here hence the necessity of the informal finance genesis.

The Microcredit and the Grameen’s Experience The majority of the scholars believe that the microcredit, considered as a new financing tool in aid of the less developed countries was born in Bangladesh in the second half of the Seventies, after the project by Muhammad Yunus9 of giving funding to all of the population ranges, in particular to the “poor among poor”. Here-hence the bank for the poor was born, known as Grameen Bank10. The economic, social and above all humanitarian aims that professor Yunus and his Grameen Bank would reach through the microcredit are: the improvement of the living standard, the poverty abolition, dignified jobs and the decrease of the socio-economic diversity11. This idea derived from the realization that the formal financial system couldn’t perceive and satisfy the active poor requirements. Against a lack of the government, there was an informal parallel credit market, deeprooted and prosperous, that sometimes accelerated the poverty process (De Wit, 1997). Professor Yunus’s project mixes the formal and informal finance positive elements creating a new credit tool, the microcredit, by supervising customer’s behaviours and modifying its own action referring to the information of the above mentioned analysis. It also allowed to be aware of the financial needs of those customers

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previously ignored (the active poor) and to create new alternative financial intermediaries in favour of those who start new economic initiatives, ask for a credit and participate to this new financial organization. In this way it is possible to overcome the obstacles of the formal finance in giving credit to the poor people, which can be summarized as follow: the impossibility to perform a payment, high carrying costs, impossibility to give real and personal warranties. Many scholars noted that the initiative success is, however, the biggest obstacle in the functional and organizational enhancement of the LDCs microfinance organizations. A lot of organization committed in the credit innovation dropped, in fact, the research of the financial testing originality and progress, restricting to the mere repetition of the Yunnus’s intervention scheme (Hulme e Mosley, 1996 da Viganò, 2004)12

Focusing on the Grameen Model The Grameen bank philosophy, in mutual opposition to the inflexibility of the formal credit system and to the informal parallel system iniquity, defined the most important characteristics of the worldwide best known and most used microcredit model (Anfosso, 2004; Brunori, 2005; Yunus, 2005). The most important features of this model are: - the reference market, the target is represented by poor people, especially exploited women, who are closet to the society borders13. The Grameen experience demonstrated that, on the contrary, women adapt themselves better and more quickly than men to the auto-assistance process, they are more careful in the management of the family, their first objective is the well-being of the sons and demonstrate greater constancy in the job than men (Todd, 1999); - bank-customer relationship, customers don’t have to go to the bank, because the bank officers reach every village in order to popularize the Grameen message, let new customers approach, take the receivables and collect savings; - documentation and warranties, in order to chop down the carrying costs and to simplify the procedures to obtain credits, the most part of the papery documentation was abolished and loans are allotted by legal tender without any bank warranty14; - mutual solidarity, the loans supply is preceded by the institution of small applicant groups - group lending(at least five subjects)15, that have to work in different fields (in order to diversify the credit risk in relation with different jobs) and have to be socially mutually responsible - peer selection, joint liability-16; - social enforcement, the exclusion, the ostracism or the expulsion from the community life are very dreaded social convictions, cohesive and supportive as those in which the microcredit phenomenon has become relevant. This fact and the mutual solidarity among the credit groups participant are alternative to the typical warranties required by the formal field peer monitoring-; - redemption, the return is always by instalments, weekly, so that the contractor’s problems are evident and let the microcredit organizations to promptly intervene (i.e. granting deferment); - benefit’s boycott, Grameen financings don’t allow free grant loans nor the possibility to cancel debts, not even in case of natural calamities, because all the loans must be entirely returned seeing the gainful nature of the financial activity and that the aim of the organization is the auto-sustainability. The cross-selection operation between the microcredit characteristic elements and the features of the formal and informal finance show that the Grameen bank financial innovation weighs on some aspects of the traditional financial system, representing an alternative to the formal and informal credit fields (matching the positive aspects of both systems). The positive aspects of the formal financial intermediaries taken by the Grameen bank are:  the adoption of market criteria in the definition of the interest rates and the respect of the economization, continuity, profit and efficiency in the management criteria,  the fixation of a specific objective for every operation financing,  obligatory nature of the lend restitution, presiding from the external events that condition the debtor,  agency’s auto-sustainability through the collection aboriginal capital and the reuse on the same territory,

