A variety of microfinance projects operate in Kalerwe Market in Kampala, Uganda.UNITED NATIONS, New York (WOMENSENEWS)– Microfinance might be a panacea for women’s poverty, as many claim, but concern is growing in the nongovernmental community about such loans to teens. Several in the field warn that microfinance loans to teen girls could actually increase their vulnerability.

Since the 1980s, microfinance has grown and spread to become a major tool in fighting poverty across the globe. Grameen Bank, a community development bank established by microfinance godfather and Nobel Prize winner Mohammed Yunus in 1983, has loaned money to over 7 million women in Bangladesh.

Loans for income-generating activities have rates of 20 percent, while loans for housing

are offered at 8 percent, according to the bank. People living in extreme poverty do not pay interest and students borrow at 5 percent. Over 90 percent of the bank’s loans go to women.

Kiva, a microlending Web site headquartered in San Francisco, has loaned over $100 million through the Internet to small entrepreneurs since it started four years ago. Its interest rates vary locally. Kiva works with 134 field partners who disburse the loans, rather than financing individuals directly.

Last April, President Barack Obama announced a $100 million microfinance fund at a summit in Trinidad and Tobago that would help small businesses in Latin America and the Caribbean access credit through diverse microfinance institutions.

"The concept of microfinance is very popular," said Connie Lindsey, executive vice-president at Northern Trust, a Chicago-based financial holding company. "It brings finance to a level that makes it a little more understandable and real for individuals–that ripple effect of a small effort having a much larger impact."

Even though the interest rates on many of these small loans can be shockingly high, proponents argue microfinance empowers impoverished clients, mostly women, who lack other access to credit establish a sterling repayment record and to use the loans to run businesses that can meet basic household needs and improve women’s social status.

More Damage Than Good

The explosion of microfinancing means this credit is not only reaching women, but also female teens.

In some cases that worries Judith Bruce, a senior associate of the New York-based Population Council.

"If we use the conventional economic approaches and drive them at poor girls they won’t be successful at the very least," said Bruce in a phone interview. "At the very worst, they’ll do more damage than good."

No microfinance program focuses solely on teens. In most countries, it is illegal to set up a contractual loan agreement with anyone under 18, though some microfinance organizations still lend to teens under the radar.

This means that, in practice, many microlending and credit programs include a segment of borrowers between the ages of 16 and 24.

Bruce said microfinancing can draw vulnerable female teens into assuming financial risk.

She gave this example: "Like a girl who may sleep with her boyfriend without a condom to get the money–to attend weekly microfinance meetings." In this case, the girl would use sex to get money to repay her loans and earn the group’s social support in the process.

That view stems from the organization’s experiences working in Kibera, the largest slum in Nairobi, Kenya’s capital, and home to almost a million people.

Kibera is also one of the most studied slums in Africa, due to its proximity to U.N. agencies, as well as its location in Nairobi, the center of business in East Africa.

When the Population Council decided in 1999 to launch a trial program that would test giving loans to female teens they believed Kibera would be a good place to start. Here unemployed men and male guardians often harass female teens. Six girls to every one boy here are HIV-positive and forced early marriage is common.

Hope for Financial Independence

A variety of microfinance projects operate in UgandaThe program hoped adolescent girls could start businesses that would generate an income for themselves and help them become financially independent.

Partnering with a Kenyan microfinance institution called K-Rep, the Population Council’s Tap and Reposition Youth, or TRY, program offered female teens loans at an interest rate of 15 percent.

To receive a loan, the teens were required to provide 4 percent of the loan to the program as collateral.

The program also encouraged the teens to apply peer pressure to ensure members of the borrowing group paid back the loan. In order to borrow, the teens formed watanos, or groups of five, who helped each other to keep up with payments.

Less than 20 percent of the participants lived with their parents or said they had friends they could turn to for support. Most lived transient lives, often staying with boyfriends or male friends.

The program started out well, but most of the teens were soon unable to pay back their loans and lost their collateral. Starting hairdressing salons, food salons and other small businesses was very challenging. An emergency would come up in their personal lives–losing their shelter or getting ill–that require more cash than they had and participants would fall behind on repayments.

The teens told TRY that they disliked the pressure they were under to both take out and pay back the loans.

But because of the pressure–which also took the form of social support–they kept borrowing even when they could not manage the repayments or were not that interested in starting businesses. Some girls, for instance, wanted to save money for school, rather than open a hairdressing salon.

Bruce said young women who are married, have children and have started their own businesses often benefit and fare well with microfinancing.

But teens with no business experience may not be able to tell the difference between a loan and a grant, which does not have to be paid back.

Teens’ Qualifications Widely Vary

Caitlin Weaver, deputy managing director of the Financial Access Initiative, a New York-based consortium of development economists, agrees that there can be a big difference among teens’ qualifications for lending programs.

"In a lot of developing countries, where you have more informal nongovernmental organizations and microfinance institutions, a lot of their clients are young women but they are not classified that way," said Weaver. "A 17-year-old running a family and married with a business [in Africa] is much different than a 17-year-old in the Dominican Republic who is still in high school."

TRY has since ended its teen loan program. Now it concentrates on savings programs, where participants deposit savings in a larger microfinance account from which they can withdraw money at any time.

The account is meant to give girls a safe place to keep their money and a cash cushion against emergencies. The program offers social support that ranges from livelihood trainings to nutrition seminars, without the pressure of loan repayment.

Local banks would require formal employment and-or significant savings to open an account, as well as opening fees.

Such savings programs for teens in developing countries are relatively new, partly because few people thought they had any money to save.

"Most teen girls have a livelihood, but it’s not what people typically consider," said Karen Austrian, a staff associate at the Population Council’s Nairobi office, in a phone interview. "A lot of them get pocket money that they save or they do chores like washing utensils and clothes, fetching water. Some help out at salons and make small amounts of money. A lot of girls like to save for emergencies."

Rebecca Harshbarger is a journalist based in New York. An entrepreneur as well, she has created a news site that connects East Africans in the diaspora with independent news from their homeland, at http://www.ugandansabroad.org. She also blogs at http://www.ugandabeat.wordpress.com.