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7/30/2019 SpandaJournal I,2

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SPANDA JOURNALq u a r t e r l y o f t h e s p a n d a f o u n d a t i o n

O N L I N E E D I T I O N | W W W . S P A N D A . O R G / P U B L I C A T I O N S . H T M L

SPANDA.ORG

I,2/2010

S P A N D A

microfinance

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can move further, a purifying process that does notend with our own lives, but reaches back to thebeginning of our linage. To be known or unknown?

The creative process shapes theboundaries of the unknownwithin itself, un quantum tiralaltro, e cos via. No past, nofuture. If you dont bear thecourage to live now, it isbecause of fear. Cross the

threshold, leave fear behind andstep in, it is urgent.

Fine, lets now shape a few smallchanges into the known. Microchanges into a micro world, amicro-cosmos, a micro-finance.Micro what?!? Microfinance is aseed of prosperity to reach fur-ther away, away from whereNothing is king. It is a tool tohelp people move on, an agent toalleviate poverty, material poverty,

educational poverty, health pover-ty, and spiritual poverty; eventhough spirituality is nowadays ablack hole within its engulfedmorphomagnetic field.

According to UNDP findings,the far greater majority of theworlds population is undevel-oped and unrepresented, ourdemocracy does not take intoaccount their rights and allows

a small financial elite to govern the world. The

economic, environmental, political crises, and thepersonal, familial, work and health stress are inher-ently interconnected, and are the symptoms of an

In the tested way,knowledge is inferior to certainty but above opinion.Know that knowledge is a seeker of certainty,and certainty is a seeker of visionand intuition.RUMI,Mathnawi, III: 4115-4121.

H I LE AF RI CA I S P LU NG IN G

into nothingness and

the MDGs are becom-ing an infant dream,

we still envion a better world,a world of justice, of liberty, ofpeace and harmony, of spiritu-al and material health, and ofspiritual and material wealth.An ideal world too ideal to bereal. So lets blend ideality andreality into a single being: unity.Again and again unity is call-ing us with its powerful drive.Destiny is not a quirk entity to

be achieved, proscribed andu nk now n f or ev er, a c om etvesting our life, no, unlike fate the immutable law of theuniverse, akin to dharmadestiny is indeed our potentialbecoming. riverrum, past Eveand Adams, from swerve of shoreto bend of bay as our friendwould say.

When intention and action aresynchronic and devoid of self-interest not even of

wanting to be or to do the good the ensuing actis pure and does not generate karma. Sooner or laterthe entire wheel will need to be purified before we

S P A N D A J O U R N A L I , 2 /2 0 1 0 | m i c r o f i n a n c e

E D I T O R I A L | SAHL AN MOM OMicro What?

ANTON SIMANOWITZQuality Microfinance

MAL CO M HAR PE RMic rofinance and thePreservation of Poverty

JENNIFER M. BRINKERHOFFMaximising the Effectivenessof Microenterprise Development

JONATHAN H. WESTOVERThe Impact of MicrofinanceProgrammes on PovertyReduction

SIMONA SAPI EN ZAMic rofinance Yesterday,Today and Tomorrow

ANANT JAYA NT NAT U

Market Strateg y Developmentand3rd Generation

Microfinance in India

ALBERTO BRUGNONIA Shariah-compliant

Mic rofinance Fund

MAN OJ K. SHARMA ~GRAHAM A. N. WRIGHTTime to Go Back to Basics?

A B S T R A C T S

| I N T H I S I S S U E

W

S PA N D A J O U R N A L

MICRO

WHAT?