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the refusal of generalized financial aids and not finalized by the world-wide organizations, since they often generate financial and economic dependency. The microcredit can be considered an authentic operation of financial engineering since, through alternative financial operators; it conjugates the typical characteristics of the informal finance (tied to the community traditions and the uses) with standardized and institutionalized instruments. The capital structure of the microcredit has affected just the friction elements of the direct exchange markets which justify the financial intermediation: informative asymmetries, transaction costs and credit rationing. The creation of the group lending, regulated by the peer selection and joint liability principles and burdened by the peer monitoring and of social enforcement mechanism, offered the opportunity of: - reducing the transaction costs following useful economies in the various interventions management, - reducing the informative asymmetries at the expense of the financial resources lender, ex ante, through the auto-selection generated in the group and thanks to the social confidence role and, ex-post, through the threat of preventing every other financing against the former insolvency, - gradually increasing the financing amount in relation to the corrected lend redemption, - constantly exchanging information between credit and real markets. The other typical aspects of the informal finance integrated in the microcredit system are: concession of credit to the women, vicinity of the institution to the customers (the road is the office of the financial civil employees), documentation abolition and confidence on fiduciary base, weekly redemption by instalment.

Microfinance: Microcredit Evolution and Development The evolution of the microcredit model, of the subjects that distribute it, the customers’ beneficiary and the societies near which it has been diffused generated consequently a transformation also of the financial necessities of the needy and a fast demand for new products and services. A new model was born, defined as microfinance, which is born from the microcredit presupposed, includes it but becomes the most sophisticated because of the financial instruments used and of the intervention depth. The products and the services that allowed the microcredit organizations to become real financials institution (MFI) are the following: 1. savings collection, the changed environmental conditions allowed the poor people to generate saving (assets and money) and “obliged� the MFI to structure the typical microdeposit products. This activity concurred, moreover, to increase the monetary mass that will be used in the loan activity17; 2. alternative employment instruments, from the trade-off between the growth of the enterprises financed with the microcredit and the necessity to reduce the MFI credit risk, the microleasing tool was born, which allows the microfinance institutions to remain owners of the good until the integral payment of the fee; 3. micro venture capital, these new organizations, taking part in the microenterprises risk capital18, can assure a managerial culture that accompanies them in the increase and the development on the medium-long period; 4. insurance products, the improvement of the living standard and the widening of the business opportunities generated new requirements and necessity of coverage achievable through typically insurance products. The offer of products that affect the independent savings collection and the performance of subsidiary services regarding those of the credit activity gives the MFI new auto-sustainability19 opportunities. In fact, the independence from the governmental funds or the international aids funds involves the freedom in the definition of the strategic plans of development and increase of the MFI. It is not possible. However, to follow always this way because the initiatives sustainability presupposes that the interested institutions can freely collect funds among its own customers with the aim to finance its activities, and this is instead the banks task. The consequence is that the MFI that do not have enough savings and/or a good organizational asset are excluded from the full sustainability concept.

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Microfinance in the World An Overview

The amazing outcomes20 of the Grameen bank pioneering experience in Bangladesh induced the world-wide organizations that support the development of the less developed areas, many international humanitarian aids associations and Non-Governmental Organizations (NGOs) to diffuse the microfinance model in the world. They created therefore many organisms of general interest, among which there are21: • Grameen Trust, a fund created and managed by the Grameen Bank, financed by private and public agencies, with the aim to stimulate the creation of microfinance organizations in the world22, • MicroFinance Network, a global organization that re-unites financials institution that distribute microcredits, NGOs and operators that give technical support in order to improve the experience and exchange of information between the members and to give an exhaustive modernized review of the existent initiatives in the world,, • Consultative Group to Assist the Poor (CGAP), a consortium of 33 agencies, public and private, for the development that operate in order to extend the access to the financial services to the poor people, • The Microcredit Summit Campaign, an organization created in 1997, when the first world-wide microcredit summit was organized; it promotes the informative exchange between agencies in order to know the reasons and the conditions of the success of the initiatives of microcredit in the world. Phenomenon Evolution

