September 03, 2008

Project report

As promised below is the project's report, enjoy!


Microfinance Research and Work in Kenya

Hello, firtsly let me apologise for the lack of a constant stream of updates on the microfinance research project and its findings. The lack of reliable internet access during my first weeks in Nairobi, Kenya practically made me give up on that course! Anyway, now that the project is done, I hope to give you a summarised, yet detailed, account of the nature of work in Kenya.

I arrived in Nairobi in eraly July, as soon as the Wwarwick academic year was done. My first task was to get in touch with the various officials of Kenya's microfinance institutions (MFIs). I was then able to organise several interviews the following week. I began by interviewing Ann Mutahi, chairperson of the Association of Microfinance Institutions (AMFI) Kenya, as well as CEO of Faulu Kenya ltd and Kenya ECLOF Ltd. This gave me a good introduction into the nature of microfinance in kenya, which you will see in the final project report.

In the second week, I was on attachment at Kenya Eclof Ltd in Nairobi, learning about a ew management information system software that they were installing. Ffrom what I saw, the demands for efficient software by MFIs in Kenya is extremely high due to their large scale credit and savings operations. During the next four weeks, I spent my time working as an intern at Faulu Kenya Ltd, a leading kenyan MFI. I was attached at their Nairobi Centra field office and worked mainly as an assistant to the loan officers in the field. It is this internship that taght me the most about the operations and challenges that characterise Kenya's microfinance industry. I was able to observe first hand the group co-guaranteeing methodology, client group organisation and the provision of credit and savings services by MFIs. It is only really by working in the field that one comes to appreciate the scale of microfinance. My last week, was spent on attachment at the Kenya Rural Enterprise Program (KREP) Development Agency (KDA). This is a donor funded research and development institution that manages various microlending pilot programs involving marginalised groups e.g. youth groups, HIV infected and affected, women, etc.

Throughout my time in Nairobi, I was able to visit slums and shanty towns in Kibera, Mathare, Kiambiu, Githurai, Marurui, Eastleigh, Kahawa West, Kawangware; all of which taught me that the poor can enrich themselves if given the tools to do so.

The week after, I spent compiling an intensive week-long report writing that I sent to the project's sponsors The Reinvention Centre, Uni of Warwick.

Overall is was a fantastic learning experience. One that I believe need more contribution from students here at Warwick. One that will also help me contribut to this global microfinance movement.

April 10, 2008

microfinace: the way out?

Writing about web page,

The limelight has been focused on microfinance and the promises it offers to lift many out of poverty. Reading through various literature, microfinance has been termed an innovative business idea’, ‘the best route to sustainable growth’ and for many opens a door to the mainstream economy.

Such comments from academics and the wide range of applause that microfinance has received definitely demonstrates that microfinance displays promises and is a means of reducing poverty levels.

However there are those who question microfinance and its institutions. Stefan Klonner (2001) questions why economists in the field have not paid equal attention to other small credit projects in the developing world. This is echoed by Evan Mervyn Davies (2007) who advocates financial inclusion but states that it has been prevalent for many years before the rise of microfinance in Bangladesh.

So are we ‘putting all our eggs in one basket’ by solely focusing on microfinance and not considering other options? Is microfinance so promising that it will be the answer to reducing poverty and be the tool in achieving the Millennium Development Goals? Shouldn’t practitioners and donors also focus on various small credit projects operating in various countries, in addition to microfinance institutions?

One major financial intermediary in many parts of developing countries is Rotate Savings and Credit Association (ROSCA.) It now flourishes in both urban and rural areas especially where financial institutions fail to meet the needs of the majority of the population.

However microfinance institutions also offer a service to clients who have been excluded from the formal banking sector, allowing many borrowers to use this to finance self-employment activities.

ROSCA is a voluntary group of individuals who contribute financially at set dates to create a fund. This is then allotted to each member in turn. Once a member has received a fund they are no longer eligible until the ROSCA ends.

ROSCA is a worldwide phenomenon known under different names such as tanda in Mexico and Chit funds in India. ROSCA has received little attention from economists, however the turnover from registered ROSCAs in India in 2001 was 100 billion rupees, approximately $2.5 billion. (Gang- Rao, 2001)

ROSCAs are used as a source of housing finance for slum dwellers. Often it is also used by members to contribute to children’s education and to escape the vicious circle of debt and the debt trap: loans offered by money lenders with high interest rates.

Moreover it used by small traders and businessmen providing an opportunity to save excess cash on a daily or monthly basis.

ROSCAs are multi-dimensional; the input does not necessarily have to be cash. Building materials can also be pooled and are used directly for construction or stored for later improvement of a house for instance. The storage of building material provides the opportunity that if in urgent need of cash then the individual can sell the materials in part or completely.

An important impact that ROSCA has is to encourage social networking and community involvement through development.

On the other hand ROSCAs are more difficult to maintain in urban areas, as people are more likely to leave the neighbourhood where they live or work after obtaining the ROSCA fund.

It is hard to control whether members pay on time and evidently this affects the rest of the members.

Interestingly, in order to participate in a ROSCA an individual’s shelter usually serves as collateral as this is evidence that individuals are unlikely to leave the community.

ROSCAs are accessible to the poor and can support their practices of incremental building and financing but are not the answer. They can work for some people under certain conditions such as those with a strong social network.

Another form of ROSCA is susu, one of Africa’s most ancient traditional banking systems which have allowed for fund mobilisation for initiation, and sustenance and development of micro and small enterprise business.

