A Looming Puzzle About Microfinance

This is my first post, so I want to start by saying a bit about who I am, and why I’m writing this. Second, I want to describe a looming puzzle about microfinance.

First, about me: I’m a professor at NYU, where I teach in the Wagner Graduate School of Public Service. NYU is fueled by the energy of downtown New York. The ethos is very entrepreneurial, and my colleagues share commitments both to ideas and to action.

In the past few years, Wagner has created new programs on social entrepreneurship and global development—and that’s been my focus too. I teach a course on International Economic Development which aims to help students better understand why so much poverty persists amidst so much wealth on the planet—and what can be done about it.

My sharpest focus has been on microfinance, driven by a particular interest in the financial lives of poor households. Two years ago, I helped launch FAI, the Financial Access Initiative , a consortium of researchers at NYU, Yale, Harvard, and Innovations for Poverty Action (IPA is a research-focused NGO), and I’m now Managing Director. The Gates Foundation gave us a running start toward reaching twin goals. First, to do cutting-edge research on the big unknowns of microfinance. (IPA now has research teams in the Philippines, India, Peru, Ghana, Mexico, and elsewhere, piloting new financial products and putting ideas to the test.) Second, to communicate lessons beyond the ivy-covered walls of academia. (Or, at NYU, beyond our graffiti-covered walls.) I advise non-profit networks like Pro Mujer and the Grameen Foundation, and international institutions like the World Bank and United Nations.

The first job has been to show that most poor people do in fact have financial lives, even if they’re living on under $2/day or $1/day in countries like India or Bangladesh or South Africa—three countries in which an amazing set of “financial diaries” show this with rich texture. The diaries follow households over the course of a year, and show how the households save and borrow and insure in varying (and often clever) ways. The second job is to find ways to improve those strategies. I’m excited about new technologies like mobile telephone banking and smart cards, but also about doing better at basics: like designing savings accounts with features that help people save more (no surprise: discipline helps!).

Which takes me to the puzzle. I just wrote a short piece for FAI on what we know about how much financial access improves the profits of small businesses. This is the heart of the idea of microfinance, the idea that won Muhammad Yunus and Grameen Bank their Nobel Peace Prize in 2006. Yunus argues that the benefits of financial access can be huge, raising incomes and transforming lives.

The anecdotes are inspiring. Consider, for example, the story of Vidalia Mamami, a 43 year-old vegetable seller in Tacna, Peru. She sells vegetables from a stand in a local market, and her earnings help support her husband and five children. She had been in business for 21 years, but only recently turned to Pro Mujer’s Peruvian branch for a business loan:

With my first loan I was able to buy more merchandise for my business and I was able to add vegetables and condiments, which have increased my earnings. Before, I earned 18 to 20 soles per day by selling only fruit, but now that I have added vegetables and condiments, I earn an average of 30 to 35 soles per day. This money has allowed my family to eat better and allows me to do things for my children that I could never do before. I remember how my older children were not able to go to school because we didn’t have enough money.

The story puts together a dramatic increase in earnings and ties it to broader social impacts. But it’s not just anecdotes. New work from Mexico shows huge returns to expanding capital in small-scale businesses, both in national surveys and in regional experiments: entrepreneurs are increasing profits by an extra 15 percent per month (or more) thanks to expanded capital access. These results don’t hold everywhere or all the time, but they do show that microfinance rests on more than cherry-picked stories.

The big puzzle is: where the returns to having more capital are so high, why aren’t the entrepreneurs saving more (and then investing their savings in their businesses)? If, as a poor entrepreneur, you could catapult your livelihood just through access to a bit of extra capital, why wait for a microfinance institution? Why not save your way to a better life?

The biggest part of the answer has to be that saving is hard. Saving is hard for all of us, and especially hard if you’re on living on tight economic margins. Improving ways to save isn’t necessarily more important than expanding access to loans, but it’s fundamental. Improving ways to save will mean more than spreading bank branches, though that’s a start. It will also mean developing products that are reliable, can work in poor communities, be amenable to regulation, and build on understandings of both the economics and psychology of saving. The Gates Foundation is interested in the savings agenda, and field work is showing promising leads. Odds are that this is the next Big Thing in microfinance.

Microfinance a tool for social cohesion- a day at the Buduburam Refugee Camp

On Tuesday June 12, 2008, Mr. Offori Attah executive director of the Microfinance Community Development Organization (MFCDO) took us to the Buduburam Liberian Refugee Camp, in Accra, where some 40,000 Liberian refugees still live today.
From 2003 till the beginning of this year, the MFCDO has partnered with other local and international organizations to help Liberian women living at the camp create economic possibilities for themselves and their families.