In order to represent the evolution that the inquired phenomenon has introduced during the last few years, I will give a systematic statistics rework of the most outstanding data published on the report “State of Microcredit, Summit Campaign”, in the years 1997-200523. The data analyzed are: • number of the activated programs, divided in different geographic areas and of socio-economic development of different countries, • number of the customers caught up and the number of the poor customers24. Analysis of the Programs Number

The following historical series reassumes the number of the active microcredit programmes in the world between 1998 and 2005 and reported on The Microcredit Summit Campaign. In TABLE 1 there are the effective unitary values distinguished for intervention areas, in TABLE 2, there are the percentage variations of the number of the programs recorded every year in relation with those of the previous year. Because of the unexpected findings pointed out by the analysis of this last aspect I will insert the diagrams relative to the percentage variations of every inquired areas (FIG. 1) and to the aggregated data (FIG. 2); there is moreover the table that reassumes the percentage variations of the number of the active programs in 2005 in relation with those assets in 1997 (TABLE 3). TABLE 1: EVOLUTION OF MICROFINANCE PROGRAMS IN THE WORLD Areas Africa Sub and Sahariana Asia e Pacific Latin America and Caribeans Middle East e North Africa Development Countries Total North America ed West Europe East Europe and central Asia Industrial Countries Total Global total

1998 377 329 141 14 861 30 34 64

1999 455 352 152 16 975 48 42 90

2003 919 1603 261 30 2813 48 70 118

2004 994 1628 388 34 3044 48 72 120

2005 959 1652 439 30 3080 35 18 53

925 1065 1567 2186 2572 2931 Source: Adapted from “State of Microcredit, Summit Campaign”

3164

3133

719

2000 613 647 193 17 1470 53 44 97

2001 740 1075 230 23 2068 59 59 118

2002 811 1377 246 23 2457 47 68 115


TABLE 2: ANNUAL % PROGRAMS MICROFINANCE CHANGE Areas Africa Sub and Sahariana Asia e Pacific Latin America and Caribeans Middle East e North Africa Development Countries Total North America ed West Europe East Europe and central Asia Industrial Countries Total Global total

1999 20.69% 6.99% 7.80% 14.29% 13.24% 60.00% 23.53% 40.63%

2000 34.73% 83.81% 26.97% 6.25% 50.77% 10.42% 4.76% 7.78%

2001 20.72% 66.15% 19.17% 35.29% 40.68% 11.32% 34.09% 21.65%

2002 9.59% 28.09% 6.96% 0.00% 18.81% -20.34% 15.25% -2.54%

2003 13.32% 16.41% 6.10% 30.43% 14.49% 2.13% 2.94% 2.61%

2004 8.16% 1.56% 48.66% 13.33% 8.21% 0.00% 2.86% 1.69%

2005 -3.52% 1.47% 13.14% -11.76% 1.18% -27.08% -75.00% -55.83%

15.14% 47.14% 39.50% 17.66% 13.96% Source: Adapted from “State of Microcredit, Summit Campaign”

