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May 2nd, 2009
02:47 pm - Dabbling in microfinance
So I'm here in Cambodia to have a 'look see' at our projects here. I've been asked to have a look at two areas in particular -- microfinance and gender. Both are areas I've dabbled in, but can't claim specific expertise in. (Indeed, I'm beginning to wonder if have any specific expertise at all, or am perhaps doomed to be a specific dabbler for the rest of my career.)
Why microfinance?
Today, I've been thinking about microfinance. Donors and NGOs are often fixated on microfinance when it comes to livelihoods sector projects. And it is not without reason. Poverty is often a trap that can't be broken out of unless one has opportunities. And opportunities usually cost money. To set up a micro-business or to grow a crop, one needs money to buy tools, equipment or inputs. The question is how does one access that money?
Reading project documents, it seems that Cambodian farmers suffer from a similar plight to farmers in Nias Indonesia (where I had worked previously), and indeed farmers all around the world. Farmers need money to buy seeds, fertiliser and tools. Usually, they need to borrow money to do so. As other farmers are in a similar plight to them and can't lend them money, the only person who to do so is the trader that comes to their village. But the interest charged by the trader is usually about 10% per month! Plus, they become obliged to sell their produce to that trader -- at a lower price. The total equivalent interest rate may be 200% per annum or more. Much of the income at harvest time then goes to servicing the loan and repaying the debt. It's a trap.
Again and again, NGO workers hear such stories around the world. I have not been exempt. This is why we have an obsession with microfinance. How can we give access to loans at a reasonable interest rate -- say at 3% per month? Or how can we help people save money so that they don't have to take out loans in the first place? In some countries, like Bangladesh and India, such microfinance services are now available through businesses such as the Grameen Bank and BRAC. But what if no such service is available? Is there a do-it-yourself alternative?
Lessons learnt from Nias
When working in Nias, I inherited an admirable project that promoted village-level savings and loan groups. About 15 to 25 people were grouped together and given a grant from our NGO. The grant was about $100 per person (about the same as one month's household income). A loan was then provided, and each member was expected to make a repayment with interest. The loan period would typically be a year. As money was saved, it would be 'revolved' by providing more loans to members. In technical terms, these funds were Accumulated Savings and Credit Associations or ASCAs. Training was provided to members on how to manage the fund.
A few months later, we went out to audit each group. In most groups, members had followed the rules exactly. But it was clear that not many understood the savings-credit mechanism we were trying to promote. We were asked many questions like, "Why does the NGO want the loan money back?", "When should our group pay the NGO back?", "But if you don't want the money back, then why are we making repayments?". In some groups, there was already up to $300, but people did not realise they could borrow the money. Come to think of it, even our NGO field staff lacked understanding of what we were trying to achieve. Thusly, none of the groups were functioning as intended.
In a small minority of the groups, there was serious dysfunction. Instalments were not repaid. Bookkeeping was inaccurate. In four groups (out of 70), the group leader or village chief had stolen the initial grant or the repayments in its entirety.
Only one group had a robust savings-credit system. I recall my meeting with this group. It was a group of 30 small-scale fishermen. They had a great commitment to making the group work, and using the fund to get an outboard motor engine for each person. So, they threw out our recommended ASCA system, and developed a new system that suited their own needs. Each month, they would get together, and each person would put in the equivalent of $10. One person would take away the entire $300 each month, and use that to buy their engine. Poorer households were scheduled to receive their share first. They proudly told me that by 2009, each person would have an outboard motor.
In Indonesia, this nifty system is called arisan, and occurs commonly without the input of NGOs. In microfinance-speak, it's a Rotating Savings and Credit Association (ROSCA). The beauty of the ROSCA is that no bookkeeping is required, and money needn't be stored. And if money doesn't need to be stored, it means that there is less chance of it being stolen. And in contexts with low literacy, limited options for safe money storage, and high risk of abuse of power, this was just what was required.
We learned a few lessons. So, a few months later, we were going back to groups to give them a choice in what they wanted to do: 1. dissolve their group and take their share of the money; 2. stay on as an ASCA; or 3. convert to a ROSCA. Alas, this occurred after my tenure was over, and I never got to know the results.
A book recommendation
Being asked to have a look-see at the microfinance on this project, I felt a need to do some revision. To go back to the basics. I had read about how microfinance institutions (MFIs) should be run. Or about best practice for a village bank or an ASCA. But after the Nias experience, I want to be more cautious even about what type of savings-credit mechanism we were promoting, making sure it's appropriate to the context. So what I wanted to know was quite fundamental. My questions are: What type of savings-credit mechanism should we choose to promote, be it an ASCA, ROSCA, village bank or MFI? How can we make sure that we are meeting the financing needs of the people we are working with (eg., for daily consumption needs, business needs, or events such as weddings and funerals)? Can we meet these needs? And finally, how can we make sure that the finance options help the poor to get out of poverty, rather than to be just a safety net?
To this end, I have been reading The Poor and Their Money by Stuart Rutherford. It's also available as a pdf. I highly recommend it. It starts with the assumption that you know nothing (which is good for us dabblers). And it certainly is not prescriptive or evangelistic about one model or another. Indeed, it acknowledges that sometimes, simpler is better. It also draws in valuable empirical information -- such as the fact that NGO-promoted savings and loan groups almost always dissolve once the NGO leaves. Like all good books, it leaves you to make up your mind yourself.
Now filled with more questions than answers, I leave for the project site tomorrow. To ask many questions. And most importantly, to listen and learn.
Current Location: Phnom Penh, Cambodia
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April 14th, 2009
07:59 pm - Thinking of aid effectiveness
There is a new book out on aid that has caused some controversy. The author, Dambisa Moyo, an economist, argues that "overreliance on aid has trapped developing nations in a vicious circle of aid dependency, corruption, market distortion, and further poverty, leaving them with nothing but the “need” for more aid". Myself, I haven't read the book, and therefore cannot offer any comment. But others have read it, and it has received negative review from the likes of The Guardian, The Economist, and a whole swathe of bloggers.
Regardless of whether the book is right or wrong, I have been spending much time contemplating aid effectiveness from my NGO head office ivory tower. This is a time of global economic crisis. Budgets are tight. How can we make sure that there is less 'dead aid'? More bang for our buck? I'm not looking to reform the entire aid world, ranging from UN to World Bank, donor governments to NGOs. I'm just thinking of my small patch -- the NGO sector.
Then, I stumbled upon this paper on how international NGOs could do less harm and more good (Development in Practice, November 2008). For the experienced aid pundit, there is not much new here. We have vented about all of this time and time again over bottles of beer. The paper asks for donors to be consistent. For NGOs to work more collaboratively, and try to genuinely do themselves out of a job by building staff capacity. And lastly and most curiously, for an end to 'aid tourism', where people from head offices and donors go out to visit aid projects. Just for a look-see.
Interesting reading, though my questions still aren't answered. If you have a good paper to recommend on aid effectiveness, please drop me a comment. I have many questions that need answering yet.
Current Location: Canberra, Australia
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