Microfinance from Below

“All lives have equal value.”

This is the bold declaration of the Bill & Melinda Gates Foundation, which was represented by Bob Christen, Director Financial Services for the Poor at the recent conference “Microfinance from Below: The Power of Savings and Savings Groups in Frontier Economics.”

As Keynote speaker, Bob began the seminar by explaining that his organization starts with this value proposition, which purposely guides them away from targeting specific groups. Instead, The Foundation maintains a core belief that “all people deserve the chance to have healthy, productive lives.”

This article will be a brief exploration of the rapidly growing, firmly established but somewhat compartmentalized discipline of Microfinance. In fact, we will be exploring the even more specialized area of Microfinance savings groups. But before we get there, let’s start with a basic overview.

What is Microfinance?

Microfinance is the provisioning of financial services to the poor, most often in extremely rural, under-developed cultures. For a number of reasons that we will explore later on, these people are typically under-served by traditional financial services.  For now, it is most important to distinguish two kinds of microfinance: lending and savings.

Micro-lending (also known as micro-credit) is the practice of enabling the poor and self-employed to borrow small amounts of money at ‘competitive’ rates for a variety of reasons; procuring equipment, paying medical bills, etc. While organizations like Kiva do a great job serving these markets, it is still fair to question whether enabling debt is a wise strategy for serving the poor. If you want to know more about that line of thinking please read my earlier blog “House of Cards” which explores the concept of money as debt.

Micro-savings organizations, on the other hand, encourage the poor to join in groups for the purpose of accumulating money over time. The group dynamic figures in quite powerfully here, so much so that micro-savings facilitators are actively researching ways to leverage tribal cohesion in more empowering ways. We will explore this concept further, after first examining a basic question.

Who are the poor?

2,600,000,000 people in the world live on less than $2 per day. Yes, that number is 2.6 billion – nearly half the world’s population. Micro-entrepreneurs (those served by micro-lending) account for only about 180 million of the total. To understand the predicament of the vast majority of rural poor, we need to imagine our lives without finance (savings, insurance, credit, etc). Bob Christen illustrated this point with an example of a Mexican family trying to save $0.04 per day on $0.32 per day income.

That’s a bleak picture. To illustrate it further, let’s consider the question “How do the poor get money in a hurry?” We’ll imagine the scenario of a medical emergency to bring this closer to home. The family’s options would include:

1. Borrowing from a lender (if they can get credit) at high interest rates.
2. Liquidating their assets at significantly reduced value (think pawn-broker).
3. Doing without.

This hits home, doesn’t it? But you know (if you are a frequent reader of my blog) that I am an optimist, constantly look for innovative solutions. So while the problems are profound, I can assure you that hope is on the horizon. Second generation banking, for example, is already empowering millions of people in Kenya. I’ll explain that in a moment, but to really understand its influence we need to diverge for a moment into the traditional banking world.

Limitation of banks:

Traditional financial services are not built for the very poor. There are three main reasons why existing products don’t fit this market:

1. High transaction cost: on average, traditional brick and mortar banking costs the branch $1 per transaction. When a customer wants to deposit less than a dollar the bank comes out upside-down on the exchange.

2. Lack of accessibility: branches need to locate in urban centers where there is high demand. By definition this excludes them from serving rural populations.

3. High cost of products for the poor: service fees, transaction costs and interest rates associated with minimum balance requirements are prohibitive for the impoverished.

It is obviously important that we find a way for the poor to save money. This is partially a cultural and social issue that involves priority allocation; learning to ignore day-to-day needs for bigger things like education and medical expenses. As one presenter put it, micro-savings won’t necessarily alleviate poverty, but it can help to regulate cash flow.  When the dry season hits and a family has some savings set aside they might be facing only one month of dire poverty instead of the usual four months.

Simultaneously, we need a model that allows people to save tiny amounts and offers flexibility that will empower them to send money to family securely & quickly. I understood this better when Bob Christen’s story of the Mexican family went deeper into specifics, explaining that it costs them 61 pesos (for a bus ride) and takes 64 hours to get to the bank.  That’s an expensive proposition in terms of both money and time, which could be better used for productive labor.