7.95%

-0.98%

Considering the number of the active programs (TABLE 1), it emerges that nowadays the microcredit is going to consolidate. In 2004 more than 3100 programs have been activated, the 98% of which in the outcast countries; the percentage variation in 2005 compared with 2004 has a negative sign and that is caused by the decrement of the number of the active programs recorded in the industrialized countries. In particular, if the participations are distinguished on the base of the country in which they are activated (in via of development or industrialized), it is possible to observe that: • in the underdeveloped nations they constantly increased. The general value indicates an equal increase to 257,72% from 1997 to 2005. Particularly interesting are the data relative to the Asia-Pacific area, where the positive variation is of the 402.13% (the participations passed from the 329 in 1997 to the 1,652 in 2005) and to the Latin America area with equal variation of 211,35% (from 377 participations in 1997 to 959 in 2005) – TABLE 3-. Notwithstanding, the annual increase speed of the activated programs has been reduced remarkably compared with the first years analyzed (TABLE 2 and FIG. 1 and 2); the aggregate value, in fact, has been annulled nearly in 2005 (+1.18%) becoming negative if South-Saharan Africa (- 3.52%) and Middle East and North Africa (- 11.76%). See also that, instead, as in 2000 an increment in the number of the interventions activated has been recorded compared with those in 1999 all the areas inquired, greater than that one taken place in 1999 compared with 1998. In the following years, this increment took place only: in the Middle East – North Africa between 2000 and 2001 (from +6,25% to + 35.29%) and between 2002 and 2003 (from a null increase to +30,43%) and in Latin America between 2003 and 2004 (you from +6,10% to +48,66%); • in the industrialized countries the number of the participations of microcredit is remarkably inferior compared with that found for the underdeveloped nations; it has been observed, in fact, that while in the first years the relationship was of 1 participation in the industrialized countries every 15 participations in the LDCs, in 2005 such relationship became of 1 to 60 and such tendency is valid not only for the aggregate data but also for that one of the single areas. Particularly elevated is the variation of 2005 compared with 2004 in European area of the Central – East Asia (TABLE 2 and FIG. 1 and 2) where there was to a lessening in the number of interventions equal to 54 (from 72 in 2004 to 18 in 2005; -75%) that heavily conditioned the area total value (- 55.83%) and made negative the global total (- 0.98%)25.

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100.00%

60.00%

80.00% 40.00%

60.00% 40.00%

20.00%

20.00% 0.00%

0.00% -20.00%

1999

2000

2001

2002

2003

2004

1999

2005

2000

2001

2002

2003

2004

2005

-20.00%

-40.00% -60.00%

-40.00%

-80.00% -60.00%

-100.00% Africa Sub and Sahariana

Asia e Pacific

Latin America and Caribeans

Middle East e North Africa

North America ed West Europe

East Europe and central Asia

-80.00% Development Countries Total

Industrial Countries Total

Global total

FIG. 1: VARIATION PROGRAMS FOR GEOGRAPHIC AREAS FIG. 2: GENERAL PROGRAMS CHANGE Source: Adapted from “State of Microcredit, Summit Campaign” TABLE 3: MICROFINACE PROGRAMS CHANGE FROM 1997 TO 2005 Areas Africa Sub and Sahariana Asia e Pacific Latin America and Caribeans Middle East e North Africa Development Countries Total North America ed West Europe East Europe and central Asia Industrial Countries Total

Change 154.38% 402.13% 211.35% 114.29% 257.72% 16.67% -47.06% -17.19%

Global total 238.70% Source: Adapted from “State of Microcredit, Summit Campaign” Analysis of the Involved Customers

If the microcredit phenomenon is analyzed with reference to the number of the customers caught up by the several activated programs, we can notice a positive trend. The goal of the 100,000,000 poor people who have to be financed within 2005 (pinpointed in 1997 during the microcredit global summit), have been partially reached: the attended customers are, in fact, 113.261.390 but only 81.949.036 of them is “poor” (TABLE 4 and FIG. 3).

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TABLE 4: COMPARISON MICROFINANCE PROGRAMS AND HIT CLIENTS

Hit clients Hit po or clients

Years 1997 1998 1999 2000 2001 2002 2003 2004 2005

Programs numbers 618 925 1,065 1,567 2,186 2,572 2,931 3,164 3,133

Hit clients 13,478,797 20,938,899 23,555,689 30,681,107 54,932,235 67,606,080 80,869,343 92,270,289 113,261,390

Hit poor clients 7,600,000 12,221,918 13,779,872 19,327,451 26,878,332 41,594,778 54,785,433 66,614,871 81,949,036