SPANDA.ORGSPANDA.ORG

I,2/2010

EDITORIAL


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unavoidable evolutionary breakthrough in individ-ual and collective development. Whosegenius loco,loci, locum, is this? Our individual, social and eco-logical capacity to deal with change and distur-bances and nonetheless to continue to develop, inother words our resilience, is our natural and socialcapital, crucial in maintaining options for furtherhuman development. In complex adaptive sys-

tems, co-creation and co-management stimulatessustainable development and enhances resilience inboth humanand natural sys-tems. In thecurrent microfi-nance scenario,banks are piv-otal instrumentsand hold an eth-ical responsibilityon how the flow

of monies ischannelled bymeans of micro-finance institu-tions to empow-er the poor.Since all theirtransactions aresolidly and inten-tionally imbedded inprofit, ignoring anysort of co-managementwith the end benefic iar ies,their imprinting reaches downthe very end of the chain bearingin itself that original sin. Even thoughcredit institutions maintain thatmoney does not have a master, moneyis their own master, their sole Goal,with the financia l elite as puppeteer.Money is matter, and matter is made upof the same energy of thought, beingmatter just a special kind of solidifiedthought thoughts are matter,thoughts are things. To communicate,

we need to encode our thoughts andperceptions in formal verbal symbol at times it is hard: many overlappinginputs, entropy: then stillness. Wherethere is no thought there is radiance. Where thereis not thought there is splendour. Where there isno thought there is you, finally.

Finally, we begin to perceive that there is neitherme nor you, nor he or she, nor them or thee: butonly one. Vision and intuition are in sight, enoughto follow the attracting radiance of the light infront of us. Peace at last, peace didnt allow us

many things, but gave us more than we couldhave ever hoped for.

Poi cominci: Io dico, e non dimando,

Quel che tu vuoli udir, perchio lho visto

l ve sappunta ogni ubi e ogni quando

DANTE, Divina Commedia, 3, XXIX: 10-12.

All images are merely images, phantoms on the screenof consciousness, on the mundus imaginalis, thateighth climate behind whose veil shines the light.Hu Hu said the father who is there? Its me! Your

humble idiot arcing the Way, whom for a while sailedyour bay. I saw pain in your eyes before you left, I

would have liked to have the nerveto say I love before.

S P A N D A J O U R N A L I , 2 /2 0 1 0 | m i c r o f i n a n c e | 3


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Anton Simanowitz is researcher atthe Institute of Development Studies,University of Sussex, UK. He was afounder and for five years Director ofthe Imp-Act Consortium (www.Imp-Act.org). Imp-Act supports and pro-

motes the management of social per-formance in microfinance, providingpracti cal les sons for practi ce andpublic policy. The Consortiums Prac-tice Guide, Putting the Social intoperformance management has beendownloaded more than 25,000 timessince its launch in December2008,and is currently being translated intoSpanish, French, Russian and Arabic.A recently launched film presents thepractical experience of leadingMFIs ofhow financial and social performance

can be balanced http://www.youtube.com/watch?v=WKesX9KJ-9M and theSPM network brings together morethan 1000practitioners and supportersof microfinance www.spmnetwork.net.Anton is also Chief Deve lopmentOfficer and Advisor to the Board of the Small EnterpriseFoundation (SEF), the largest developmental microfinanceorganisation in South Africa. His work with SEFfocuses onimproving efficiency and effectiveness through strengtheningperformance management and systems to balance social andfinancial performance.

R E C E NT L Y H E AR D A B O U T A T E A M O F M A RK ET

researchers in Uganda, who were talking toclients of an MFI about what they liked anddisliked about the services. The clients

responded angrily about their treatment at thehands of field agents: they are devils [ ] all theycare about is getting their money back.

This story from one of the most competitivemicrofinance markets got me thinking. Microfi-nance is coming of age, with accelerating growthin numbers of people reached and the financialvalue of the industry1. Annual growth rates have

been between 40 and 60 per cent in a number ofmarkets, with India growing 94 per cent perannum since 2003 2. Yet the potential market for

microfinance remains vast with some 2.5 billionpeople lacking access to even basic financial ser-vices. Scale drives profitability and profitabilitydrives scale, and the race is on to serve more andmore people and maintain the impressive returnsthat attract investment. But what do these num-

bers mean? Are we valuingwhat matters, and if not thenwhat are the consequences?

