The MicroCredit Summit reaffirmed and gave politically charged impetus to the commitment to reach large numbers of the poor with MicroCredit services as soon as possible.
In order to do this, increasing numbers of organizations are “replicating” the programs of successful Microfinance Institutions (MFIs). This approach allows rapid start-up using a tested model and systems.
Unfortunately, these strengths are also weaknesses since the models being replicated usually require substantial modification to make them appropriate for local conditions. Replication of a scheme designed for densely populated Bangladesh in (for example) sparsely populated mountainous areas is neither feasible nor desirable.
Furthermore, close adherence to “blueprints” is likely to substitute for careful research into the needs and opportunities for the provision of financial services for the poor, thus the design of appropriate systems.
All institutions seeking to provide appropriate, quality financial services in a new environment need to examine the “financial landscape” in which they will be operating. This will allow the institution to understand the options and to become aware of the competition they will face from existing formal and informal financial service providers.
Replication also risks the suppression of innovative and creative ways of providing still better financial services, particularly when promoted by powerful apex funding organizations as is currently in vogue among donor agencies.
Apex funding institutions allow donors to support larger numbers of small Microfinance organizations but risk unintentionally suppressing innovation through their operational norms and reporting requirements.
Perhaps the most dangerous form of “replication” is that driven by consultants, leaders, or donors designing and/or recommending systems they only partly understand, thus giving incomplete and/or blurred blueprints
With the success of the Microfinance industry, the growing international reputation of the Grameen Bank, and the drive to reach large numbers of the poor, there are many alarming examples of this happening.
Finally, there is a tendency towards using credit as a way of attracting clients to meetings (where they can be required to participate in other activities such as family planning, etc.).
This “part-time banking” is dangerous both as a result of the complexity of providing financial services and because the clients come to rely on and expect permanent access to savings and credit facilities and are likely to suffer when and if the organization stops or “withdraws”.
The Gospel
The implementation of MicroCredit schemes in the name of “Grameen replication” has become almost a religion. The MicroCredit Summit was, to a large extent, a convocation of the disciples who pledged to spread the word and reach 100 million poor by the year 2005.
One can easily imagine that quality may be sacrificed on the altar of quantity. This fear was greatly heightened for those practitioners who attended the MicroCredit Summit Preparatory Committee meetings, which were ably managed and manipulated by the dedicated and extremely professional RESULTS team.
During the second of the Preparatory Committee meetings, in Washington in September 1996, practitioners attending attempted to stage a revolution in the interest of best practices. Speaker after speaker noted that the very name of the “MicroCredit Summit” would send the wrong message, and that with MicroCredit as the rallying cry, the vision could be more simply stated as “driving 100 million poor women into debt by the year 2005.”
Others noted that the astronomical projections for the amount of capital required from donors to fund the effort could be raised, in substantial part, through providing appropriate savings services. Almost all concluded that the name should be changed to “Microfinance Summit” or perhaps “MicroEnterprise Summit” – but not “MicroCredit Summit.”
The reaction from the podium was to politely agree that savings might be important and then to stick firmly to the Summit’s original name on the basis that it was somehow easier to explain to the general public that poor people needed loans so that they could develop profitable microenterprises.
Besides, the name “MicroCredit Summit” had already gained some substantial recognition and the stationery had been printed. A few light cosmetic changes referring to the importance of savings and financial services were buried deep down in the Summit’s Final Declaration, but the credit-driven model had won the day.
In retrospect, what we practitioners had failed to understand was that the Summit was being staged primarily as a Public Relations exercise to raise public awareness of the potential of “credit for the poor.” It had been formulated in this manner (despite the presence of leading Microfinance practitioners – including Nancy Barry of Women’s World Banking, Ela Bhatt of SEWA, and Michael Chu of ACCION on the Organizing Committee) because the Summit was the brainchild of Sam Daley-Harris, (whose RESULTS organization had long been lobbying in Washington on behalf of Grameen Bank) and Professor Yunus.
The Grameen Bank’s name and its remarkable success in reaching literally millions of poor women in Bangladesh (which, sadly, still represents a hopeless “basket case” to most Americans) would be a powerful symbol to demonstrate that there was indeed a way of helping the very poor. In a time when people all over the world seem to be less and less willing to contribute to or pay taxes for development programs, it was (and still is) important to showcase the “success stories.”
Thus, the inspiration and driving force behind the Summit was the Grameen Bank’s internationally renowned and respected credit-driven model. The ultimate aim of the Summit was to publicize MicroCredit’s success and potential, and thus raise the funds to “put money into the hands of poor women.”
