Mi-fi Module – Our First Project

We are having our first Mi-fi Module in Georgia working together with the MFI Crystal. Two of our members, Noah and Stepanka are on their way to Kutaisi, to work together with the local Microfinance provider. The visit has two main goals – the first is to present some basic research and inputs on extension services and value chain finance. The second lies in an analysis and feedback on workflows and processes on the different products and services offered by Crystal.

Microfinance project, from Zurich to Georgia

Noah writing on his travels:

“As I am writing these lines I am waiting for my flight to take me to Tbilisi at the airport of Athens. Me and my colleague Stepanka Kralikova, are travelling to Georgia on behalf of Mi-fi in order to visit Crystal, a Microfinance institution (MFI) that operates from the town of Kutaissi in the utmost west of the country. In the upcoming two weeks, we will be witnessing the impact of Microfinance at first hand as we will visit the different branches of the banks and have the chance to meet some of those people whose businesses have been made possible through Microfinance. We will especially focus on value chain building through Microfinance, as the greatest impact can be achieved, if an MFI not only finances individual projects, but rather tries to create value chains within which small entrepreneurs can operate.  A farmer can produce as much and as high quality as he wants, if the next step on the value chain is underdeveloped or lacks completely, it is not possible for the farmer benefit from his increase in production. The true challenge of Microlending is to create a functioning value chain that will henceforth benefit every link of the chain and therefore reduce the default risk for the lender. During the next weeks Stepanka and me will regularly keep you updated about our experiences in the Caucasus on this blog. Now I am thrilled to finally board the plane and, after all the theory about Microfinance, experience some practical Microfinance in action. Stay tuned!

Microfinance and Poverty III – Credits for the ultra-poor

Microfinance and Poverty III – Credits for the ultra-poor

In the last blog “Microfinance and Poverty II – Changing Consumption Patterns” I summarized the findings of a group of researchers on the impact Microfinance has on poverty. According to the paper discussed, Microfinance only slightly increases income for borrowers with a preexisting business. Other borrowers repay their debt by decreasing day-to-day consumption. But what happens to those extremely poor, whose income isn’t even sufficient to pay back the credit? I now want to show one example of how credits can be made accessible to the very bottom of the income pyramid.

Microfinance today ceased to be directed at the poorest members of the communities it’s operating in. This has many reasons:

 

  • The extremely poor are usually not willing to take up a credit, since they don’t see any opportunities for paying them back.
  • The very small credits they would need are not worth the administrative costs, even for Microfinance institutions.
  • The extremely poor have strong incentives to use the credits given to them for consumption instead of making productive investments, since they lack many basic necessities like food or medicine.
  • Even when Microcredits lead to an increase in income, this income is needed for basic necessities the extremely poor couldn’t afford before, making it hard for them to repay their debt.

 

So what are the options for the extremely poor, if they desperately need money for medicine, food or education?
Either they take out a credit and repay it by yet another credit, leading to the much feared debt spiral mentioned in the former blogs. Or they have to starve, can’t cure their injury or illness or have to take their kids out of school, obviously leading to much higher costs down the road.

To give the extremely poor an opportunity to get cheap credits when urgently needed, the Swiss Catholic Lenten Fund (Fastenopfer), together with it’s local partners, has developed a program in the Senegal called “Calebasse de la solidarité” (Calabash of Solidarity). This summer I had the opportunity to work with AgriBio, one of the Fastenopfer’s local partners in the Senegal, to get a first hand look at this project.


Together with its partners, the Fastenopfer is encouraging communities to build “little banks” on their own. This is how it works: A group of people from a community gets together once a week. Every member of the group puts anonymously a certain amount of money into a covered “Calabash” (bucket). The money is then counted publically and entrusted to a member of the group. If somebody needs a credit for absolute necessities like food, health or education, they can ask for a credit from the group. An elected committee of three people makes the decision. In case a credit is granted, it has to be paid back in due time – without any interest! This way the total amount available for credits is never decreasing (only temporarily).
Since all the people within the group know each other, fraud is very rare. Credits are actually used for what they are intended for. If it’s your neighbor, who is responsible for granting you a credit to send your daughter to school, he will notice if you use the credit to buy cigarettes while your daughter stays at home every day.
Many people are very skeptical of the model, since there is no apparent incentive to put any money into the Calabash. Every member of the group is eligible to take out a credit, independent of his or her contribution. In fact, if implemented in small communities, experience shows that there is enough solidarity between the members of the group for the project to work. There are enough contributions, even without any individual incentive except for the well being of the other group members and the functioning of the Calabash.
Until today, the different partner organizations of the Fastenopfer in the Senegal have helped with the implementation of more than 700 “Calebasses de la Solidarité” in various regions of the country, with a total of more than 36’000 members. The amounts managed by each Calebasse are modest, but so are the credit demands. And according to Vreni Jean-Richard, responsible for Fastenopfer operations in West Africa, the biggest success is not the resilience created by the credits granted, but by the strengthening of the communities through those groups. By showing what they can achieve by sticking together, they can be encouraged to participate more actively in the political process and to stand up for their rights when they are threatened.