E N S U R I N G Q U A L I T Y A N D

R E S P O N S I B L E L E N D I N G

Increasing numbers of clientsis not by itself an indicator ofpositive impact or the strengthof an institution. The financialcrisis and subsequent recessionis exposing a loss of qualityand inadequate systems in par-ticular for ensuring responsiblelending and collection prac-tices in manyMFIs.

Competition and a desire togenerate high rates of return on

equity so as to attract commer-cial investment and allow everfaster growth have led to multi-ple-lending and the pushing ofcredit. This combined with

erosion of client livelihoods through increasingfood prices, recession and retrenchment is leadingto over-indebtedness and client delinquency. Severedelinquency problems are occurring or predicted ina number of countries3, and a number of high pro-file, fast growing and seemly successful MFIs haverun into serious problems Zakoura (Morocco),

Opportunity Bank (Montenegro), Kashf (Pakistan)and First Microfinance Bank (Afganistan). Themost CSFI4 Banana Skins report for 2009 surveyconcluded that credit risk is now the number onechallenge for MFIs, demonstrating the impact onthe very foundation of microcredit the ability ofclients to repay their loans. Like the famous pyramidschemes that feed off positive sentiment and col-lapse when confidence disappears, at least in somemarkets, it seems that in the rush for growth some ofthe fundamentals of responsible and quality businesshave been overlooked.

At the heart of these failures lies the breakdown ofeffective systems for managing the fundamentalsof microfinance. High rates of growth put huge


Q UA L I T Y M I C R O F I N A N C ES U C C E S S F U L C L I E N T S A N D I N S T I T U T I O N S

A N T O N S I M A N O W I T Z

The greatestof evil and

the worst

of crimes

is poverty.

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pressures on management systems, challenging theability to ensure consistency and quality in servicedelivery. The CGAP Banana Skins 2008 survey, forexample, named management weaknesses as thenumber one challenge for the industry. In additionto this pressure on systems a short-term prioritisa-tion of client numbers and return on equity divertsthe attention of management, Board and investors

away from a double-bottom line that puts clientservice and success at the foundations of successfulmicrofinance.

The need to ensure that systems and managementprocesses can secure an effective balance betweensocial and financial performance is illustrated by

the financial incentives that many MFIs provide totheir staff. These often make up a third of a fieldagents salary or more. Most incentive schemes inthe industry focus squarely on growth, commonly

rewarding three things: number of new clients;increase in portfolio outstanding; and arrears orportfolio at risk. That is to say that staff are incen-tivised to bring in as many clients as possible, giveout as much money as possible, and make sure thatthe money comes back. This leads to a potentialloss of quality in terms of not bringing in targetclients (who may be more time-consuming toreach), poor attention to assessing capacity torepay, and harsh debt collection methods. Therecognition of these problems, reflected in a num-ber of high profile media reports on the negative

impacts of over-indebtedness, is leading to move-ment in the industry to be much clearer need totake action to avoid possible negative impacts of

microfinance particularly over-indebtedness andharsh debt collection practices. Client protection isthus increasingly being seen as one of the key issuesfor the microfinance industry in the future5.

R E S P O N D I N G T O C L I E N T N E E D S

One of the defining features of poverty is the

inability of poor people to cope with the inevitableproblems that life throws up illness, natural dis-aster, death, creditors not repaying etc. How MFIsrespond to this vulnerability in the services theyoffer and in delinquency management makes ahuge different to their social outcomes, and is a

critical consideration for MFIs that seek to be respon-sible lenders.

This issue is illustrated by one of my formative experi-ences in microfinance visiting a group of women in

Kenya. After three successive failures of the rains theywere on the verge of starvation (so much so that theyhad to apologise for falling asleep in an afternoonmeeting, explaining that they had not eaten that day).Despite their desperate situation they still managed tomake a full repayment on their loans... they hadclubbed together and sold a chicken to raise money.

