MM icrofinance: Getting Money
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M
64
icrofinance: Getting Money
To the Poor or Making Money
Out Of the Poor?
Joy Mueni Maina Microfinance institutions are row as individuals, but must borrow
Kiiru currently experiencing very high re- through a joint liability group.
Phd student at payment rates of between 95-99%. Poor households are caught up
the Centre for Coupled with growing loan sizes by in a vicious cycle of poverty, where
Development clients, these institutions are even labour, their best resource, is ‘locked
Research, making profits. No wonder there up’ due to different constraints in-
Bonn University and seems to be a good reason for the cluding a lack of liquidity. The
assistant lecturer world to celebrate the microfinance household’s productivity as such is
at the School revolution. It is not necessarily limited to a level whereby the availa-
of Economics, wrong to reduce poverty and make ble household income is insufficient
University of Nairobi some money on the side. The ques- to sustain good standards of living.
tion however arises as to whether For example a poor household may
that is indeed what is happening have family members who are will-
with microfinance. ing to work in the family garden to
grow sufficient food crops. However
What is microfinance and if they cannot afford improved crop
what does it promise varieties and farm inputs then it will
R. P. Christen (1997) defines not be possible for the family to grow
microfinance as the means of pro- enough food. The household’s labour
viding a variety of financial services is therefore said to be locked up due
to the poor, based on market-driven to a liquidity constraint among other
Les économistes affir- and commercial approaches. These constrains.
ment que, pour briser services may include savings, insur- Many governments and donor
le cercle vicieux de la ance, money transfers and credit. communities believe that the liquid-
pauvreté, il faut une However the microfinance move- ity constraint is the most important
force extérieure qui
ment to date has generally favoured constraint impeding poor house-
injecte de l’argent, afin
de libérer la force de microcredit, which is the provi- holds and that if it is addressed it
travail de l’économie sion of small loans to households will be possible for households to es-
familiale. who are perceived to be too poor to cape poverty. Economists argue that
qualify for loans from formal finan- to break the vicious cycle of poverty,
cial institutions. This essay mainly there needs to be an outside force
discusses microfinance to these very that will break the vicious chain by
poor clients who cannot even bor- injecting some liquidity, thereby
FINANCE & THE COMMON GOOD/BIEN COMMUN - N° 27 - II/200765
unlocking the household labour. cial services to the poor was because
Microfinance promises not only to it was assumed that the local money
break the vicious chain of poverty lenders were exploiting the poor by
but also to initiate a whole new cycle charging extortionate interest rates.
of virtuous spirals of self-enforcing Yet the poor were paying even then!
economic empowerment that leads The point is that microfinance
to increased household well-being. should be understood as a resource
La microfinance pro- reallocation policy tool and, just like
met non seulement de Misleading assumptions any other such policy, it is important
casser le cercle vicieux
Such is the model that has pro- to keep close watch of the underly-
de la pauvreté, mais
aussi d’initialiser un moted the microfinance institution ing assumptions, for if they are not
nouveau cercle ver- and given it the ‘polite and respect- valid, the policy objectives may not
tueux s’appuyant sur able’ image it currently enjoys. With be realized.
un potentiel écono- all due respect, it is worth raising The main objective of this essay
mique générateur de some questions regarding the under- is not to challenge, prove or disap-
bien-être. lying assumptions of such a popular prove anything, but rather to bring
model. to light the realities of what the poor
In the first place, proponents of people have to cope with in order to
the model assume that many poor repay their loans promptly. The goal
people can become micro-entrepre- is to bring the social and financial
neurs. Entrepreneurship skills and costs associated with microfinance
L’important est de managerial capability are assumed instalments to the awareness of the
comprendre la microfi- as given, thus the ability for micro-
nance comme un outil policy maker.