In Ghana only 5-6% of the population have access to formal banking facilities and have limited access to deposits and financial services provided by Formal Financial Institutions (FFI)

The Ghanaian economy is largely characterised by micro and small enterprises (MSEs) and the frustration of accessing credit facilities from formal systems compel the poor to resort the non-banking arrangements like susus. It is termed the ‘Ghanaian Micro-Finance’, which extends microfinance to the least affluent.

The theory behind financial inclusion encompasses the various means described above. Evan Mervyn Davies (2007) states that economic growth should be broad based and sustainable. Enforcing financial inclusion is the means of achieving this.

Whatever the method or means of achieving financial inclusion, it allows those who are normally ignored by financial institutions to become financially self-sufficient.

Admittedly microfinance is a strong tool that can be used to realize financial inclusion. Unlike many humanitarian efforts where the cost of reaching every additional person brings the programme closer to its economic limits, microfinance becomes more self-sufficient with scale.

Microfinance has been heralded as not only financially empowering the under privileged, it can also facilitate institutional relations necessary for broad based social change.

Jude L. Fernando (2006) states ‘there are no other viable alternatives to micro-credit credit and for helping the poor. Micro-credit works!’

Whether it is microfinance or chit funds in India, there are both benefits and downsides to each approach, whether they ‘work’ remains to be seen.

April 05, 2008

An introductory look into the research of Microfinance

Writing about web page

This blog and our research into the prospects of microfinance as a global development tool begins by looking at Jon Westover's journal, "The Record of Microfinance: The Effectiveness/ Ineffectiveness of Microfinance Programs as a Means of Alleviating Poverty". The reason we are looking at this journal because it provides key outlines into the downfall and limitations of most research of microfinance in highlighting its strengths and weaknesses. Jon Westover, in his journal alos highlights some key strength's and weaknesses found by academic research into microfinance.

According to this journal, the main things any research into microfinance needs to look at is:

  1. Despite the increased popularity of microfinance, what is the record of such programs?
  2. What is the effectivenes/ineffectiveness of such programs on reducing poverty?
  3. What are the predominant methodological approaches in the microfinance research literature?

Westover's argument is that as microfinance programs increase globally, it also becomes increasingly important for there to be a formal investigation into its global effectiveness.

Some key strengths and positive impacts of microfinance programs in poor and impoverished areas of the world that Westover highlights in his journal include:

  • Microfinance programs can be an effective way to provide low-cost financial services to poor individuals and families (Miller & Martinez 2006, Stephens and Tazi 2006).
  • Such programs help in the development and growth of the local economy allowing individuals and families to move past subsistence living, and therefore increases their disposable income levels (Khandker 2005).
  • Many academic qualitative research have shown microfinance programs are able to reduce poverty through increasing individual and household income levels as well as improving healthcare, nutrition, education and helping to empower women (Khandker 2005).
  • Microfinance programs increase access to healthcare, making prventive healthcare more affordable to the poor.
  • It allows for more children to be sent to school ants day enrolled longer (Murdoch 1998).
  • Since microfinance services are primarily focused on women, it is argued that this leads to the empowerment of women and the breaking down of gender inequalities, through providing opportunities for women to take on leadership roles andresponsibilities (Goetz and Gupta, 1995).

Westover also highlights a few key reported problems and negative impacts of microfinance and microcredit programs:

  • Some studies have shown that microfinance programs benefit the moderately poor

    more than the destitute, and thus impact can vary by income group (better-off benefit more from microcredit) (Copestake et al., 2001; Morduch, 1998; Dugger, 2004).
  • Most microfinance programs target women (due to higher repayment rates), which may result in men requiring wife to get loans for them (Goetz and Gupta, 1995).
  • Examples exist of a vicious cycle of debt, microcredit dependency, increased workloads, and domestic violence associated with participation in microfinance programs (Copestake et al., 2001; Morduch, 1998).
  • Studies have shown that there are low repayment rates in comparison with traditional financial institutions (Miller and Martinez, 2006; Stephens and Tazi, 2006), thus possibly contradicting one of the key strengths listed above, that such programs can lead to empowerment and increased self-confidence through responsible loan repayment.
  • There have been reports of the use of harsh and coercive methods to push for repayment and excessive interest rates (Business Week, 2005; The Financial Express, 2005).
  • Finally, concerns have been raised that the reliance on microfinance programs to aid the poor may result in a reduction of government and charitable assistance (“privatization of public safety-net programs”) (Neff, 1996).

Jon Westover's journal also highlights another key point. Despite variuos articles outlining key strengths and weknesses of micorfinance programs, many of the research conducted is hugely flawed. As Westover highlights, "Much of the literature reporting positive results of the impact of microfinance programs in reducing poverty fails to meet a rigorous level of study design and statistical analysis, using qualitative methods, looking at single cases or specific areas or regions, using cross-sectional data, analyzing self‐reported measures, and using non-random sampling procedures, resulting in findings that cannot be easily replicated nor generalized to all programs. In contrast to the common qualitative and case-study approaches in the less rigorous body of research, only a handful of studies use sizeable samples and appropriate treatment/control frameworks to answer the questions of real impact and effectiveness............Until more such studies are conducted and findings reported, we must take the findings of less rigorous impact studies with a grain of salt and not be too quick to generalize findings of the impact and effectiveness of a specific program, in specific location, at a specific time, to other cases."

Some other articles and journals that may be of interest to look at are:

  • Khandker's 2005 article: Microfinance & Poverty: Evidence using Panel Data from Bangladesh.
  • Kan, Olds and Kah 2005 (Senegal)
  • Morris and Barnes 2005 (Uganda)
  • Copestake, Bhalotra & Johnson 2001
  • Morduch 1998

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