There has been huge progress in understanding theneeds of different client markets and developing arange of products that respond to client needs.Increasing emphasis on savings and the developmentof micro-insurance build client resilience to prob-

lems and provide the means to respond to problems.However, many credit-led MFIs offer little flexibility,locking clients into a rigid system of regular loan



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repayments. Credit programmes that apply zero tol-erance with little flexibility risk harming their clients.Most MFIs see delinquency management as beingcritical to success, and send out a strong message tostaff that late payment should not be tolerated. Thisis supported by incentive schemes that often drasti-cally cut financial incentives should the portfolio atrisk rise above quite a low level. In the worst cases we

see MFIs that achieve a 100 percent repayment ratethrough practices such as holding clients hostageuntil all money has been collected clients withrepayment problems leave the meeting to find themoney and return after an hour or so. Where doesthe money come from? Perhaps from savings orfrom a friend, but more likely a money lender orselling assets. But organisational incentives do notask this question, and just focus on whether themoney is repaid rather than how it is repaid.

The issue is one of balance. I am not arguing thatorganisations should not emphasise repayment,

rather that MFIs should understand this tension,and work to maximize their ability to be able torespond to problems that poor clients inevitablyface, and structure products that are responsive todifferent cash flows and that promote savings aswell as credit. To balance their social and financialperformance MFIs need to combine appropriateservices with an ability to be flexible and responsiveto the problems that clients face whilst maintaininghigh repayment rates and a low portfolio at risk.

B E Y O N D A C C E S S

A D D I N G V A L U E T O

M I C R O F I N A N C E S E R V I C E S

Beyond doing no harm, microfinance seeks to havepositive social impact to add value. As a socialbusiness an MFI can focus not just at how to increaseefficiency and financial returns, but how to increaseeffectiveness and social returns. Value can be addedin a number of ways: by developing financial that aretailored to client needs; through delivery mecha-nisms that are cost-saving for clients (eg. doorstepservices) or that build capacity or empowering (eg.working through groups or through the staff-client

relationship); non-financial services can be integrat-ed with financial services (eg. business advice, educa-tion or legal support); the infra-structure of microfi-nance can be used to deliver other services to micro-finance clients through partnerships with otherorganisations that specialise in such services.

It sounds like stating the obvious, but not all micro-finance is the same. Listening to the debates ragingabout the impact of microfinance it would seemthat this point needs to be heard. We have differentmethodologies, products, different target clients,different management systems, and these lead to

different outcomes. So when we look at microfi-nance, surely we should be looking beyond num-bers of people accessing financial services?

For example, in the push for efficiency the value-added through human relationships is often overlooked. The relationship between client and staff isimportant not just in terms of making a goodassessment as to the clients needs and eligibility forservices, but can be at the heart of the ability ofmicrofinance to do far more than provide access tofinancial services and build the capacity and self-

esteem of its clients. But the main drivers of growthin the microfinance industry today are efficiencyrather than quality or social value-added. Manage-ment drives up targets for field staff, pares down themethodology to reduce wasteful contact timebetween field staff and clients for example to elimi-nating home visits or moving from weekly tomonthly group meetings, centralises services intobranch offices, and introduces technology thatpotentially can all but eliminate the need for anyhuman contact between the MFI and clients.

This focus on efficiency, cutting costs and reduc-

ing the human interface combined with incentivesthat push growth in numbers risks underminingthe very foundations of effective microfinance.

The vision of microfinance is doing well by doinggood. As the microfinance industry attracts greaterinvestment and achieves increasing commercial suc-cess, there is much debate as to whether microfi-nance is achieving this win-win balance, orwhether commercial focus is compromising thesocial mission. Whilst the economic crisis bringschallenges for the clients of microfinance and MFIs,it also creates an opportunity for reflection. This is

a time to take stock and ensure that microfinancesets an example for responsible lending that pro-vides access to financial services for the billions ofpeople excluded, and adds value to this access tohelp improve the lives of its clients.

