Alms for the really poor - TUP in Haiti

I’ve been reading the postings made by some of the other authors in this network, some working in the “squishy office-chair” department of microfinance, and, while I sit here trying to open my email account for the last three and a half hours on a chair made of rope, I do feel a tinge of jealousy. I’d like to take this opportunity to wish all of the interns luck on the remainder of their work in all of the various fields of microfinance and development they’ve chosen to help out in. Comfortable chairs or not, it’s all important.

For the next four weeks I will be here, in rural Haiti, meeting with families and members of Fonkoze’s pilot Ultra-poor programme, CLM (Chemen Lavi Miyo). Structured after BRAC’s TUP successes, CLM attempts to meet the most basic needs of Haiti’s extreme poor: smoothing consumption, creating access to healthcare, access to savings, confidence-building, skills training etc. The goal is to introduce these members, after the 18 months, into solidarity groups and access to traditional microcredit through Fonkoze. Essentially, this pilot program in Haiti, having a little over 100 women who have been selected through poverty-assessment scores, personal interviews, and a general agreement by their village of their dire need, dedicates itself to helping them form a foundation both economic and, in many ways, emotional from which to build a sustainable access to financial services.

Fonkoze is the largest MFI currently operating in Haiti. With their financial services reaching far into remote, rural villages, Fonkoze displays a clear social mission to target the poorest of the poor. As an organization, ASAP-Alliance of Students Against Poverty (through which this internship has been made possible) shares a similar interest, helping encourage institutions to target the families that microfinance has increasingly been neglecting. The arguments are all too familiar: the extreme poor are too costly to serve with traditional microcredit, their projects are too risky to our portfolios, or they don’t generate enough profit to attract commercial funding. All of these are more or less accurate, but there is a danger inherent to arguing too strongly for a global shift towards the commercialization of MFIs, and that is that we tend to forget about the most destitute. It’s a dangerous mission drift. It’s true that not all of the poor, specifically the extreme poor, can benefit from microfinance, but it’s also become increasingly apparent that some local programs simply aren’t tailored for their specific needs.

CLM offers its members asset transfers (goats, chickens, and an option to start some form of micro-commerce), training, free healthcare, bi-weekly checkups, an emphasis on saving, and a weekly allowance of ~$7 to help smooth consumption for the first 8 months. The 18 month program, now 14 months in, is looking to graduate roughly 85% of their members into the microfinance programs available through Fonkoze, also known as Ti-Kredi. During their membership in CLM, these women are not asked to pay for any of the services extended to them, and are even compensated for some; the 3 days of training are supplemented by free transportation to the site and 2 meals/day to avoid a classroom of starving, and thus inattentive, women.

I can hear all of the editors at the Economist grinding their teeth from here. Yes, it costs an arm and a leg to give basic commodities to those who have absolutely nothing to their name, ~$2000 per person in this program specifically (Haiti must import most of its livestock). It’s not cost-effective, nor does it follow classical economic models of market structures and incentives, but it is necessary. Imagine also, that as an MFI, Fonkoze will welcome future clients who’ve graduated from CLM, who they’ve invested greatly to ensure that they can succeed with the opportunities they’re given. I think these clients will be less of a risk in the long run.

My job will be to interview these women and relay their stories back to the microfinance and development communities in the US through a documentary I’ll be helping to film. I’m not sure what to expect. Extreme poverty is one of those things that, no matter how much you study it, or read about it, or hear others talk about it, or hear Bono talk about it, it doesn’t ever truly feel real until you witness it yourself. It is hard to imagine a level of poverty that cripples a person so completely that they struggle simply to exist. Hopefully, I can learn a little more about the nature of poverty and how, in the near future, I can help relieve some of the suffering associated with it.

Social investment - but profitable, please!

Imagine you start working in a new company: You show interest for your new employer’s mission. You ask yourself “What are the main aspects of my new job?” And your first step is certainly to identify all the features of your new company which distinguish it from the other institutions operating in the same sector. That seems as easy as pie, …especially when you know the sector in which you are working.

So, let’s start with this tough question first: Where do we stand?