finance to create employment even
pratique de redistri-
bution des ressources if self-employment. Secondly, even Keeping loan
et, de même qu’avec if the first assumption were correct, repayments high
n’importe quelle the model continues to assume that
politique similaire, il there is going to be a vibrant mar- Over 120 million people current-
est important d’avoir à ket for goods and services and that ly benefit from the services of over
l’esprit les présupposés it will be possible for all micro-en- 10.000 microfinance institutions
sous-jacents, parce que trepreneurs to gain access to markets paying interest rates of between 15
si ceux-ci ne sont pas and 35%. In November 2006 the of-
for their products; otherwise how
fondés, les objectifs ficial Microfinance Information Ex-
poursuivis peuvent
else can incomes be improved from
entrepreneurship if there were no change, Inc. released some thought-
s’avérer irréalistes.
markets? Thirdly, the supporters of provoking statistics from the leading
this model also assume that as long microfinance institutions. The most
as the poor can repay at market rates, profitable microfinance institution in
or slightly above market rates, it is a 2006 was in Africa, with an average
good indication that they are doing of 30.90% return on assets, followed
well financially. Ironically, one of by another in Asia with an average of
the major reasons why it was felt so 30.2% return on assets. On average
justified to bring more ‘formal’ finan- the top 100 most profitable microfi-
GETTING MONEY TO THE POOR OR MAKING MONEY OUT OF THE POOR?66
nance institutions worldwide have cial characteristics are the ones that
an average of 10.44% return on as- make Asia a prime market for micro-
sets. The second largest microfinance finance. D. Roodman and U. Qureshi
Ici, l’objectif principal
n’est pas de poser des
institution after Grameen (in terms (2006) argue that the real genius
problèmes, de prouver of client outreach) is ASA, with over in microfinance is not because they
ou désapprouver quoi 4 million clients. ASA has a 14.53% firmly believe that the poor can pay,
que ce soit, mais plutôt return on assets and it is among the but rather it is because they have
de mettre en évidence top 15 global microfinance institu- been able to come up with clever
les pressions auxquel- tions in terms of profitability. solutions to the problems of build-
les doivent faire face
les pauvres pour rem- The top 5 Microfinance institu- ing volume, keeping loan repayment
bourser leurs emprunts tions in terms of outreach are all in rates high, retaining customers, and
rapidement. Asia where high population density minimizing scope for fraud, and be-
is the norm, coupled with a high ing able to deliver cost-effective mi-
level of poverty and lack of alterna- crofinance to thousands and millions
tive finance. These unfortunate so- of poor clients.
Figure 1: Loan repayment by the poor
Individual
Microfinance borrower
institutions
Dynamic Forced
incentive savings
Joint
responsibility
Peer monitoring
Joint responsibility LOAN REPAYMENT
FINANCE & THE COMMON GOOD/BIEN COMMUN - N° 27 - II/200767
Microfinance institutions have crofinance debts in order to get more
innovatively shifted two classic funds and hopefully offset the debts
banking obligations to the borrow- so far incurred. The clients keep bor-
ers. Firstly, it is the poor who de- rowing to repay, until the ultimate
cide the credit worthiness of bor- face to face with excess debt. Excess
Les institutions de rowers through peer selection into debt can deplete household capital
microfinance ont the borrowing groups. Secondly, it assets and other basic livelihood as-
innové en reportant is still the poor who impose debt sets, thereby leaving the household
deux obligations ban- collection from peers while being exposed and vulnerable.
caires traditionnelles governed by innovative contracts The second is the principle of
sur les emprunteurs. that are too costly to breach.