In order to reach the ambitious goals of the Summit, existing institutions will have to expand, and many new MicroCredit organizations must be established.
In many respects, the easiest way of establishing new organizations is through the process of “replication,” whereby the “replicator” organization takes the blueprint of an existing successful institution and attempts to implement it. Indeed, this approach is being promoted by many agencies.
But it requires careful consideration.
There is a remarkable level of diversity in the implementation methodologies followed by organizations inspired to “replicate” – even amongst those “replicating” the same model.
However, this diversity is not usually driven by careful research and design methods to create economically appropriate systems tailored to meet the needs and opportunities of the environment in which the organization operates.
More generally, the diversity of systems is driven by the needs of the project or the institution implementing it: their existing groups, non-financial service objectives (such as the delivery of family planning commodities or community conscientization, etc.), the donor agencies’ disbursement schedule, or blueprint implementation models.
These systems then often perform poorly and require extensive modification in the light of hard reality (geography, topography, demography, economy, society, culture, communications, and infrastructure, etc.) in the field.
There is now an increasing recognition that donors’ Microfinance “projects” should support the development of sustainable institutions designed to deliver cost-effective quality financial services to their poor clients on a permanent basis.
This is a big step forward: previously projects came, delivered loans and then left, often leaving “beneficiaries” in much the same position as they were before. This recognition also makes clear the need to identify and support an institution separate and distinct from the “project” or process of supporting the institution.
Implicit in attempts to create sustainable institutions is the need to make the institution, its financial services, and the systems to deliver them, appropriate for the local conditions … and not just to impose a blueprint Microfinance program developed and designed in a distant land in an alien environment.
Blueprints for Replication
When an institution is developed (or under the old school a project is implemented) from the beginning as a Microfinance program, it is common to see the system driven by blueprints (such as those promulgated by the Grameen Trust/CASHPOR, FINCA, or Foundation for Development Cooperation (FDC)) rather than by a careful analysis of the needs and opportunities in the communities in which the institution operates.
The blueprint approaches, such as those being promulgated by Grameen Trust/CASHPOR, and more recently ASA, risk attempting to standardize rather than optimize systems and client service, and do so irrespective of the diverse settings in which they are implemented.
In many ways, these approaches help in that they offer tested methods and systems, but hinder in that they do not encourage adequate research into local constraints, needs, and opportunities.
The blueprints can be seen as, and indeed often are, substitutes for research and analysis. In this respect, the emphasis of UNDP’s MicroStart on reviewing the “Strategic Environment” and “Market” through secondary data analysis and multiple interviews makes this a more situation-responsive and responsible blueprint.
But, despite these significant limitations, there are some notable successes that have arisen as a result of these types of blueprint approaches.
The blueprints can often give a reasonable starting point that can then be modified in the light of experience and client demand … if the institution learns to listen.
But blind adherence (often enforced through donor implementation methodology and reporting requirements) to these blueprint replication programs does little or nothing to innovate, to search for improved ways of meeting the needs of the poor for financial services.
It is this failing that is in many ways one of the most dangerous since it not only risks failing to address community- or location-specific needs and opportunities but also ingrains and institutionalizes a limited number of high-profile models with all their increasingly well-acknowledged shortcomings.
Less well-known, but in many ways more successful, models (often those which have not accessed large amounts of donor funding and therefore have not been subjected to endless evaluation missions, peer-reviewed research, and profiling in public relations publications) are often overlooked.
Furthermore, blueprint programs usually ignore existing informal sector savings and loan groups and systems from which they could usefully learn and which they could harness to strengthen their programs.
Pal (1997) provides an interesting description of Credit with Education, the Freedom From Hunger model, modified to fit the local situation using pre-existing systems of “caisses populaires” (credit unions), “caisses villegoises” (smaller village banks), and “
tontines” (ROSCAs) in Burkina Faso. This helped the program overcome not only the challenges of Burkina Faso’s social systems but also those presented by the huge distances between villages. She notes that in this case, “replication … does not refer to what Hulme termed the “blueprint method” (1993) whereby one approach, in this case the GB” [Grameen Bank] “model, can be universally applied to a variety of situations and contexts” (Pal, 1997).
It is this need to explore the existing informal and formal sector environment (the “financial landscape”) that has been largely ignored to date, but the importance of which is increasingly recognized as a prerequisite for designing appropriate quality financial services for the poor (see, for example, Johnson and Rogaly, 1997). Rutherford has listed the types of questions that a client-responsive Microfinance Institution should ask in designing its system and products (See the previous page).