Instead of an answer, let’s see what the company’s homepage where I am presently working as a trainee states:

A bridge between microfinance and the capital markets

BlueOrchard Finance is a Swiss company specialising in the management of microfinance investment products.

Ok. Our sphere of action is clearly the microfinance sector (otherwise I wouldn’t post here, right?…), but aren’t we trying to “strictly adhere to the investment policies and guidelines” in order to attract international capital? On the other hand, you could call us a “Fund Manager Company” like all the others which are inherent to all big international banks, except that we pay particular attention to the social impact of our investments.

Let me discuss this second view because it is a fundamental aspect of my work. In my first days I was in charge of a project aiming at the search of new clients, i.e. Microfinance Institutions (MFIs) needing financial resources. I don’t know how many MFIs there are in the whole wide world and nobody could give me reliable numbers, but there’s a big market potential for sure. Actually, BlueOrchard manages a number of funds totalling several hundred million dollars. And every week, during a credit committee session, our analysts propose how much money for how long and under which conditions should be lent to which MFIs. That is a kind of sacred meeting where my colleagues present and discuss credit projects, thrashing out the level of interest rate payments, scrutinizing the creditworthiness of the MFI and drawing the others’ attention to its more or less alarming financial figures. All elements are thrown onto a scale that it is never perfectly stable and where many different factors can change the balance.

It is an instructive lesson to attend such a committee when you should help to find new clients because you learn the main lines of reasoning which determine if a MFI is a valid potential client or not. But this is only the practical side of the coin and doesn’t tell you anything about how to justify the thresholds of our quantitative criteria in terms of financial sustainability. Which are the characteristics of the successful MFIs? How can you distinguish “good” clients from those who don’t pay your loan back?

These questions are definitely not innate to the microfinance sector; however, I think, they play an essential role for the progress of commercial funding in microfinance because private investors aspire to financial returns when placing funds. Return on assets, portfolio at risk, write-off ratio and compañeros are still (and rightly) considered as the best proxies for future profits.

However, this is not everything microfinance is about and while searching for new clients, I came once more across the concept of the “homo oeconomicus”: one of the main arguments we use to attract new financiers is to call their attention on the so-called second dimension of microfinance investments: the social impact. This represents nothing less than a breach with classical economic ideas since it negates the self-seeking agent who only worries about financial gains as long as they are hers. While the typical investor faces a trade-off between the expected yield and the risk of an asset (and thanks to Markowitz we also know how to ease this conflict by using diversification), a socially sensitive agent also has an interest in taking the social return of an investment into account. But how to measure this second dimension? How will you know how much poverty an MFI alleviates? Is it correlated with the financial yield? Hasn’t it got its own, additional risk dimension?

Too Much of a Good Thing?

The global microfinance revolution is about unleashing power. Even small loans can enable poor communities to transform their skills and energy into higher incomes. This is the basic idea celebrated by the 2006 Nobel Peace Prize to Muhammad Yunus and Grameen Bank of Bangladesh. It meshes with economic theory, and it’s backed by thousands of success stories.

So why, all of a sudden, does credit seem like a mixed blessing? A few months ago I joined thirty microfinance leaders for an off-the-record meeting at an estate outside New York City. Participants flew in from Africa, Latin America, and Asia. There were no guidelines and no set topics for conversation. But one theme emerged more strongly than others (and was highlighted in the group’s public statement): we need to start worrying about over-indebtedness. Now. Before the big crash.

This is a remarkable turnaround. For decades the problem has been that poor households have way too little access to loans. But with many microfinance institutions doubling in size every two years, barriers to access are breaking down. Poor borrowers now may have options, weighing offers of credit from competing microfinance institutions vying for business. The response of customers increasingly is: “Thanks! I’ll take them all!” Borrowers thus take loans from multiple lenders, and lenders stay in the dark about how indebted their customers are.

In slowly growing numbers, borrowers are getting in over their heads, triggering even more borrowing and even worse problems. Credit bureaus would help, but they’re largely absent in the communities served by microfinance.

