January 24, 2006: Headlines: Directors - Blatchford: Microfinance: The New Nation: Joe Blatchford's ACCION has an odd history in microfinance

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ACCION, founded by Director Joe Blatchford, was a pioneer in microfinance

ACCION, founded by Director Joe Blatchford, was a pioneer in microfinance

Accion was founded in 1961 by Joe Blatchford, a young law student and accomplished tennis player who was sent on a goodwill tour of Latin American cities by the American government. Appalled by the poverty he witnessed, he created an aid group to build schools, install electricity and the like. Joe Blatchford was the thrid Director of the Peace Corps serving under President Nixon from 1969 to 1971.

ACCION, founded by Director Joe Blatchford, was a pioneer in microfinance

From charity to business
Tue, 24 Jan 2006, 21:58:00

To Anyone familiar with banking in the rich world, the world of microfinance can seem rather odd. The main providers have not been motivated by anything as straightforward as making money, at least until recently. The core of the industry today consists of some three dozen multinational networks of microfinance providers, which despite their superficial similarities and inspirational rhetoric compete fiercely and fight over everything.


The evolution of microfinance from a charitable social service into something resembling modern commercial banking can be seen in the work of ACCION International, a network of financial institutions based in Boston and Washington, DC, with 27 loosely affiliated members in 22 countries and direct investments in ten. ACCION has an odd history. It was founded in 1961 by Joe Blatchford, a young law student and accomplished tennis player who was sent on a goodwill tour of Latin American cities by the American government. Appalled by the poverty he witnessed, he created an aid group to build schools, install electricity and the like.

An experiment in Brazil in 1973 played an important part in defining ACCION'S future role. The Brazilian unit kept clear of the usual development-agency activities, instead concentrating entirely on providing what at the time were called "micro" loans. Initially, the separation of finance from social services was controversial. But slowly a consensus has begun to form, particularly in Latin America, that this kind of specialisation makes it easier to build efficient (and therefore sustainably helpful) financial institutions.

Early on, financial institutions affiliated to ACCION offered "solidarity loans" small loans to groups of five people that were collectively guaranteed. Variations on this model remain essential to Grameen, FINCA and many smaller microfinance providers. Each member of a group has a tiny amount of money allocated to him or her, and as they collectively meet their obligations the members establish a credit history that allows them to increase the size of their loans.'

There are virtues to this model, notably the way that social pressure from group members encourages repayments and avoids the twin problems of moral hazard (an unwillingness to repay) and adverse selection (being stuck with bad payers who inflate costs for everyone). Credit screening costs the lender next to nothing. Group meetings may also have other advantages, such as the sharing of clients and effective business techniques.

Even so, a growing number of the institutions tied to ACCION soon discovered limitations to the group-lending model. Over time, businesses financed by group members grew at different rates, and so required different amounts of capital. The members whose businesses grew fastest felt constrained in what they could borrow, and those whose businesses grew more slowly found themselves guaranteeing big debts for other people. The meetings themselves became a problem, consuming time members wanted to devote to their businesses. And, perhaps most importantly, as group members developed personal credit histories through their loan payments, the need for collective guarantees disappeared.

At the beginning, simply providing credit was reason enough to start a small not-for-profit financial-services organisation. As time went on, clients started to demand more products, particularly savings accounts, but regulators were reluctant to grant the necessary banking licences to microfinance institutions that had no clear ownership structure and little prospect of profits. Success also increased the demand for capital. In a major strategic change, in 1992 Prodem, a small Bolivian not-for-profit organisation in the ACCION network, turned part of its operations into BancoSol, a normal bank run on commercial lines, albeit still seeking to serve the poor.

The transition was marred by bitter internal fights. Interest rates charged on loans were initially at 65%. Yet in the end the transformation worked, enabling the bank to grow and to bring down its interest rates by two thirds. True BancoSol has not been an unqualified success, but it has remained viable even as Bolivia has suffered huge financial problems. It is now seen as a model for similar transformations in Latin America, Africa and Asia, with ACCION playing a critical role in managing the change.

-The Economist

© Copyright 2003 by The New Nation

When this story was posted in February 2006, this was on the front page of PCOL:

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Story Source: The New Nation

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