Answering these questions will allow the Microfinance Institution (MFI) to identify opportunities to provide savings and credit facilities or alternative pawn/mortgage facilities, to promote Rotating Savings and Credit Associations (ROSCAs) or Accumulating Savings and Credit Associations (ASCAs), self-help groups, or credit unions.
The process of asking and eliciting answers to these questions will also give the MFI important information on the magnitude of financial transactions underway within the community, and thus useful information for setting loan sizes, etc.
In short, the process will give a good overview of “the financial landscape”, and what, if anything, the MFI can contribute – as well as an overview of the competition it will face.
Mass-Production Blueprints
Similar blueprint approaches are coming to the fore with the increasing interest in second-tier, apex organizations.
These are greatly favored by donors as a way of financing many relatively small Microfinance organizations without having to worry about them on an individual basis; the responsibility for supervision is given to the apex organization.
Furthermore, some argue that the better apex organizations do not simply wholesale capital funds but also provide technical training and backup. There are two fundamental problems with this: firstly, it sets up an inherent conflict of interest, and secondly, it can lead to the suffocation of innovation.
The conflict of interest arises from the apex organization’s dual role as financier and technical assistance provider. As a financing institution, the apex will want to lend its capital to its client MFIs as quickly as possible (and therefore may be willing to cut corners in terms of quality irrespective of concerns relating to long-term portfolio quality).
The apex will also be keen to demonstrate (both to the MFI and the world at large) the effectiveness of the technical assistance it delivers and be under significant pressure from the recipient MFI to follow the assistance through with capital funding. In the event of one of the MFIs it funds facing problems that threaten its investment, the apex is likely to deploy its technical assistance capability to protect its capital.
In addition, in the words of Gonzalez-Vega (1998), “When large amounts of credit are used to persuade the MFO” [Microfinance Organization] “to accept the technical recommendations of the apex organization, the MFO may find that it is not really obliged to repay the loans if failure of its own lending activities can be attributed to poor technical advice from its dominant implicit partner” (the apex organization).
Gonzalez-Vega goes on to note, “Furthermore, a sine qua non for institution-building to be effective is the willingness of the MFO to accept the advice of the provider of technical assistance. When technical assistance is tied to borrowing, it is hard to tell if the MFO wants the advice.”
This leads us to the second fundamental problem posed by apex organizations: that they once again risk the promotion of one specific approach to providing financial services without adequate recognition of all the options open to client organizations.
The level of risk depends largely on the philosophy and approach of the apex organization, but these apex institutional arrangements can result in the suffocation of more creative approaches to the provision of financial services to the poor.
This risk needs to be better acknowledged by the donor agencies funding the apex organizations, and mechanisms to support more innovative and client-driven models should be promoted.
PKSF’s understandable search for quality partner organizations also has had another, little recognized, but very dangerous result. One of PKSF’s requirements is that partner organizations have a track record: that they have been operating for at least one year and have a 95% repayment rate.
This has meant that many well-intentioned, would-be credit NGOs have set about forming groups, collecting savings, and lending them back to their members with the aim of achieving PKSF’s track record criteria and accessing capital funds from it.
At the beginning of programs, clients are justifiably skeptical about the capacity of NGOs to deliver on their promises, and almost inevitably the demand for loans far outstrips the capital raised through the (usually compulsory, locked-in) savings program.
If, as is often the case, confidence lapses and repayments falter, the NGO suddenly faces a situation where it cannot meet PKSF’s requirement for a 98% repayment rate and is unable to access additional capital funds to meet its clients’ demands for loans.
Then the vicious circle is complete, for without funds from which to offer loans, the would-be MFI is unable to meet the demands of its clients who begin to lose confidence in the organization and to reduce or withdraw savings deposits, thus further reducing the organization’s ability to lend.
Soon the repayment rates falter further, confidence declines yet more, and finally, the savings of poor clients are lost to loan defaulters or in the costs of administering the program.
One cannot help worrying that the enticing prospect of PKSF funds may have encouraged several of the failed NGOs that litter rural Bangladesh to “take a gamble” on their members’ savings.
Incomplete Blueprints
But perhaps the most dangerous form of “replication” of all is that promulgated by consultants or leaders in agencies with limited knowledge and experience of the systems they are recommending.
The Grameen Bank name has now acquired such an aura, such a mystique, and is so closely associated with successful credit operations that it is invoked as a matter of routine in all matters to do with development credit. In other parts of the world, the FINCA model has acquired a similar mystique.