Information on the Fastenopfer projects in the Senegal on fastenopfer.ch

Dr. Vreni Jean-Richard is holding a workshop on the Fastenopfer projects in West Africa at the University of Zürich on the 3rd of May (workshop held in German). Dr. Jean-Richard has spend many years in Chad, working on her PhD in Epidemiology, before doing her Masters in Cooperation on Development at ETH Zürich. Today, she is responsible for the Fastenopfer’s operations in West Africa. (facebook)

Microfinance and Poverty II – Changing Consumption Patterns

Microfinance and Poverty II – Changing Consumption Patterns

In the last blog entry “Microfinance and Poverty I – Hype and Crisis” I have written about the hot debate on the impact of Microfinance on poor communities. On the one hand, its proponents celebrate Microfinance as an effective development tool, giving poor people the opportunity to start their own business and become self-sustainable. On the other hand, its opponents vilify Microfinance, as an industry responsible for trapping communities in vicious circles of debt. Lets now move away from this ideological towards a more balanced, facts based view of some scientists.

Today, many researchers from institutions across the world try to inform the ideologically loaded debate on the impact of Microfinance on poverty with their research. Due to a lack of transparence and data, it is very hard for them to find causal relationships between microfinance and typical measurements of development.
Randomized, controlled trials are rare and very difficult to implement. Still, there is some interesting new evidence on the impact of Microfinance on poverty. An assessment of six independent randomized controlled trials across the world by Abhijit Banerjee (MIT), Dean Karlan (Yale), and Jonathan Zinman (Dartmouth) from 2015 suggests the following: Microfinance has a small positive effect only on the income of borrowers with preexisting businesses. There is no evidence that income of borrowers without a preexisting business goes up after taking out a Microcredit. This suggests that Microcredits are not a very effective tool for stimulating entrepreneurial activity. And if it is, it works only for those borrowers who already own preexisting businesses, and not for the extremely poor. These findings contradict the main claims of Microfinance advocates, pretending that every poor person can become a successful businesswoman if she is just given the opportunity.

On the other hand, Microfinance also doesn’t usually seem to create the debt-traps that its opponents are so worried about. Evidence shows that, not surprisingly, borrowers are likely to use the credits to purchase more expensive, long-term goods, which they never had the opportunity to buy before. The rhetoric of the MFIs suggests that the debt would then be repaid by the increase in income flowing from those purchases. But what happens if income doesn’t increase? Do borrowers really take out another credit to pay off the first one, creating the vicious circle of debt described above?
Interestingly, this doesn’t seem to be the case. Instead, MFI clients tend to pay off their debt by decreasing day-to-day consumption over the time where the credit is paid back. Therefore, Microfinance could lead to a shift in consumption from short-term to more long-term goods.

During the Mi-fi Day on the 19th of April at the University of Zürich, the effect of Microfinance on development was discussed in more depth in workshops, presentations and a podiums discussion. One workshop offered by Oikocredit, Kawien Ziedses des Plantes, head of capacity building and communications at Oikocredit International, was focusing on how impact is measured in the oldest and one of the biggest Microfinance investment funds in the world.

 

So if Microcredits don’t increase income, what happens to those whose current income isn’t even high enough to pay back the interest rates? How can we create credit opportunities for the world’s extremely poor? I will be writing about one approach, put in practice by the Swiss Catholic Lenten Fund (Fastenopfer) in the Senegal in the last blog of the series “Microfinance and Poverty”.


Links & Sources:

[1] http://pubs.aeaweb.org/doi/pdfplus/10.1257/app.20140287

Microfinance and Poverty I – Hype and Crisis

Hype and Crisis

Starting in the early years of the 21st Century and peaking with the Nobel Peace Price awarded to Muhammad Yunus in 2006, Microfinance was celebrated as the silver bullet all development agencies were looking for. The end of poverty was predicted by it’s proponents, claiming that the opportunities brought by this new access to finance will help poor communities to gain independence from the goodwill of donors in the global north.