This sounds a lot like the problem with credit cards in the US. For most people, credit cards are a great financial tool, but they’re easy to abuse (Hello, Amazon.com!), and not all financial institutions are equally good at policing themselves. Microfinance is not today suffering a crisis of over-indebtedness of the sort seen in segments of the credit card market. The biggest problem is still that way too many people lack access to decent financial tools, not that too many people have too much access. And that makes it exactly the right time to start thinking about the problem. Before the crash.

A Fundamental Mismatch

On Tuesday I learned that traipsing across the city was not the only way to learn about microfinance in NYC – another way to gain insight was to simply sit back in my desk chair and listen to the phone at my ear.

That morning I participated in a conference call hosted by the NYC Office of Financial Empowerment (OFE) that presented the results of a “Neighborhood Financial Services Study.” The study, launched by Mayor Bloomberg in December 2006, was the first local government initiative in the nation exclusively dedicated to the financial empowerment of low-income residents. The study explored the supply and demand of financial products and services in low-income communities. It specifically looked at banking, savings, credit, and financial education in Jamaica, Queens and Melrose, the Bronx.

To collect data, OFE partnered with two community-based organizations that administered 640 in-person surveys in English and Spanish to residents. It also worked with other organizations to conduct an initial supply-side analysis and to gather relevant community and city data. The two communities of Jamaica and Melrose were selected because of their statuses as low-income target communities – more than one-third of Jamaica residents and more than one-half of Melrose residents have incomes of less than $20,000 per year.

The findings of the study showed that:

• A fundamental mismatch exists between current financial product and service offerings and the needs of households in low-income communities.
• This mismatch plays a more prominent role than bank branch proximity in determining why residents remain “unbanked” and why fringe financial services are so widely used in these neighborhoods.

The following graph displays the responses that polled individuals gave as to why they were unbanked:

This chart displays another example of the imbalance that exists between products offered and the needs of residents of low-income communities.

As a result of the disparity between supply and demand in the formal financial sector, many Jamaica and Melrose residents have turned to fringe financial services. Forty-six percent of the respondents polled reported use of fringe credit sources – of this portion, 26% used refund anticipation loans, 21% frequented pawn shops, 14% took advantage of rent-to-own schemes, and 9% sought short-term loans. All of these services were used either in addition to, or instead of, formal financial services.

The use of fringe financial services is closely linked to financial instability. Respondents with fringe debt have more than twice the odds of experiencing financial instability – 40% of them could not pay rent in the last year.

So what’s to be done? What can policymakers and members of the formal and informal financial sectors do to rectify this fundamental mismatch between products and needs? What measures can be taken to improve the overall financial well-being of low-income individuals?

Well, one answer seems to be to render financial services more amenable to the wants and needs of low-income communities. The OFE study names several target groups and proposes corresponding products that could attract target members to mainstream banking. Among other things, these new products would include: starter accounts, enhanced checking, short-term loans and automated savings mechanisms.

The OFE study also reveals that financial education is strongly associated with positive financial behavior. While many (71%) of Jamaica and Melrose respondents had never received formal financial education, those who had attended workshops or classes about money demonstrated improved financial behavior. A higher percentage of financially educated individuals possessed a bank account, formal savings, and debt in the mainstream sector only, as compared to their financially uneducated neighbors. What I found to be most interesting, though, was that 68% of respondents who belonged to this first category had checked their credit score within the last month, as compared with 46% in the second category. Increased financial education leads to increased awareness and knowledge of financial matters, which in turn results in improved financial behavior.

Simply increasing the number of bank branches in a given area will not improve the financial lives of the unbanked and the partially banked. More fundamental measures that truly get at the heart of the problem must be taken. The gap between formal financial products and the needs of low-income individuals must be closed. Residents of low-income communities must be given the opportunity to learn correct financial behaviors through the availability of financial education. Only once these basic measures have been taken will the unbanked and partially banked residents of Jamaica, Melrose, and elsewhere be able to participate in the formal banking sector and hence achieve financial stability.

Business at the expense of the poor?!