Premièrement, c’est les
joint responsibility borrowing. This
means that a group of borrowers
pauvres qui décident Four principles rather than the individual is re-
de la solvabilité des
emprunteurs, entre for repayment sponsible for repaying microfinance
pairs. Deuxièmement, The popular explanation of how loans. If the individual borrower
c’est encore les pauvres the poor repay their loans is based defaults, the whole group is held
qui se chargent du re- responsible. The third is the prin-
on four principles. The first is the
couvrement de la dette
principle of dynamic incentive to ciple of peer monitoring and peer
d’autres membres du
groupe, dans le cadre loan repayment. This means that pressure. The individuals within a
de contrats novateurs the lending institution will offer the group monitor and bring pressure to
qu’il serait trop coû- prospect of a larger loan once an in- bear on each other to ensure that all
teux de dénoncer. dividual borrower has been able to loans are repaid on time. In case the
repay the current loan. individual is not able to repay due
This alone is supposed to be an to having made wrong investment
incentive to the clients to finish re- decisions or for some other reason,
paying their current loan and qualify then all the members of the group
for a larger one. Proponents of joint have a moral obligation to help in
L’histoire la plus responsibility borrowing argue that the repayment. Finally, joint liability
connue en microfi- dynamic incentives make micro- borrowing is purported to thrive due
nance est celle de M. finance for the poor operate in a to the principle of forced savings. In-
Yunus, le fondateur de similar fashion to the credit card in dividual borrowers are forced to save
la Grameen Bank qui a fixed regulated amount of money
developed countries, whereby cli-
a inspiré de nombreu- every month.
ses institutions de ents repay because they want to ac-
microfinance à travers cess more credit in the future. Other Neither the group nor the indi-
le monde. writers have argued that the same vidual can access the forced savings
dynamic incentive is a great incen- at will, but they can be used as secu-
tive for providing bridging loans to rity for future loans and can only be
poorer households in order to clear paid back if the individual borrower
their earlier debts. Poor microfi- is dropping out of the project and
nance clients are therefore likely to has been cleared by all members of
get locked up in a vicious debt cycle, the group. The forced saving is not
contracting more debts to repay mi- only a partial security for loans bor-
GETTING MONEY TO THE POOR OR MAKING MONEY OUT OF THE POOR?68
rowed by an individual, but can also repaying reliably even though they
be seized by the microfinance insti- could offer no collateral. Later, with
tution if any other member(s) of the the support of the Central Bank of
group defaults on their loan repay- Bangladesh and donor support, that
ment. humble experiment developed into
La Grameen Bank a the world’s most famous microfi-
aujourd’hui à son actif A success story… nance institution, the Grameen Bank,
un Prix Nobel, 1’700 The best-known story in microfi- and institutions that replicate its pi-
succursales, 16’000
nance is that of Muhammad Yunus, oneering methodology worldwide.
employés et 6 millions The Grameen Bank today boasts a
de clients dont 96%
the founder of the Grameen Bank
who has inspired many other mi- Nobel Prize, 1.700 branches, 16, 000
sont des femmes. employees, and 6 million customers
crofinance institutions worldwide.
The Grameen Bank started in the of which 96% are women.
aftermath of the country’s war of in-
… not always that good
dependence. At this time Bangladesh
was plagued by desperate poverty However, the microfinance story
Cependant, l’histoire does not always have such a good
aggravated by very high birth rates.
de la microfinance ne
The economy was still very rural, track record. A study carried out by
se passe pas toujours
aussi bien. coupled with a government that was the International Food Policy Re-
perceived to be weak and corrupt. In search Institute (IFRI) that focused
order to deal with the poverty situ- on the Malawi Rural Finance Corpo-
ation, there was a strong preference ration came up with rather ‘uncon-
for non-bureaucratic ‘grass roots’ and ventional’ results (Diagne, 2000).
other collective approaches. This The results were in sharp contrast
M. Schrieder (2003) to conventional wisdom and as-
prompted the formation of self help
constate qu’une
groups for equally disadvantaged sumptions regarding the informal
coresponsabilité des
emprunteurs peut me- groups in order to pool resources advantage of the joint liability and
ner à un effet domino, for the mutual benefit of the group its implications of incentives for
dans lequel des em- members. It was in this environment peer selection, peer monitoring and
prunteurs qui auraient that Muhammad Yunus, an Eco- peer pressure with respect to loan
pu payer décident de nomics professor at the University of repayment. The findings did not
ne pas le faire, sachant Chittagong, began an experimental support the widely held assumption
qu’ils n’auraient de that joint liability is responsible for
research project, providing credit to
toute façon pas accès the high repayment rates of the suc-
à de futurs emprunts à the rural poor of Bangladesh. He be-
gan by lending people a little money cessful group lending programs. In
cause de l’insolvabilité
d’autres débiteurs. out of his own pocket and soon real- particular the study found that no
ised that it was enough for villagers effective peer monitoring was taking
to run simple business activities like place in the credit groups because of
rice husking and bamboo weaving. the associated social costs.