We need to recognise that at its heart, microfi-nance is a social business, and that our perfor-mance metrics and management systems need tobalance both social and financial goals. This articlelooks behind the numbers and discusses ways inwhich microfinance can continue to grow whilstmaintaining quality, avoiding harming its clients,and take advantage of opportunities to add valueand maximize the social returns to microfinance.We must measure and manage what we value.

1 The Microcredit Summit Campaign reported a growth

from 19 million microfinance borrowers in 2000 to 155 millionin 2007, with a growth from 1567 to 3552 MFIs reporting.

2 Data on the Microfinance Information Exchange,www.themix.org

3 Presentation by Xavier Reille, CGAP, at the EuropeanMicrofinance Platform conference, November 2009.

4 Centre for the Study of Financial Innovation.5 See the SMART campaign for client protection

www.smartcampaign.org.



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Professor Malcolm Harper is Chair-man of Micro-Credit Ratings Inter-national Ltd (M-CRIL) , EmeritusProfessor, Cranfield School of Man-agement, United Kingdom.Dr Harper is a veteran in the field of

microenterprises and microfinance,financial inclusion, and livelihoodspromotion. His core areas of expertiseinclude: microenterprise promotion,assessment of microfinance pro-grammes, designing and developingmicrofinance and microenterprisepromotion programmes and financialanalysis. Prof Harper has advised onand evaluated a large number of such microenterprise programmesand microfinance institutions world-wide. He has substantial experience

of leading multidisciplinary designteams in large and complex microfi-nance and financial inclusion pro-grammes in the poorest regions of theworld. He has worked with mostinternational donors and governmentsand has experience of facilitating donors and private sectorto work on enterprise and microfinance issues. Mr Harpersresearch and consultancy work has been supported by a widerange of national, international and non-government devel-opment agencies.

T H E C O M P A R T A M O S I P O : T R I U M P H

O R T R A G E D Y ?

N AP R IL T W EN T IE T H 2007, M I C RO F I N A NC E C A M E ofage. Compartamos, a medium sized Mexi-can microfinance bank with some 750,000clients, had its initial public offering on

the stock exchange. About one third of the shareswere put on the market, and the institutions andindividuals which were selling them cleared some450 million dollars, valuing the whole institutionat around one and a half billion dollars. Twoyoung men had started the institution seventeenyears before, with assistance from the United

States Agency for International Development andother agencies. They had adopted the followingmission statement:

We are a social company committed to the people. Wegenerate development opportunities within the lowereconomic segments, based on innovative and efficientmodels on a wide scale as well as transcending valuesthat create external and internal culture, fulfiling per-manent trusting relationships and contributing to a

better world.

They each made over fifty mil-lion dollars from the flotation,and the rate of return on thesix million dollars which theyand others had earlier invested

in the institution was around100% per year. Compartamoswas charging an annual inter-est rate of about 96% on itsmainly very small loans toMexican women, who had pre-viously had no access to creditfrom formal financial institu-tions. There was a certainamount of competition fromother institutions, but Com-partamos had successfullymaintained this high rate of

interest in order to accumulateprofits to finance its growth,and to attract equity share-holders as a basis for furtherborrowings from banks.

The extraordinarily high valuation was in part theresult of global stock market euphoria, and theattractions of a new form of investment, with per-ceived social as well as profitable gains. Betweenthe flotation and July 2010 the Dow Jones indexfell by around 20%; in the same period the Com-partamos share price had risen by about 30%. It

had not, however, been a bad investment by thestandards of stock market performance during thatrather turbulent period.