Probably the most promising characteristic of Microfinance is the fact that it creates win-win situations. It is this attribute which makes Microfinance such an appealing tool against poverty. Being a master student in international economics, I am definitely aware of the power of incentives. Even if you are not fully convinced of the notion of the “homo oeconomicus” and its implications for economics, you cannot reject the underlying idea of every voluntary transaction: for if not every participant draws a benefit from the arrangement, the latter simply won’t take place. I was attracted by this commercial/business approach (in international development) and decided therefore to use my summer holidays to gain insight into this expanding sector by applying to BlueOrchard - a private Microfinance Fund Manager located in Geneva, Switzerland – for a ten weeks lasting internship. The company describes the “win-win situation” on its homepage as follows:

“BlueOrchard provides innovative financial instruments and solutions for placements in microfinance, bridging the gap between capital markets and microfinance institutions. We generate profitable returns on investments while supporting the development of millions of promising small enterprises.”

At first sight this rationale seems to be a rather simple endeavour. One might even ask why it took humanity so long to reveal this mechanism. But you must be either naïve or completely brain-washed by classic economic thought to ignore several set-backs troubling this perfect picture:

Whenever I was telling friends about my internship project, the reactions I received barely covered their inherent scepticism. Casting doubt on the two-bottom-line strategy of Micro Finance Institutions aiming at social impact AND financial sustainability my typical conversational partner blamed me for the hypocrisy of my future employer: “Every cent of profit you make would be of better use in lower interest rates for the poor.” And I thought this objection was right. For even if a commercially funded MFI was able to serve the poor while breaking through: wouldn’t it be socially fairer to subsidize the grants and allow hence the MFI to lower its interest rates?

And there were more criticisms about the implications of the private sector of developed countries in microfinance: “You only serve the top-tier, those profit-orientated MFIs which cash in on the vogue and barely worry about their poverty impact.” or “Don’t tell me you choose the MFIs you’re funding with regard to their social performance.”

And little by little I saw my application for the internship more like a revealing battle for truth. I want to show to the man in the street that the microfinance sector is actually in need of private funds in order to expand and that the alternative to commercial funding is not necessarily subsidisation, but simply no funding at all. I believe that there is enough room for both types of financing because the bottleneck in this market is certainly not the demand side. But how can donors and commercial funders coexist in the same sector? While private investors are accused to lose sight of poverty impacts and to provoke a mission-drift of MFIs, the international (donor) organisations’ tendency to subsidize the financial viable microfinance-markets crowds out these investors and reduces the amount of available money on the supply side.

To put it another way: How can the microfinance sector expand without private investment and how can it guarantee its identity with them? Are commercial funders the “good” or the “bad” guy?

The Character of Domestic Microfinance

Second stop on my whirlwind tour of microfinance institutions—ACCION New York.

ACCION NY was established in 1991 as the domestic branch of ACCION International, a global microfinance NGO that services Latin America, Africa and Asia. In 1996, ACCION NY became an independent organization in order to better address the growing demand for microfinance services within and around New York City.

Today, ACCION NY is one of the largest microfinance institutions (MFIs) in the greater metropolitan area. In 2006, the organization had a loan portfolio of $17,037,888, and had disbursed a total of $65.7 million to almost 6,000 borrowers since its conception seventeen years ago. ACCION NY is responsible for approximately 75% of all microloans issued in New York City.

The size and breadth of the organization’s outreach did not come as a surprise to either myself or my companion in exploration, the FAI research assistant, Lara. As soon as we stepped off the elevator on the seventh floor of the Manhattan office building, we were struck by the flurry of activity. Sixty or so ACCION workers were busy analyzing data, logging numbers, tracking loans, and meeting with clients – all working side by side in an atmosphere that could only be described as efficiently frenzied.

At the receptionist’s desk, we were greeted by Laura, Manager of Communications Projects at ACCION. Unable to find an empty meeting room amid the hustle and bustle of the office, Laura herded us into the office’s pantry where she patiently proceeded to answer our long list of questions.

We learned that ACCION receives funding from a number of commercial and governmental sources, but about sixty percent of the organization’s operational costs are covered by self-generated profits. The MFI offers a variety of loan products, including business term loans, lines of credit, start-up business loans, and small credit development loans. Loans range from $500 to $50,000, though tend to average from between $7,000 to $10,000. Once a client is issued a loan, that client is monitored through formal accounting procedures and occasional check-ins with loan consultants until the loan is repaid. During the life of the loan, ACCION provides clients with a range of educational services that include financial literacy training and business plan development.