He later found that borrowers were Another important finding of
not only benefiting greatly by ac- the same study is that peer pressure
cessing the loans but they were also took place less frequently than im-
FINANCE & THE COMMON GOOD/BIEN COMMUN - N° 27 - II/200769
plied by the joint liability, and when ing from public transactions in com-
it did in most cases it failed to in- munities where individuals worry
duce defaulters to repay their loans. about reputations. And the discov-
M. Schrieder (2003) argues that ery is not really new to micro credit;
joint liability borrowing may lead to money lenders too have used pub-
Contrairement à l’Asie domino effects, in which borrowers lic honor to motivate repayments.
où la honte, l’honneur who would have repaid, choose to When interviewed, a woman street
et la réputation sont default because they would lose ac- vendor who was a client of a group
des motivations im- cess to future loans in any case, due of moneylenders called “the Bom-
portantes pour que les to the default of others. In reality bays” in the Philippines noted that
clients pauvres dans un joint liability may not cut the cost of the Bombays always picked the busi-
groupe remboursent est hour of the day to collect so that
lending but rather shift it from lend-
leurs emprunts, cela
ers to borrowers. there would always be witnesses to
importe peu au Kenya,
alors qu’il est possible A study by J. Kiiru and J. Mburu her embarrassment’.
pour un client d’em- (2007) found that joint responsibil-
prunter de l’argent et ity borrowing in Kenya today does
Trust is not enough
de partir pour un autre not necessarily mean zero collat- Faced with the fact that trust
village ou une autre does not provide systematic so-
eral loans. Peers no longer agree to
ville, sans être trop
guarantee each other’s loans based lutions, joint liability borrowing
stigmatisé socialement.
on sociological ties and trust alone; groups have invented drastic meas-
rather they demand a tangible guar- ures to deal with un-cooperating
antee that the loans shall be repaid. peers. In the study by J. Kiiru and
Unlike in Asia where shame, honour J. Mburu (2007), the joint liability
and reputation are important incen- groups studied had included two
tives to loan repayments by poor cli- preconditions for prospective new
Confrontés à l’insuffi- ents in the groups, those are of no members that had to be met before
sance de la confiance being admitted as members of the
great importance in Kenia, while it
dans les recherches de
is possible for a client to get a loan group.
solutions, les grou-
pes d’emprunteurs and move to another village or city, The first precondition is that
solidairement respon- without being much concerned a prospective member will have to
sables ont imaginé des about such social stigmas. formally sign a contract with her
mesures drastiques On the contrary D. Roodman peers, guaranteeing her future loans
pour traiter ceux de with collaterals; the assets used for
and U. Qureshi (2006) write: ‘even
leurs membres qui ne
MFIs (in Asia) that do not employ this kind of transaction are basic
coopèrent pas.
either joint liability or regular group livelihood assets such as livestock,
meetings for transaction purposes household furniture and cutlery;
tap into this sensitivity to reputation also accepted are capital assets such
for delinquency control: XacBank as sewing machines, and electronic
in Mongolia posts names of clients equipment and the suchlike.
and their instalment repayment re- Secondly, the prospective mem-
ports on the walls of its branches. ber must also provide an acceptable
Peer pressure, [...] is pressure aris- guarantor for her loans. The guaran-
GETTING MONEY TO THE POOR OR MAKING MONEY OUT OF THE POOR?70
tor’s acceptability is based on his or which strained social relations lead
her ability to repay. This person is to a depletion of the social capital in
obliged to sign documents accepting poor communities.
responsibility for defaulted loans by
Group meetings are held on a
the borrower.