The Compartamos IPO has been widely docu-mented elsewhere, and there is still a fierce debateas to whether it was an unfortunate and isolatedexample of excessive profiteering, or a triumphantvindication of the argument that the poor were ascredit-worthy customers as anyone else. My pur-pose, however, is to suggest that this incident wasno more than a rather dramatic illustration of theexploitative everyday reality of microfinance, and

that it is an indicator that that this aspect is rapidlytaking over from the more benign face which themovement once had.


He givesthe poor man

twice as

much good

who

gives quickly.

P U BL I U S S Y R U S

| C H A L L E N G E S

O

M I C R O F I N A N C E

A N D T H E P R E S E R V A T I O N O F P O V E R T Y

M A L C O M H A R P E R


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The trends which I shall identify are not, I hope,irreversible, and I do not want to suggest thatmicrofinance has been wholly taken over byexploitative interests. Microfinance has brought for-mal financial services to many millions of disadvan-taged households which previously had no access tosuch services. It continues to expand, and to bringthese services to ever more people, for good and for

ill. I would not suggest that the damaging anddependency-creating features of microfinance,which are the subject of this paper, are the result ofa conspiracy to keep the poor poor, even thoughthis does maintain the customer base of the institu-tions. They are an unfortunate by-product of theway the movement has evolved, which follows thenormal but now accelerated centralising effect ofglobal capitalism. They can, however, be resisted.

This short paper will point out some of the waysby which microfinance may be contributing to theperpetuation of poverty, rather than to its allevia-

tion (or even to its elimination, as some of itsmore enthusiastic proponents claim that it cando). And, it will suggest ways in which thesetrends may be resisted, or even reversed.

These tendencies are covered under the followingfive broad headings:~ the types of clients reached by microfinance;~ the features of the financial products that are

provided;~ the means through which they are delivered;~ the cost and the uses of micro-loans;~ the sources of funds and ownership of the

microfinance institutions.

C L I E N T S

One of the defining features of microfinance,which has caught the imagination of the generalpublic more than any other, is that its clients, whotoday number is well over one hundred millionpeople, are overwhelmingly women. Microfinanceis not at all a womens business in the sense that thefounders, owners or staff of the institutions arewomen; they are predominantly male, as are theleaders, owners and staff of most businesses, partic-

ularly in poorer countries, but their customers aremainly women. The Micro-credit Summit Cam-paign estimates that 84% of all microfinance clientsare women, and Grameen Bank states that 97% ofits customers, or members, are women. Manyinstitutions, indeed, refuse even to accept maleclients, although it is unlikely that many apply.

This strong gender bias is widely publicised as oneof the main strengths of microfinance, in that itputs financial resources into the hands of womenwho have traditionally been deprived of influenceover the use or even of legal ownership of money

or other assets, world-wide. This form of discrimi-nation is still strong, even in the so-called devel-oped countries, and is even stronger in poorer

societies. Microfinance has been widely and rea-sonably applauded as an important reversal of thisalmost universal aspect of society, everywhere,since it empowers women in the most direct pos-sible way, by putting money into their hands.

It is important, however, to examine all the reasonswhy women are the preferred clients for microfi-nance. The intention is to empower women, to

enable them to play an equal role in economicdecision-making, and this is right and proper.Women clients, however, play an important partin enabling microfinance institutions to achieveboth aspects of the double bottom line, to do wellas well as to do good. There are many reasons whythey are more profitable customers than men:Women are physically, economically and sociallyweaker than men; they find it more difficult toresist pressure for repayment, they have feweralternative sources of financial services than menand are thus less likely to risk damage to their

credit rating with the only institution that willserve them, and they are less likely to have power-ful social and political networks which will helpthem to avoid repayment obligations.

Additionally, women are more likely than men toaccept routine standardised conditions of borrow-ing, and repayment. They have less opportunitiesto break away from the traditional activities andconstraints of their local communities, and childbearing and child rearing, as well as the householdduties which are traditionally ascribed to them,make it less likely that they will be able or wish to

invest in different types of activities, to borrowlarger sums, or repay over longer or more irregularperiods, than their peers. They fit more closely to astandard predictable pattern of customer behav-iour, and this makes them less expensive and lessrisky to serve. They are better business.