2005

120,000,000 100,000,000

2004 2003

80,000,000

2002 2001

60,000,000 2000

40,000,000 1997

20,000,000

1998 1999

0 0

500

1,000

1,500

2,000

2,500

3,000

3,500

Programs numbers

FIG. 3: COMPARISON MICROFINANCE PROGRAMS AND HIT CLIENTS Source: Adapted from “State of Microcredit, Summit Campaign”

From the analysis of TABLE 4 and FIG. 3, it emerges that that the number of the programs, the number of the attended customers and the number of the attended poor people grew during the years. In particular, it can be observed as the last two variables grew according the number of the activated programs; this increment, however, is not proportional in the three variables and in fact the number of the attended customers grows more quickly compared with the number of the activated programs (TABLE 5 and FIG. 4). TABLE 5: CLIENTS AND POOR IN RELATION TO PROGRAMS NUMBER 40,000

Years Clients/Programs Poor/Programs 1997 21,810 12,298 1998 22,637 13,213 1999 22,118 12,939 2000 19,580 12,334 2001 25,129 12,296 2002 26,285 16,172 2003 27,591 18,692 2004 29,163 21,054 2005 36,151 26,157

35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 1997

1998

1999

2000

2001

Clients/Programs

2002

2003

2004

2005

Poors/Programs

FIG. 4: CLIENTS AND POOR IN RELATION TO PROGRAMS NUMBER Source: Adapted from “State of Microcredit, Summit Campaign”

A particular event took place in 2005 when, against a reduction of the programs number, however the number of the financed customers grew up; that is probably because of the increment in the transactions volume of every single

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initiative (in that year each of them has caught up in average 36,151 persons, of which 26,157 poor people, compared with the average of the customers caught up by the several microcredit programs realized in the period 1997-2005 equal approximately to 25.000 customers, of which 15,000 poor people). The growth speed of the number of poor customers reached by the microcredit initiatives is inferior to the growth speed of all the other customers (this is evident, in the FIG. 3, from distance between two represented curves). A pointer of the microcredit ability to reduce the poverty level appears to be the relationship between the number of poor people and the total of the attended customers (TABLE 6 and FIG. 5). TABLE 6: POOR IN RELATION TO TOTAL CLIENTS Years Poor/clients 1997 56.38% 1998 58.37% 1999 58.50% 2000 62.99% 2001 48.93% 2002 61.53% 2003 67.75% 2004 72.20% 2005 72.35% Source: Adapted from “State of Microcredit, Summit Campaign”

FIG- 5: POOR IN RELATION TO TOTAL CLIENTS Source: Adapted from “State of Microcredit, Summit Campaign”

The trend of the ratio Poor/clients concurs to conclude that the microcredit programs are now able to acquitting to their function of fighting poverty and in fact the weight of the poor people on the total of the attended customers is increasing in the years and it is equal to approximately 70 poor every 100 attended customers (an anomaly is found in 2001 when the number of the poor people attended by the microcredit initiatives has been equal to 49 every 100 attended customers). There is, however, reduction in the growth speed during the last few years and in particular in 2005.

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Conclusions The survey of the microcredit and the microfinance theoretical foundations within the general theory of the financial intermediation showed the importance that, already today, this segment covers for the credit market. Its importance, in the socio-economic development of a country, is as width as great is the poverty level in which it pours a country. In 2005, the partial attainment of the objective that the world-wide community has prefixed is imputable to the slowing down of the growth trend recorded during the last few years. This circumstances let thinking on the nature of the new tool nature and on the necessity to continue maintaining high the interest towards the product and process innovation, which appears necessary to the aim of adapting the microfinance model to the various socio-economic contexts in which the programs are used. The importance of the innovation as a tool for the adaptation of the model to the situation in which the initiative is implemented is particularly elevated when the countries to be reached are industrialized; this is because of the increment of the “new” poverty, of the widening of wraps of population that live at the margins of the society and soaring social and economic difference between rich and poor. Poor people, in some specific situations, is demonstrated that are reliable and solved; it is therefore necessary to stimulate the use of the microcredit in order to make emerging their own will of redeem and to exceed the assistance in which they have lived up to now.