weekly basis, and are usually attend-
The same study revealed the ex- ed by a loan officer to ensure that
istence amongst all solidarity groups all due instalments are collected. In
of a rigorous administrative structure some cases the loan officer will not
to ensure that every loan is repaid on agree to end a meeting until all the
time. For example, in order to mini- instalments have been repaid. It fre-
Les institutions de prêt
de microfinance infli-
mize the risk of non-repayment by quently means the groups’ officials
gent des pénalités fi- some poorer borrowers, solidarity (chairperson, treasurer and secre-
nancières aux groupes groups advise their weaker members tary) are obliged to use the groups’
qui ont du retard sur to start submitting their loan instal- pooled fund.
le remboursement d’un ments to the group’s treasurer on a
acompte. Ces pénalités weekly basis. There is need for re- From harassment to
retombent de ma-
nière égale sur tous les
search to help understand the extent loss of property
to which forced savings and weekly
membres du groupe. These funds are raised through
Cela donne une mo-
loan repayments lead to undercapi-
talization of small enterprises and to group registration fees, and regular
tivation aux membres
du groupe d’exclure what extent this undercapitalization contributions to a pool. Usually this
les ménages ou les compromises returns and therefore money is not banked, but held by the
collègues très pauvres incomes. treasurer of the group. In the event
qui présentent de Microfinance lending institu- of there not being enough money in
mauvaises perspectives the pool, the officials may resort to
de remboursement, de
tions impose financial penalties on
groups that delay the remittance borrowing from friends; and if this
manière à minimiser is still not adequate, they may even
les conséquences en of a loan instalment. These penal-
ties are borne equally by all group choose to borrow from the local mon-
cas de non-rembouse-
ment. members. This gives an incentive ey lenders to avoid the consequences
for group members to exclude very imposed by the microfinance institu-
poor households or colleagues who tion, and to keep their records clean
have a bad debt repayment record, in with the institution. Once the group
order to minimize the risk of penal- has ‘cleaned’ its records with the
ties in case of default. The financial microfinance institution, they may
penalties also have the effect of mak- take possession of the assets of the
ing peers extremely aggressive when defaulted borrower until every cent
dealing with a colleague who is not of the debt has been repaid.
in a position to meet her immediate Currently the only way to avoid
financial obligations. In many cases repaying a loan and get away with
such instances lead to strained rela- it (at the risk of the forced savings
tions in social networks. Again there only) is if all members of the group
is a need to understand the extent to decide to do the same. However mi-
FINANCE & THE COMMON GOOD/BIEN COMMUN - N° 27 - II/200771
crofinance institutions already have relatives to meet their repayment
taken measures to minimize these obligations. Domestic animals, fur-
kinds of eventualities. They do not niture, and electronic goods and
grant loans simultaneously to every sometimes clothing were some of the
member of the group, but rather do major assets sold or confiscated from
so on a rota basis. In this way, at any the poor to repay the loans.
given time, there are those members There is a greater than ever need
Selon l’étude de J. Kiiru who have already begun repaying to set up a regulatory framework for
et J. Mburu (2006), and have almost finished their re- microfinance that would protect ex-
au moins 60% des payments. This group will ration- isting property of the borrowers. As
clients de microfinance ally exert pressure on the others to expected, such a regulatory policy
ont connu certaines
repay. In this case it is almost im- is likely to change the operations
formes de harcèlement
par des membres de possible for the entire group to de- of microfinance institutions in an
leur groupe, mis sous fault, and leads to the likelihood of attempt to reduce the risk to their
pression pour leur faire all loans being repaid. D. Roodman clients. However this should not be
rembourser des em- and U. Qureshi (2006) observe that viewed negatively, as microfinance
prunts qu’ils n’auraient through an interaction of human is a policy tool for resource realloca-
pas pu assumer en ingenuity and evolutionary dynam- tion. And like any other such policy,
regard de leur situation ics, microfinance leaders have found subsequent adjustments are inevita-
financière réelle.