But after every boom there is a bust: With all the hype around microfinance, Microfinance Institutions (MFI) all around the world were receiving a lot of cheap money. Compartamos Banco in Mexico, originally an NGO working in Microfinance, raised almost $500 million in their IPO in 2007. With more money to be given out as credits, credit agents were pressured to serve more clients at the time. Similar to other booming industries, agents became more risk-friendly. Credits started to be given out almost blindly, leading to a shift in granting processes.

Many of the innovations originally said to be responsible for the success of microfinance (i.e. group lending), where largely reversed in a search for more efficiency. Consequently, more and more borrowers started to use Microcredits for consumption rather than investments. Critics claim that they therefore often won’t have sufficient income to pay off the credits.

This could tempt them to take out new credits, which now were widely available, to pay the former ones leading to dangerous debt-spirals within the very same communities that MFIs claimed to be serving. In India, some argue, this problem of debt accumulation caused a spree of suicides in 2010, which was very widely published in the media all over the world. MFIs in India were temporarily shut down and new regulations were introduced in India in the wake of this scandal.

During the Mi-fi Day on the 19th of April at the University of Zürich, the effect of Microfinance on development will be discussed in more depth in workshops, presentations and a podiums discussion. In an introductory presentation, Pat Gleeson will be talking specifically on the relationship between microfinance and poverty. Mr Gleeson is Managing Director of ECLOF International and looks back on more than 30 years of Microfinance experience in many countries (more information)

We have seen some arguments for and against Microfinance. But what does research tell us about the effect of Microfinance on poverty? One possible answer will be described in the next blog entry.


Links & Sources:

[1] https://www.gsb.stanford.edu/insights/vinod-khosla-microlending-end-poverty

[2] http://www.adb.org/sites/default/files/institutional-document/32094/financepolicy.pdf

[3] https://www.researchgate.net/profile/Marcus_Taylor/

[4] http://www.bbc.com/news/world-south-asia-11997571

Microfinance and Gender Equality

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Women have long been considered key partners for successful Microfinance loans. They have proven accounts for lower default rates than men. Also Microfinance allows to integrate women in entrepreneurial activities in regions that previously had seen them excluded from any business related activities.

Ever since the emergence of Microfinance, its relationship to the empowerment of women in developing countries has been extensively discussed. In many poor rural areas that see active MFIs, women had been traditionally excluded from participating in entrepreneurial activities. However, programs offered specifically at women have systematically begun breaking down these barriers.

It is usually women who have a better overview on the household spending and are more used to organize the family expenditures. Additionally, there is a higher tendency for men not to use the money for the claimed entrepreneurial activities, but rather spending the loans on alcohol or on gambling related activities. [1]

The active targeting of women with microcredit programs or related schemes had a beneficial effect not only for women. While they can better provide for their families and enjoy a higher social standing – on the other side they boast higher retention rates at their MFIs and repay their loans more dependably. It should come as no surprise that in a 2013 study, 74% of MFIs claimed to target women in particular and more than half of them saw women’s empowerment or gender equality as one of their goals [2].

Yet it is very important not to view such positive cases and successful effects as a nice-to-have add-on. Much rather, as highlighted in a study focusing on the situation in rural Vietnam, gender equality and the empowerment of women should be integrated guiding paradigms when designing new Microfinance products [3].

Another study goes even further and looks not only at the target groups for credits, but also the equality of the employers and credit agents. The paper provides evidence that MFIs can achieve lower default rates by ensuring gender-diverse boards and employing female loan officers [4].

As a result it should be pointed out that while much has already been achieved in Microfinance in general, it is especially pleasing to highlight the positive impact that has been generated by and for many women around the globe. It goes to say that men should not be excluded through gender differentiated targeting, but a smart design of Microfinance should take into account gender specific aspects when giving out loans.


 

Links:

[1] http://blog.worldvisionmicro.org/worldvisionmicroblog/bid/311845/Microfinance-and-Men-What-s-the-Problem

[2] http://www.cgap.org/blog/prove-it-measuring-gender-performance-microfinance

[3] Dineen, Katherine, and Le, Quan V., The Impact Of An Integrated Microcredit Program On The Empowerment Of Women And Gender Equality In Rural Vietnam, in: The Journal of Developing Areas, Vol. 49, No. 1, Winter 2015.

[4] Hartarska, Valentina, Nadolnyak, Denis, and Mersland, Roy, Are Women Better Bankers to the Poor? Evidence from Rural Microfinance Institutions, in: American Journal of Agricultural Economics, 96(5): 1291–1306, August 2014.