2nd generation banking:

Clearly there is need for something beyond traditional services. Savings groups are great in some ways, but lack the privacy and security offered with customary bank services. So how can rural people save money, keep it safe, and access it when needed?

When we start thinking outside of the ‘brick and mortar’ box many possibilities emerge. Point-of-sale (POS) terminals are common throughout the world, as are retail outlets, post offices, etc. In the developing world even cell phones are readily available. Enter M-Pesa, a mobile application developed by Safaricom. Here’s an overview:

“M-PESA is an innovative mobile transfer solution that enables customers to transfer money. It is aimed at mobile customers who do not have a bank account, either by choice, because they do not have access to a bank or because they do not have sufficient income to justify a bank account.

M-PESA is a Safaricom service allowing you to transfer money using a mobile phone. Kenya is the first country in the world to use this service, which is offered in partnership between Safaricom and Vodafone. M-PESA is available to all Safaricom subscribers (Prepay and Postpay), even if you do not have a bank account. Registration is FREE and available at any M-PESA Agent countrywide. The M-PESA application is installed on your SIM card and works on all makes of handsets.”

In other words, people in Kenya can go to a local POS vendor and exchange actual currency for M-Pesa credit that shows up in their mobile account. They can then move the credit to other M-Pesa accounts, save it, or withdraw it at any other POS location. This service eliminates 92% of the costs of traditional money transfer.

While there are legitimate regulatory concerns about non-banking companies like Safaricom entering into the financial market, this is an example of an evolutionary and necessary step toward financial inclusion. M-Pesa signed on 5 million clients in 21 months. It is manifesting explosive, scalable, viral growth. As Bob Christen points out:  “looking for impact is the key; whatever we do needs to have intrinsic energy built in.” Still, M-Pesa lacks the commitment to savings that is cultivated in groups. While it gives us something to get exited about, M-Pesa doesn’t directly empower a culture of savings.

To that end, the Gates Foundation too is working on inclusion; recently it funded over  $30 million to 3 Non-Governmental Organization’s (NGO’s) with the goals qualifying the effectiveness of current efforts to:

1.    Reduce savings member acquisition costs from $20-60 to $3-5.
2.    Reduce savings group maintenance costs and balance support with long term group survival.
3.    Reach remote rural clients.
4.    Establish scalability to reach massive impact on the lives of poor families.

This begs the question, should we see savings groups as a transitional stepping-stone or a permanent part of financial culture?

Savings groups: permanent or transient?

Are savings groups an alternative to credit, or a necessary first-step to encourage the growth of lending and other financial services?

Jeffrey Ashe, Director of Community Finance for Oxfam America recognized in the early 1990’s that Micro-lending was not effectively reaching the rural poor. He envisioned a different way to launch microfinance in non-existent credit markets via micro-savings. In something of a success story, those groups went on to become self-replicating.

This “facilitator model” (which encourages savings as compared to a “Provider model” offering credit) essentially generated local ‘nano’ credit unions for the poor. As Ashe points out, by not taking out a loan the poor are 20-30% ahead right away because they don’t suffer interest repayment. Oxfam adopted this approach and have so far positively impacted 160,000 women in Mali. That number is expected to grow to 340,000 within two years via support from the Gates Foundation.

So it sounds like micro-savings groups are a good thing, and we should invest more heavily in them, right? Well, not so fast. There are inherent limitations. Marguerite Robinson, author of “The Microfinance Revolution” argues based on her first-hand accounts that even the rural poor want bank branches for individual accounts. They want security, privacy, convenience, access to loans, friendly service and good returns. Robinson believes that large banks & mobile banking will reach these people by mid-century, and wonders what will happen to microfinance savings groups then? She believes that their roles will change: as the groups lose market share to industry leaders who ‘will provide what people really want’ the microfinance industry will evolve on many fronts (see “Groups as a platform for development” below).