a set of techniques in their product ble, to ensure that the policy inter-
design and management, that solve vention tool continues to be relevant
the fundamental problems of mi- to the objectives for which it was
crofinance of cost control, building devised.
volume, keeping repayment high,
and preventing internal fraud, while A call for
operating in a poor country. regulatory policy
Les animaux domesti-
ques, les meubles, les In the study by J. Kiiru and J. Just as personal bankruptcy
objets électroniques et Mburu (2007) revealed that at least should not be a reason for banning
parfois les vêtements 60% of microfinance clients had ex- access to credit cards or mortgages
ont été parmi les prin- perienced some form of harassment in richer countries, it is also not ra-
cipaux objets vendus by fellow group members in an at- tional to denigrate the whole idea of
ou confisqués aux pau- tempt to convince them to repay loaning to the poor. It is nevertheless
vres pour rembourser
loans on which they would other- important to realize that in the quest
des emprunts.
wise have defaulted, given their cur- to alleviate poverty, it is possible to
rent financial capability. 4% had had capitalize on the benefits of microfi-
some of their property confiscated nance, while minimizing vulnerabil-
by group members to settle loans ity to crisis, by improving debt man-
on their behalf, while another 17% agement capacities of the poor and
had actually sold some of their pre- by setting up clear regulations in the
existing assets in order to meet their microfinance sector. There is there-
repayment obligations, and a further fore a need to create policies that
2% had to borrow from friends and increase the demand for goods and
GETTING MONEY TO THE POOR OR MAKING MONEY OUT OF THE POOR?72
services in rural areas; otherwise the of entrepreneurship will require ac-
benefits of entrepreneurship to peo- cess to credit.
ples’ livelihood cannot be achieved. Finally there is currently a recep-
It is not necessarily wrong for tive attitude within the national and
the poor to borrow to meet basic international community to microfi-
food needs. However savings rather nance instruments and, by and large
than microfinance would offer a bet- the microfinance institutions still
Il est donc nécessaire ter alternative. This is because it is have a ‘polite and respectable image’
de mettre en place unsustainable to depend on excess
des politiques pour among many donors and govern-
debt for consumption purposes. ments. It is also true that there is no
augmenter la demande
This calls for innovative yet cheaper
de biens et de services major apparent crisis or emergency
dans les campagnes ; technologies to meet the very basic
in the microfinance institutions. But
autrement, la qualité needs of food, health and education.
there are signs of cracks in the over-
de la vie ne pourra pas All this should be neatly wrapped
all impact that microfinance has had
être améliorée par together with responsible govern-
l’entrepreneuriat. among poor borrowers. These bor-
ance, in terms of resource mobiliza-
tion and reallocation. This should be rowers continue to operate under
developed to ensure that households such tight debt schedules that it is a
would need credit for reasons other real struggle for them to build busi-
than for meeting basic consumption ness volume and therefore growth for
needs, but rather to use for income- the enterprises, let alone escape pov-
generating activities that bring about erty. This calls for regulatory policy,
real increases in income. This would and it is important to note that poli-
provide an efficient way of lending cies implemented in tranquil times
money to the poor, since only those can help prevent major problems in
who can make best use of it in terms the future. •
FINANCE & THE COMMON GOOD/BIEN COMMUN - N° 27 - II/200773
References
Christen, R. P., 1997. Banking Roodman, D. and Qureshi, U.,
services for the poor: Managing for 2006. Microfinance as Business,
financial success, Washington DC, Working paper No101, Washington
ACCION International. DC, Centre for Global Development.
Diagne, A., 2000. Design and Schreiner, M., 2003. ‘A Cost-
sustainability Issues of Rural credit Effectiveness Analysis of the Grameen
and Savings Programs: Findings From Bank of Bangladesh’, Development
Malawi, Washington DC, IFRI Policy policy Review, Vol.21, No3.
Brief No12.
Kiiru, J. and Mburu, J., 2007. ‘User
Costs of Joint Liability Borrowing and
their Effect on Livelihood Assets for
Rural Poor Households’, International
Journal for Gender Women and Social
Justice, July-December.
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