ACCION, like NYANA (see July 14^th post) has managed to provide residents of NYC with efficient and effective microfinance services. It has done so by successfully adapting the Grameen model to fit the needs of clients operating within the U.S. business sector. For those unfamiliar with the Grameen model, let me take a moment to explain:

The Grameen Bank of Bangladesh, started by economist Muhammad Yunus in 1976, is considered the founder of microfinance. The Grameen model of microlending is based upon a couple key elements: the lending-out of small sums of money over a relatively short period of time, frequent incremental repayment periods of days or weeks, monitoring and collection meetings orchestrated by local loan agents, group-lending where joint-liability replaces the need for collateral, and a predominantly female clientele that hails from the lowest echelons of society.

For a number of economic, structural and cultural reasons, the Grameen model is very effective in the developing world. However, New York is not Bangladesh—a whole different set of constraints operates here. U.S.-based MFIs have therefore been forced to alter and adapt the Grameen model in order to best address the needs of their domestic clientele.

The first and most obvious difference between international and domestic microfinance is the size of loans—domestic microloans tend to be substantially larger than microloans abroad. Whereas a Grameen loan of a couple hundred dollars can sustain a Bangladeshi family business for a year, an ACCION loan of a similar size could achieve no such thing in New York. The costs of starting-up and maintaining a business in the U.S. are simply much higher than in the developing world.

Secondly, domestic MFIs issue microloans to individuals rather than to groups. This is a result of the formality of the U.S. business sector, specifically with respect to credit history. In the U.S., individuals must possess a credit history in order to access many basic services from a credit card to a home loan. But for foreigners living in the U.S., credit histories are notoriously hard to establish. One of the main goals of ACCION and other domestic MFIs is to give clients the opportunity to establish a credit history, hence individual-based lending schemes.

Another consequence of the formal nature of the domestic business sector is that domestic MFIs are unable to work with the very poorest of the poor. Because of the operational costs of running a business, paying taxes, and the general expenses of the domestic formal sector, recipients of microloans in the U.S. tend to be relatively better-off than their international counterparts.

And finally, while MFIs abroad disproportionately lend to female borrowers, U.S.-based MFIs have a much more balanced gender breakdown. For example, in 2006, only 40% of ACCION’s clients were women, a figure that is roughly parallel to the gender breakdown of the New York City business sector.

For all these reasons and many more, domestic microfinance is a very different phenomenon than international microfinance. ACCION NY is emblematic of a U.S.-based organization that has managed to efficiently and effectively adapt the international model to best serve a domestic, urban clientele.

Bank of Ghana to Regulate Susu Collection Agencies

In the wake of several scandals surrounding susu banking in Ghana, The Bank of Ghana, the government’s supervisory and regulatory authority pertaining to the country’s financial sector, is embarking on a project that aims to regulate the susu banking industry. Over the past year, several freelance susu collectors, and at least one susu collection agency, have scammed clients out of their savings, in the amount of more than USD 65,000 equivalent in several cases. The Bank of Ghana will advocate for laws by which susu-collection agencies—currently free from governmental regulation—can be monitored and regulated through standardized practices and formalized operations.

By Susu banking in Ghana is a more-than-¢160 million cedi (USD 160 million), or £75 million, economy that operates in the informal sector. Services range from individual susu collectors serving a handful of clients to large agencies that serve close to 10,000 clients. The magnitude of this industry necessitates some sort of governmental regulation.

The Institute of Susu Collectors, Ghana is a one year-old umbrella body to which many susu collection agencies belong that acts as a networking and self-monitoring body. The susu collection agency that cheated its clients out of their savings (the director disappeared to a northern region and the office experienced a fire) was neither a member nor known to the Institute of Susu Collectors. In response to the scandals, Mr. Godwin Ofori-Atta, executive secretary of the Institute of Susu Collectors and also the executive director of the susu banking agency for which I intern (the Microfinance and Community Development Organization), stated to the local press that, “the Institute was established to collaborate with the Government and Bank of Ghana to organize 'susu' companies under proper regulation for the general benefit of all 'susu' patrons and the national economy.” One short year later, the government, through the Bank, has joined the movement to regulate susu banking.