MFCDO used group and community connections to recruit potential clients and then helped the women organize themselves in small businesses; and with the help of volunteers it provided skills training in computer, sewing, tie and dye, fish smoking, hair dressing, etc…
The goal of the program was for MFCDO to teach these women skills and services that they can use and sell for profit at the local markets. The women enrolled in the training program were then eligible for MFCDO micro loans programs upon completion of the skills trainings.
The loans were granted to the women following a group lending scheme to ensure that the program goal was effectively strengthening community ties and to minimize default risks on the loans. Then group leaders were elected by the members to manage and oversee activities related the management of the loans, the coordination membership activities. The Liberian refugee women through this program were able to enlist 3000 members and finance the construction of a primary school for Liberian children and a hospital for the Liberian community near by the refugee camp.

According to Mr. Offori, MFCDO had pride running this program because of its positive impacts in the community as well as in the personal lives of the women. Unfortunately, today, as you are reading this post the Buduburam camp is closing- for many political, and diplomatic issues, that will be too long and probably not appropriate to discuss here- all refugees living at Buduburam have been asked to return to Liberia or seek to be granted full citizenship in Ghana by the end of June 2008.

Beatrice, a Liberian refugee woman in her late fifties whom I had the pleasure to interview, member of MFCDO women program at Buduburam had been living in Accra since 1996.
She described to me the opportunity that the program created for her as an escape from abject poverty. Thanks to her involvement in the group activities, she said, she was able to provide for her family and had a greater sense of being part of a community.

At the end of this visit, in the van taking me back to Asheshi University, I could not agree more with economists propagandizing microfinance as a tool for poverty alleviation and development. At Buduburam microfinance economically made a difference in the lives of many Liberian refugee women but it also acted as a tool for social cohesion and economic development.

microfinance in Accra, Ghana

As a student in Program Evaluation in Developing Countries, taught by Professor Rema Hanna at NYU in Ghana, I was able to perform a two-day internship with the Microfinance and Community Development Organization (MFCDO) / Open Heart Solutions Agency.

The MFCDO’s self-stated goals are to “promote community development, poverty minimization, micro-enterprises, rural industries, and social entrepreneurship through microfinance services.” The MFCDO works toward these goals through two programs: Susu banking—a savings and loans program, and the support of community-based organizations at the Buduburam Refugee Camp—a Liberian refugee camp outside of Accra. Since Buduburam recently entered the resettlement process (to a refugee camp in Liberia), the MFCDO hopes to restructure its community development programs to target Ghanian women, utilizing the existing infrastructure that once served Liberian women.

Susu banking is a centuries-old banking system that offers savings and loan opportunities to micro-entrepreneurs—mainly roadside stall vendors and market traders—that do not have access to traditional banking systems. Typically, a Susu client will contribute a small amount of savings to his Susu collector at the end of the work day, and after one period, which is usually 31 days, the Susu collector returns 30 days of savings to the client, keeping 1 day’s savings as a banking fee.

The MFCDO operates its Susu banking arm out of the Kaneshie Market, Accra’s second-busiest market, concentrated in a five-story building that occupies several city blocks and extending to the surrounding streets. Twelve of the twenty Susu agents are stationed in booths, from which they accept payments from their specific clients and also make rounds to check on each client, at least one time per day. MFCDO clients save at rates between 50 pesewas (about 50 cents US) to a few Ghana cedis (one US dollar is worth slightly less that one Ghana cedi). The MFCDO has 7,000 clients in and around the Kaneshie market, a number that has grown rapidly since it’s beginning in 2003.

Greetings from Accra, Ghana!

My name is Grace Gabala I am Wagner graduate student studying international finance and interested in economic development. Shortly, after interning with the Financial Access Initiative, I enrolled in Professor Hanna policy and program evaluation course taught in Accra this summer. As part of the course practicum I have been assigned to a mini internship with The Open Heart Solution Agency / Microfinance and Community Development Organization (MFCDO).

The Microfinance and Community Development Organization (MFCDO) was established in 2003 with the goal to use microfinance as a tool for poverty reduction and community development in Accra. From a modest team of three MFCDO increased in breath and scope over the past five years to a team of 20 staff members serving 7000 clients at the Kaneshie market of Accra. MFCDO clients are mostly women entrepreneurs who sell at the Kaneshie market as well as women in few other rural communities.

Through a series of interviews, visits to the clients I was able to observe and hear from some of the beneficiaries how micro-saving (commonly called Susu banking throughout West Africa ) and micro loans help them in their business and life in general.

Posted by FAI Student Network on behalf of Grace Gabala