This may be regarded as exploitation of womensdisadvantaged condition, or as natural business sense,depending on the viewpoint of the observer, but thepredominance of women as microfinance customersis not only an expression of micro-financiers concernto redress social injustice. For whatever reasons, the

operating methods of the industry have evolved insuch a way that it is good business to work mainlywith women.

Women are generally poorer than men, so thatworking predominantly with women presumablylowers the income profile of microfinance clients.It is now generally accepted by most well-informedauthorities, however, that microfinance does notreach the very poorest people, the so-called poor-est of the poor, and that when it does, it oftendoes them more harm than good 1.

Many microfinance institutions, such as BRAC in

Bangladesh, recognise this and have introduced awhole range of remarkable programmes which arespecifically designed to reach out to destitute people.



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These programmes, however, are not microfinance;they are poverty alleviation programmes. They mayinvolve grants, in kind or in cash, or they may bebased on paying poor people for their labour on civilworks. They are not sustainable, still less profitable,and they must be heavily subsidised. Some are highlysuccessful, and have enabled many thousands ofwomen and men to escape from extreme poverty and

to join the ranks of the economically active poor,the main clientele of microfinance.

The rhetoric of many other institutions, however,particularly but not only some of those in theGrameen family, suggests otherwise. Microfinanceis still said to reach and benefit the poorest people,and, it is still widelytouted as a panaceafor poverty. TheGrameen Bank hasitself introduced aprogramme for beg-gars, with very smallno-interest loanswith flexible repay-ment, to enablethem to add micro-vending to their tra-ditional beggingactivity, but this isunique. Microfi-nance generally doesof course reachmany very poor people, if not the very poorest, butthe claim that it reaches the poorest of the poor,

and can on its own eliminate poverty, contributes towhat is perhaps the major problem affecting micro-finance: gross exaggeration of what it can achieve.

This in turn leads both social and for-profitinvestors, as well as donors, politicians such as thePresident of the United States, and the general pub-lic, to believe that if they or their governments sup-port microfinance they are addressing the root caus-es of extreme poverty. This is obviously an attractiveproposition, since microfinance is popular in theCity of London and on Wall Street as well as inMexico and India. It amounts to an easy way out

the belief that poverty can be alleviated painlessly,and even profitably. This can only crowd out gen-uine attempts to deal with absolute poverty.

A great deal has been written about the peoplewho are and continue to be clients for microfi-nance, and the literature is replete with heart-warming stories about women who have success-fully started little businesses and sent their chil-dren to school. Less is known, however, about thepeople who are not clients, and about those whowere, but have dropped out. Microfinance is saidto reach the unreached, but it can also further

marginalize those most in need.Many institutions do not know or are reluctant toreveal the numbers who drop-out from their groups,

but in East Africa they are said to amount tobetween 25% and as much as 60% per year2while fig-ures from India show an annual dropout rate ofsome 10% from self-help groups 3. There is sadly littleevidence to suggest that the people who drop outfrom microfinance groups are flying out, becausethey have graduated to an economic level where theywant, and can access, a more individualised type of

financial service, such as the readers of this paper,and the managers and staff ofMFIs themselves enjoy.Grameen Bank, again, has introduced student loansto enable young men and women from client fami-lies to go on to higher education, but this is not acommon practice; most microfinance clients either

remain as microfi-nance clients, ordrop out becausethey fall below themodest level of well-being that is neededto remain a group

member in goodstanding.