To learn the details of susu-banking operations, the Bank has invited three members of the Institute of Susu Collectors to participate in a study to learn about their susu savings and loans operations: the Open Heart Solutions Agency, the MFCDO’s susu-banking division, is one of the three. The Bank is examining the financial management of the selected agencies, conducting audits, and studying their day-to-day savings and loans operations.

Through the Institute of Susu Collectors, the Bank has already encouraged susu collection agencies to incorporate as a LLC, which will facilitate regulation and legally define liability in the industry. Once freelance susu collectors, unregistered susu-collection agencies, and sole-proprietary or NGO-registered companies are LLC registered, the owners can be held legally liable to their clients for funds collected.

One susu banking practice that the Bank will closely regulate is loan extension. Most susu collection agencies grant loans to their clients from money collected from other clients in the susu savings operations. Although loan-default rates are low in susu banking (as in micro lending), this is an obviously risky practice because borrowers have no collateral and susu agencies and freelance susu collectors are uninsured. Instead of lending against client savings, the Bank of Ghana has encouraged members of the Institute of Susu Collectors to seek funds for extending loans from outside sources, such as commercial banks or international agencies that offer loans or grants.

Once the Bank of Ghana determines the official operating and monitoring processes that will govern susu collection agencies, it will empower the Institute of Susu Collectors to certify susu collection agencies. This government-approved certification will identify those agencies whose operations abide by approved accounting and banking practices in regards to both the clients they serve and the large banks or other institutions with which they may have partnerships (for example, an institution that grants funds for the loans extension).

The Open Heart Solutions Agency is currently registered as a sole-proprietary company but will roll over its operations to a new, LLC-registered company. The organization will maintain its current operations and mission as it moves toward a formalized, and government-regulated, industry.

Microfinance in NYC

Generally, when people hear the term “microfinance,” they think about small amounts of money lent out to groups of impoverished women in developing countries. In their minds, this scene might occur against the backdrop of thatched huts or rice paddies in rural South Asia or Africa. Perhaps a few cows or chickens stroll into view as the loan agent comes to call on his clients. Rarely, if ever, do people imagine individuals arriving via the subway, or crossing a traffic-filled Broadway Street, to seek out their desired loans.

Most people are unaware of the vast array of microfinance services that proliferate throughout the United States. Yet, for many resource-deprived residents of major metropolitan centers and rural areas throughout America, microfinance services are a very real, and very integral, part of life. As the summer intern for The Financial Access Initiative (FAI), I’ve been assigned the task of investigating the often-overlooked phenomenon of microfinance in America. Over the next couple of weeks, I hope to shed light upon how microfinance services operate in the city of New York.

Accompanied by the FAI research assistant, Lara, I made my first stop at NYANA (New York Association for New Americans) located in lower Manhattan on Broadway Street. NYANA is a large organization that provides immigrants and refugees living in New York City with a variety of services regarding education, healthcare, legal advice, and financial aid. When Lara and I entered the office of NYANA’s Micro-Enterprise Development Program, we were warmly received by two employees—Leonid, a loan officer, and Yanki, the Director of the Business Center.

Leonid and Yanki talked with us at great length about a range of topics concerning their work. We learned that NYANA receives funding from a number of governmental and commercial sources. The organization uses these funds to cover operational costs, as well as to extend a variety of loan products to its clients. To receive a loan from NYANA, individuals must meet some basic criteria: They must reside within the five boroughs of New York and have either an existing or start-up micro-enterprise. In Queens and Statten Island, borrowers can be US-born, while in other boroughs borrowers must be foreign-born. (As of 2007, NYANA's Women's Business Center has allowed the organization to lend to all female entrepreneurs.) Ideally, individuals seeking a loan should be “un-bankable,” that is, either without, or with a very weak, credit history, and therefore unable to access loans from a bank. Loan products range from $500 to $35,000, with terms extending up to five years. The organization has a very low default rate among clients with a loan loss rate of less than 2%.