Narasimhan Srinivasa, a consultant formerly with the Central Bank and Apex Rural Development Bank of India, estimates that worldwide 130 million poor have access to savings groups. Of 5 million people included among savings groups in India, 3.7 million have gone on to borrow too. This lends credibility to the idea that micro-savings groups are in fact a transient stepping-stone toward more typical borrower-lender relationships.

Further, as Malcolm Harper (Chairman of M-CRIL) succinctly points out: “Savings groups depend on philanthropy; there is no profit in promoting savings for the poor, but there is a lot of money to be made from getting people into debt. MicroFinance won’t really turn into a way for the rich to get richer” so it will always be limited in scope.

Maybe this isn’t a case of either-or.  Perhaps we should see the developing financial services model as a continuum. After all, the primary savings-group benefit is that it allows people to save $1-2/week. There really isn’t any other financial product available (yet) that allows them to do so. Further, anything that allows financial transactions to occur in villages contributes to greater local economic development.

Escaping poverty: Institutionalization of Preservation?

Can we (and should we) institutionalize and preserve the progress that is being achieved, so we can maintain it over time? This seemingly straightforward question actually opens up many complicated considerations:

•    Without access to credit, growth will be very slow.
•    There must be effective & enforced regulation and supervision of microfinance institutions
•    If a system provides credit but doesn’t create skill and scalable business opportunities, how useful can it be?
•    Does adding a ‘skills’ requirement expect too much from the microfinance institution?” Should savings groups actually become platforms for non-financial services?

To a large extent, this conversation about ‘scaling up’ is really about organizational design. What model should we be using?

Given that every culture has indigenous financial institutions, it seems to me that we need to consider those unique conditions and build each solution to specific markets. This makes me think that we will be best served not by building ‘the model’ but rather be lots of small-market models. The question then becomes: How can we most efficiently determine what’s needed and support it?

The framework could be guided by Cause Marketing (hybrid public/private sponsorship), which might hold some keys to common needs for:

•    A harmonious fusion of bottom-up local influence and top-down capital.
•    A subsistence economy structure where savings is primary & most important, but access to credit exists beyond that to create real entrepreneurial opportunity.
•    A policy that encourages microfinance institutions and members to unify as a political coalition to protect their own interests from political, social & financial influences.

Groups as a platform for development

Beyond the immediate economic benefits offered by micro-savings groups, objective evidence suggests that people like the groups for solidarity & community. Are there ways to tap into this collective energy and intention, and harness it for purposes that lie outside of conventional expectations?

Illiteracy, health services and education are major problems for the rural poor. Can the organizational skills learned through micro-savings groups be harnessed to increase quality of life in non-economic areas while scaling up productivity?

Existing groups are a convenient and relatively inexpensive way to deliver messages, but how often is a savings group the right group for a particular message about education, health, etc.? The group does have elements of organization & trust, so it’s important that we identify how existing organizations can be used in other ways (agriculture, industry, etc). But we also need to realize that that the profit motive is still at work even among the poor (micro-savings groups determine their own in-lending rates, which often run 5-10% higher than those at other lending institutions).

Will the homogenous nature of the group support or suppress diversification? Can the existing savings groups evolve into social networks that can truly generate social capital (including standards for barter and currency)? Is there a way to organize groups so as to prevent or minimize disruptive events (disaster mgt)? Cooperative Federations, for example would allow groups to aggregate demand (based on consumption) to increase buying power and decrease costs. But this requires further organizational capabilities to maximize labor efficiencies and minimize overlapping (superfluous) contributions. On the other hand, this would represent a real move away from the subsidy model and into true sustainability.

Overall, microfinance is about developing local economies. It requires a balance between a common purpose (based on the same fundamental save/borrow properties that created cohesion in the first place) and the kind of diversification that is necessary to build a heterogeneous economy.

While there has been an historical ambivalence in the microfinance community between “local is beautiful (i.e.: avoiding imperialism) and doing something to help, we can now see that organizations are building new models that include a concept borrowed from Enterprise Planning: “know the exit strategy before you build a program.” Here’s to the wise…