The Catanduanes Agricultural Support Programme (CatAg) was set up on the basis of the pre-project report of a senior consultant hired by the European Union. Indeed, this consultant was so popular in Brussels that he was hired to make nearly half a dozen pre-project reports in preparation for programs to be implemented in the Philippines.
In each case as an integral (and often central) part of his report, he made almost exactly the same recommendation. His recommendation was a blurred photocopy of the Grameen Bank’s system… with several key pages missing.
He recommended the establishment of 5-member “Guarantee Groups” that would federate together into “Savings and Loan Societies” (SLS) and operate their own revolving loan funds – to be injected into the SLSs by the benign donor. Thus each 25-50 member SLS would be capitalized, trained how to manage its revolving loan fund, and live happily ever after. The Central Cordillera Agriculture Project (CECAP) was faced with the same recommendation in the pre-project report, but a little thought by management and a visit to Catanduanes convinced the project not to follow this path.
Experience has shown us time and again that, without external support, such self-managing groups rarely if ever work.
For example, CARE, Bangladesh’s Women’s Development Project, delivered a broad range of health, skill development, and savings and credit with group formation, under a community development program in Tangail for three years before withdrawal. Ritchie and Vigoda’s (1992) subsequent evaluation found that “over half of the savings and loan groups … are no longer in existence” 20-44 months after withdrawal. Many community development specialists in Bangladesh would see it as an impressive success that so many groups had survived. BRAC has also given up as impractical trying to create free-standing Village Organizations to look after their own affairs.
This problem is not confined to Bangladesh – the entire Village Banking movement has long since recognized and responded to the need to provide ongoing services to village-based groups. “At the International Village Banking meeting in 1994, the concept of graduation was discussed by managers and proponents of village banking from all over the world.
The failure to have banks actually graduate from their programs as a phenomenon witnessed by many programs… At this meeting, it was decided that the word “graduation” in reference to village banking should be abandoned. Instead, there was an emphasis on establishing ties to as many formal financial institutions as possible” (World Bank, 1997).
These ties are important to help the village-based group manage their funds better: excess savings not lent out among the group can be placed on deposit to earn interest, and when there are inadequate funds to meet the group’s credit needs, these can be borrowed from the formal financial institution.
Furthermore, and in many cases, most importantly, the formal financial institution can provide the security, bookkeeping, and auditing services necessary to maintain cohesion and trust among the village-based group’s members.
It is for this reason that most indigenous, self-started village groups such as Revolving Savings and Credit Associations (ROSCAs), Christmas clubs or funeral funds tend to be time-bound and self-liquidating. This built-in natural termination provides the benefits of having an automatic audit as the scheme closes.
Either all the money is there and everyone has been paid, or it is not; and this is the fundamental basis for the participants’ decisions as to whether to participate in the next “round” of the scheme if it is to continue. In addition, regular payouts solve the problems
that large, accumulating sums of money create in villages – onerous bookkeeping, the envy and attention of those outside (and sometimes even inside) the scheme, the need to store and protect the capital and so on.
The model proposed by the consultant and adopted by CatAg made one other fundamental error: that of putting revolving capital funds directly into the village-based group. Capitalizing the group directly adds to the need to maintain excellent records and trust among its members and provides a large temptation to “split the money and run”.
Even at this early stage, it would not be imprudent to suggest that, as soon as the CatAg program finishes, many of the SLSs will find the weekly meetings or bookkeeping too onerous, or will lose faith in the Treasurer, and will simply divide up the SLS’s fund among the members and disband.
Indeed, even as CatAg is being implemented, there are already examples of this happening.
To compound the problem and make it even more intractable, because the capital funds have already been handed over to the SLSs to manage, they have no incentive to link to an apex formal financial institution.
The SLSs have the capital funds (indeed in most cases the amount of capital held by the SLS exceeds the demand for loans among its members), and do not wish to pay for the services of an apex organization at all.
CatAg has now recognized this problem and is scrambling to find a solution – and it is proving to be very difficult. Almost every possible solution requires significant additional investment, and still carries a high risk of failure.
There is a very real possibility that this 5-year, $14 million program may prove to have been an extremely elaborate way of handing a few thousand pesos to each “beneficiary”. It would have been more cost-effective to have distributed the cash from the outset and wrapped up the project after a month.
The National Livelihood Support Fund program is by no means an isolated example – many schemes worldwide claim Grameen inspiration and then ignore the principles that have made the Grameen Bank so successful.