Yet, despite the general success of NYANA’s provision of financial services, vice-president Yanki told us that she believes the organization should strive to become more efficient. Comparing NYANA to the Grameen Bank (often considered the founder of microfinance) in Bangladesh, she told us that “everything here [in New York] is slower and less efficient.” Seems a bit ironic, no? But, she went on to explain how the scale and character of the city complicates NYANA’s work –while a Grameen worker can hop on his bicycle and visit 15 clients in a day, a NYANA worker simply cannot work as quickly or cost effectively.

Although unable to alter this aspect of the urban setting, Yanki believes that NYANA must first and foremost strive for increased practicality. Instead of relying upon theoretical or academic teachings, NYANA workers should focus on the human aspect of microlending—they should seek out personal relationships with clients, pay heed to lessons learned in the field, and above all, employ common sense when faced with a problem. (An example of this sort of practicality is apparent in NYANA’s policy that agents of diverse racial and ethnic heritages should work within communities of similar cultural backgrounds.) At the same time though, the organization should streamline its services—it should employ an under-writer responsible for creating and maintaining a scoring model that would standardize the lending process. This, in turn, would allow agents to spend more time developing personal relationships with their clients.

However, therein lies the paradox—with increased efficiency comes the risk of becoming a detached, impersonal institution that churns out micro-loans. In the coming years, NYANA must find a way to increase its efficiency while maintaining its commitment to practicality and the development of personal connections. This will be no easy task, but with creative and committed individuals like Yanki and Leonid at the helm, I feel confident that NYANA will succeed.

July 4th Picnic

I took my 3 sons to the DC suburbs for the July 4th weekend. The highlight was the annual picnic in my parents’ neighborhood (pony rides, egg toss competition, blueberry bake-off). One of my parents’ friends, someone who has been around the international development scene for decades (including a stint at the World Bank), disturbed the patriotic revelry to give me her 2 contrarian cents on microfinance.

“I can’t stand it,” she started. “Half the people I know say they’re involved in microfinance. They’re driving BMWs and working in finance and think they’re changing the world.”

“But they are!” I insisted. Okay, maybe they’re not changing the world yet, but achieving global financial access requires the energy and intellect of people who know about securitizing debt, swapping currency, re-insuring risk, and developing retail innovations. The unmet demand for finance stretches wide. In many parts of Africa, less than a quarter of the populations have bank accounts of any kind, even among the entrepreneurial class. In India, the millions of newly-banked citizens are outnumbered by the millions who remain unbanked. Thus, enter the bankers. Clear the way for the BMWs.

It was too nice a day to talk shop at a picnic. So, what I didn’t say is that recent international evidence paints a far more complicated (and more interesting) picture. The evidence shows clearly that commercial microfinance is growing (thank you, bankers). But it is not, in general, reaching the poorest customers—especially outside of South Asia. Reaching the poorest customers is still the niche of NGOs and government banks. And it’s a huge niche—so big that it shouldn’t even be considered a niche at all. In fact, NGOs, Indian self-help groups, and government banks serve over three quarters of microfinance customers worldwide, despite the attention that commercial microfinance approaches have been getting in The Economist and other business publications.

It’s exciting to think about the power of unlocking the “fortune at the bottom of the pyramid” through innovative for-profit businesses: the bankers have a role. But, in microfinance at least, if that was the only available strategy, there would be no hope of soon bringing finance to many of the world’s poorest citizens. And lacking access to reliable finance is, as they say, no picnic.

Teaming Up for Sustainability

It is contemporary knowledge that microfinance has the potential to lift poor families out of poverty, but I have been pleasantly surprised to find out that more and more commercial banks are supporting and teaming up with small microfinance organizations on the ground in order to increase access to financial services to the poor.

In Ghana Barclays- one of the world’s leading bank with its headquarters based in London- is collaborates with traditional Susu collectors like Mr. Offori (executive director of MFDCO) to provide and broaden the range of financial services available to the poor. After some research, I found out that the formal/ established partnership between Barclays and Ghanaians microfinance organizations exist since 2004.

What Barclays bring to the market (a market worth an estimated 75 million British pounds) are services such as deposit accounts for the collectors and capital for loans that the collectors can in turn lend to their clients. Thus, Barclays can be seen in this market as the middle man who comes in mainly with capital and expertise. So, a win-win deal for both parties isn't it?

