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.

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