References [1] [2]

Adams, D.W., & Fitchett, D.A. (1994). Informal finance in low-income countries. Westview Press Boulder. Anfosso, F., (2004). Il microcredito come strumento di “poverty alleviation”. Economia, impresa e mercati finanziari, 1, 65-101. [3] Arrow, K., (1963). Uncertainty and the Welfare Economics of Medical Care. American Economic Review, 53, 941-973. [4] Boscia, V., (2002), The future of small banks in the new competitive environment. The case of the Italian banking industry, Cacucci editore, Bari. [5] Brunori, L., (2005), La rivoluzione del microcredito: dai paesi poveri ai paesi economicamente sviluppati. Autonomie locali e servizi sociali, 3, 429-440. [6] De Wit, J., (1997), Presentation to the Micocredit Summit on poverty targeting. Small Enterprise Foundation, South Africa, www.alternative-finance.org/uk/en. [7] Eisenhardt, M. K., (1989). Agency theory: An assessment and review, Academy of Management Review, 14(1), 57. [8] Ghatak, M., (1999), Group lending, local information and peer selection. Journal of Development Economics, 60, 27-50. [9] Gonzales-Vega, C., (1998). Do financial institutions have a role in assisting the poor?, in Kimenyi, M.S., Wielaned, R.C. & Von Pischke, J.D., Strategic issues in microfinance, Ashagate publishing, Brookfield VT e Aldeshot, Uk [10] Isern, J., Cook, T. (2004), What is a network? The diversity of networks in microfinance today, Focus 26, CGAP. [11] McKinnon, R.I. (1973), Money and capital in economic development, Brookings institution, Washington DC. [12] Todd, H. (1996), Women at the centre: Grameen Bank borrowers after one decade, West-view Press, Boulder. [13] Viganò, L. (1996), La capacità di credito: analisi delle determinanti e strumenti per la valutazione nelle economie in via di sviluppo, Giordano Dell’Amore Fondaction & University of Bergamo. [14] Viganò, L. (2004), Microfinanza in Europa, Giordano Dell’Amore Fondaction, Milano, Giuffrè. [15] Yunus, M. (2005), Il banchiere dei poveri, , Feltrinelli, Milano. Contact author for the list of references

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End Notes Microfinance includes the microcredit and enlarges its field of interest to the collection of micro-savings and to different services that financial intermediaries give to their own customers, i.e. consulting and insurance services. 2 This organizations were created in the post-war period with political implication regarding the influence on the previously colonized countries classified as the Third World; afterwards, this organizations adopted humanitarian purposes. The most important are: the United Nations, the World Bank, the International Monetary Fund and the International Labour Organization. 3 In the anther words, the population must renounce to an immediate wellbeing quota , deriving from the resources and form a part of the aids, in favour of the country development. This sacrifice would derive from the fact that the consumption expenditure, including the healthcare, the education and a better nutrition, do not determine the development. 4 A.A.V.V. (1971), The mobilization of savings in African Countries, Record from the meeting hold in Milan from 20 to 23 September 1971, about The Credit Markets of Africa, n. 3. 5 The risk of moral azard referes to the deceitful reduction of the profits that have to be shared with the bank, raising the overhead or resorting to accounting tricks. 6 The risk of untoward selection referes to the possibility that the customer hides information about his own balance sheet or that of the enterprise, or to the case that the customer glosses over the real characteristics of the entrepreneurial project. 7 “Informal” has been used for the first time with this meaning by Hart in 1973 in the article: Hart V.K., Informal Income Opportunities and Urban Employment in Ghana, March 1973. 8 The social control is the condemnation and repression system for the unfair behaviours and for the isolation of the ethic and religion rule-breaking, and auto-generated into the community. 9 He was winner of the Nobel Prize for Peace in 2006, thanks to his Grameen Bank project, which allowed the creation of a new credit typology for the less developed countries. 10 This experience retrieved and repurposed different aspects and characteristics of other older initiatives. In fact, after the first and above all the second world war, in the colonial coutries, especially in the French ones, rural mutual savings bank, following the example of the Caisse centrale de la France d’outremer, that were in harness with the actual microfinance situation. They tried to substitute the real warranties, such as soil, buildings and livestock, with moral warranties, bringing into play the debtors solidarity. These institutions at the beginning had reimbursement rates near to the 100% but, starting from the’60, when the decolonization led to the colonial economy crisis,the rural credit situation also got worst and then failed. Sciortino A. (2001), Le mille incognite del microcredito, in Libertaria, n. 3, April-June. 11 The microcredit conceived by Yunus can be considered a tool for the fight to the povertà, not only for the financial and economic benefit settled for the social redemtion of the poor people, but also for the evolution and the behavioural changes that it implies. In the last case, he created the so called “sixteen rules” that suggest a radical transformation of the everyday way of living toward a model that gives great importance to health, hygiene, children education, job and the mtual respect. 12 Comment quoted in: Hulme D., Mosley P. (1996), Finance against poverty, vol. 1 e 2, Routledge, London, in Viganò L. (2004), op. cit., pag. 59. 13 “…Why target Women? 1.2 billion people are living on less than a dollar a day. Women are often responsible for the upbringing of the world’s children and the poverty of the women generally results in the physical and social underdevelopment of their children. Experience shows that women are a good credit risk, and that women invest their income toward the well being of their families. At the same time, women themselves benefit from the higher social status they achieve within the home when they are able to provide incombe..”, See http://www.microcreditsummit.org. 14 The traditional economic theory suggests that loans without warranties, or with small warranties, make the allocation credit mechanism sensitive to informative asymmetries problems (adverse selection e moral hazard).