Perhaps one of the most important tasks for those involved in the Microfinance “industry” is to help clarify and promote some basic principles and best practices – without issuing them as commandments set in stone: a difficult balance to strike. The chapter entitled, “The Principles of Microfinance” makes an attempt to do this.
Part-Time Bankers
In addition to poorly designed “blueprint programs,” increasing numbers of the development organizations – both Governmental and Non-Governmental – are jumping on the Microfinance bandwagon as a sideline.
These organizations tend to get sucked into providing savings and credit services by a combination of two factors.
First, their clients demand these services, and they are seen as a way of persuading them to come to meetings (which are then also used to pursue other agendas).
Second, the organizations often see savings and credit as a way to make a little money and thus address their donors’ demands for “improved sustainability” or “increased self-financing.”
Neither of these are good reasons for organizations that do not specialize in savings and credit to enter into this complex field. The risks are too high.
Certainly, increasing numbers of NGOs (and indeed Government programs) are using credit as the lure to encourage the poor to form groups which are then used to deliver other extension services – health and family planning, literacy, etc.
In Bangladesh, JOICEFP’s programs in Gorashal and Feni, Gashful’s in Chittagong, as well as many others, are using credit as the chief motivating force to gather groups which are then given the family planning and health inputs that address the central or real objectives of the programs. Freedom From Hunger’s experience is typical, “Freedom From Hunger [FFH] entered village banking wi
h the underlying aim of reducing malnutrition. In FFH’s experience, providing solely nutrition information was not enough to attract regular active participation by poor people. The financial services portion of the program was developed to entice participation and improve poor people’s ability to generate income for food” (Holt, 1994).
It is difficult to overstate the dangers of getting into savings and credit as a sideline. Banking is a complex business.
The financial accounting, the systems of control, the management of cash flow and client confidence, the management information systems and the staff and client training necessary to implement a savings and credit program are extremely complex.
And more, once an organization has started to provide savings and credit services to its clients, it is almost obliged to continue to provide them. This obligation arises from two sources.
First, recovering loans from clients who know that no further loans/financial services are going to be made available is notoriously difficult… and if the organization cannot get its loans back, it probably cannot give its clients’ savings back.
Second, clients who have had access to financial services use these to better manage their household income and expenditure, and they and their businesses become increasingly dependent on having access to those financial services on a long-term basis.
Few readers of this book, and no business of any size, could manage without access to a bank account, credit cards, and periodic loans. It is therefore imperative that those organizations which get involved in the provision of financial services not only do it on a professional basis but also do so with a clear commitment to provide permanent, quality services to their clients. Anything less is a recipe for disaster.
Conclusions
It is perhaps the complexity of delivering financial services and the knowledge that organizations must seek to establish sustainable MFIs, together with the success of Microfinance programs worldwide, that has given rise to the epidemic of blueprint-driven replication.
After all, there is still a huge unmet demand for quality financial services. Despite widespread demand, it is estimated that institutional finance is unavailable to over 80 percent of all households in developing countries (Christen et al., 1996, and Rosenberg, 1994).
A conservative estimate of Microfinance demand all over the world is about 2.5 billion people or 500 million households (Robinson, 1997). The MicroCredit Summit’s ambitious target of “reaching” 100 million families by the year 2005 would therefore address only 20% of the demand.
But blueprint replication will not lead to quality financial services tailored to meet the local needs and opportunities of the community the institution is trying to serve. Indeed, it is likely to result in a system that forces the people using it to manage their way around its inappropriate rules, regulations, systems, and services.
Introducing a system of financial services without having researched the financial landscape (see “Central Cordillera Agriculture Programme: System Design Process – In Progress” for a description of one way of going about this process) and the needs and opportunities it presents is similar to assuming that you can drive a city sedan on all roads.
What worked in Bangladesh will not necessarily work in Nepal, Burkina Faso, or the Cordillera.
The process of replication must include a period of research and reflection, pilot-testing, monitoring, and modification, to tailor the “model” system being replicated for local conditions. And the modifications should maintain most, and ideally all, of the basic principles of Microfinance (see the chapter on “The Principles of Microfinance”). In the words of Christen et al. (1996), “… the emerging model for micro-finance appears to be widely applicable if sensibly adapted to local circumstances.”
Without this, the Microfinance industry, which was born of a willingness to experiment and take risks, will perpetuate in-bred systems in a spate of regressive reproduction instead of researching, learning, and tailoring in a process of progressive evolution to optimize services. In the rush for replication, we must not sacrifice quality for quantity.