Well, it is not that simple…

In fact believe it or not, Barclays has actually failed to bring on board some big MFIs in Ghana such as MFDCO because such partnership in the end increase operation costs for the collectors, and eventually forcing them to increase interest rates on their loans. After offering training and information sessions to close to 70 % of Susu collectors and agencies in Ghana today, only about 500 of them have partnered with the giant British commercial bank. As far as MFDCO concerned, its executive director had to turn down the offer based on his calculations that the interest rates it charges to its clients would have to increase from the current 20% on a three months loan to a new 35%. In a competitive market with close to thousand other Susu collectors in Accra alone this is a risk MFDCO was not willing to take.

There are currently about 4000 Susu collectors in Ghana which engage with an estimated 21 million customers, with small collectors servicing between 400 and 2000 clients. Although, stronger and more formal relationship between the formal and informal banking sectors in emerging markets such as Ghana is welcomed, such partnership should be worked out so it does not ultimately restrict access to financial services to the very poor: the very market failure microfinance institutions aim to redress.

My time at the MFCO was shorter than what I would have liked, but I hope to have brought you some key insights into the challenges of opportunities that MFIs have to face in their day to day administration.

It was a real delight for me to see first hand how the lives of hundred people were changed through microfinance, I am grateful for MFDCO for allowing me to interact with its staff and clients and last but not least the staff at the Financial Access Initiative especially Lara for posting on my behalf when I had not means to access the internet while in Accra and now in Addis.

Have a great summer….

Posted on behalf of Grace Gabala

Formalizing an Informal Institution

Susu banking is not new. It is a well-established, long-running financial solution to the age-old problem of access to credit, which is widely experienced by merchants in the informal sector, petty traders, and small-scale businesses throughout West Africa. “Susu” in Ghana is known as “esusu” or “ajo” among the Yoruba in Nigeria, “yesyes” or “jojuma” in Togo, and “nago” in Côte d’Ivoire. This system of microcredit supports traditional methods of small-scale savings and loans operations and encompasses the traditional daily deposit collection common to West-African markets.

Located in a large market in Accra, Open Heart offers high-street banking services to its clients: a petty trader approaches the window of the tiny office to make change for a five-cedi note; a woman who sells water sachets comes for an advance in collecting her payment; two young boys, each with a handful of coins come to deliver their family’s daily “contribution”.

One of the projects I am working on is computerizing the banking records of the 7,000 clients served by the Open Heart Solutions Agency. We are creating a client database to facilitate access to client information, such as credit history, savings balance, and loan repayment.

The current records and accounting systems are precise and the lines of responsibility are well defined, but with a rapid rate of growth, the agency needs to modernize. Many clients are identified by a nickname, their first name (which is commonly the name for the day of the week on which they were born), or a combination of their first name and the item they sell. (“Kwame Shoes” is one of my favorites!) While each of the twenty susu agents knows her own clients and sees them nearly-every day, it is increasingly difficult to keep track of them (one agent has nearly 500 clients), using only client contribution cards.

To address this the executive director of the agency asked that we obtain official information from each client so that the records are more formal and more complete. With consultation from the susu agent supervisor, I created client profile form for each susu agent to use to collect personal information on her clients—legal name, nicknames, home address, business or trade location, DOB, and then client account number and card number (which are the two indicators currently used to identify client accounts).

The following day I met with the agent supervisor and several susu agents to see where we stood and to estimate the amount of time this project would take. The susu agents returned with no information, explaining that their clients were apprehensive to give out personal information, that even though they interact with their agent a few times a day, they didn’t want to have an account in their legal name and they didn’t want their agent writing any unnecessary information about them. The agents did their best to explain to the clients why they were collecting this information, but in the end, they had to explain to me that their clients still didn’t understand why the agency wanted the information, and were, in a sense, afraid to formalize their financial practices.

Hesitation to disclose personal information is a cultural difference and it was maybe an obvious response, considering that those who use susu prefer informal banking institutions. The effort to modernize the susu records and accounting will have to stay in the office, leaving susu banking to be a mix of formal and informal institutions.