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Stiglitz J.E. (1993), Peer monitoring and credit markets, in Hoff K., Braverman A., Stiglitz J.E., The economics of rural organizations: theory, practice and policy, Oxford University Press, New York. 15 Family relationships within the same group are not allowed, in order to limit the cohesion among members belonging to the same family, fact that could led to a scarce cognition of the social sanctions imposed in case of opportunist behaviors. 16 Seeing that the insolvency of an individual, also called “pari”, relapsed on all the group members, the "peer monitoring" process starts, which is one of the main characteristics of the high interest rates for the return of the loans. Ghatak M. (1999), Group lending, local information and peer selection, in Journal of Development Economics, vol. 60, pagg. 27-50. 17 Although Italy for years on end was in bed economic conditions equal to the economic situation of the underdeveloped countries, we can find in our country experiences similar to the actual microfinance institutions. See also “Monti frumentari, pecuniari and di pietà” that operated until the XIX secolo. 18 In this case the target is different from the typical microcredit (poor among poorer), although those enterprises that can use it can be the evolution of micro-enterprises created through previous microcredit projects . 19 The auto-sustainability is the condition in which the gains fully cover fund-rising costs, the operative costs, the loss percentage foreseen on the loan portfolio and also the foreseen inflation. 20 Loan reimbursement rates near to the 99%, improvement of the financed subjects living standard (these subjects, thanks to the creation of the micro activities obtained loans in order to rebuild houses and to buy new hand tools), independence from external aids and fulfilment of the economic and financial break event of the Yunus activity. 21 The basic requirement for the model success is a social contest that can take and enhance the finance potentialities in favour of the poor people. In particular, we refer to the spread of the basic formation, and also to infrastructures that can led to the creation of new entrepreneurial opportunities, to the improvement of the medical corps, ecc. 22 http://www.grameen-info.org/grameen/gtrust/index.html 23 In 2006 the report was spread during the Global Microcredit Summit, held between 12 and 15 of November in Halifax in Nova Scotia, Canada, http://www.microcreditsummit.org/pubs/reports/socr/2006.htm 24 T hat is to say, all the human beings living with less than 1 $ a day. 25 Only in two cases we assisted at a bigger increment compared to the previous year in the variation in the intervention number in Europe of the central-eastern Asia between 2000 and 2001 (from +29,41% to +34,09%) and in North America-West Europe between 2002 and 2003 (from -20,34% to +2,13%).

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The Microfinance: Theoretical Foundations and Evolutionary Tendencies