Some may leavebecause they leavethe area, or becausethey change to acompeting supplierof microfinancialservices, but mostdrop out, because

they cannot maintain the regular savings, they can-not repay their loans or they lack the skills, the

confidence and the opportunities they would needto invest in their own micro-business. The sustain-ability, or profits, of microfinance institutionsdepend on all their clients being in debt. Someallow clients to remain in their groups while theyrest for a few weeks at most between loan cycles,but if they stop borrowing for any longer they arebalanced out, that is, their outstanding loans areset against their accumulated savings, they aregiven the balance, often without any interest, andthey have to leave. Clients who want only to saveare unprofitable, and such people tend to be the

poorest; they are too poor for micro-debt.In my own experience I have found that membersof the groups themselves also want to avoid thetopic of dropouts; those who have dropped out areof course unhappy to talk about their own failure,which has pushed them still further to the marginsof their communities.

F I N A N C I A L P R O D U C T S

Traditional retail banking, worldwide, has beenbased on clients savings. These savings are used not

mainly as a form of security for loans, or to developand test clients ability to take small regular amountsfrom their day-to-day spending as practice for



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repaying a loan. Secure, accessible and if possibleremunerative savings, for their own sake, are themost important service which the institutions offerto their members. Loans come second, and arefunded from the accumulated savings of those whowant mainly to save.

Institutions of this type depend on the trust oftheir clients for their survival. They may or may

not be owned in a legal sense by them, but theinstitutions depend on the clients, rather than theclients depending on the institutions. Microfinanceinstitutions, which started by being called micro-credit institutions and still offer loans as their mainproduct, depend on their clients to borrow andrepay their loans, but the dependencyrelationship is heavily weighted infavour of the institution and itsowners. The clients are boundto repay by legal and socialsanctions, and the group

systems strongly motivatecontinued indebtedness.Savings constitute inde-pendence, loans createdependence.

The size and terms ofmicrofinance loans furtherstrengthen the dependenceof their clients. Loans aresmall, and for short terms, withfrequent repayments, commonlyspread over twelve months or less.Clients must remain in continuous contactwith the institution, and the size, and the cost andterms of their loans mean that it is very difficult forthem ever to become independent of their source ofmicrofinance services. Their economic and evensocial survival comes to depend on remaining in thegroup and always being able to borrow and be indebt. There is no escape, except to fall to an evenlower level.

D E L I V E R Y C H A N N E L S

Most microfinance clients receive their financial

services through some kind of group intermedia-tion. The groups may, like self-help groups in India,act as financial intermediaries themselves, borrow-ing from a bank or MFI, or taking members savingsand on-lending themselves, or they may perform asocial intermediation role, approving and guaran-teeing members loans, and facilitating transactionsbetween members and the institution, but not actu-ally taking title to the funds themselves.

These groups perform a valuable service to theirmembers, under the broad heading of empower-ment. The services they provide to the microfi-

nance institution, including guaranteeing or secur-ing members loans as well as extensive transactionassistance, are one important means which makes it

possible to provide formal financial services to peo-ple who lack any collateral security and whosefinancial needs are not sufficient to justify the totalcost of an individual account. Microfinance institu-tions outsource to their groups many of the normalfunctions performed by bankers: this assistance isunremunerated, but it can be reasonably be arguedthat it is the only way through which the institu-

tion can provide services to the members at all.Group lending systems, however, can containinherent contradictions. They do enable lenders toreduce their costs, and the financial services whichare provided can be empowering for individualborrowers. But the processes of enforcing loan

repayment in particular can be dis-empowering, particularly for the

most poor and vulnerable.Group based systems, through

their informal financial andrisk sharing mechanisms,

can reduce informationasymmetries and securehigh recoveries. Theseadvantages, however, areoften offset by theunequal and dependent

power relations whichsuch systems support. By

building on existing informalmechanisms, microfinance

institutions may be perpetuatingand even reinforcing power asymme-

tries in a way that is completely contrary

to their stated objectives of poverty alleviation andproviding opportunities for the poorest and mostvulnerable 4.

Like many other features of microfinance whichhave been introduced for good reasons, however,groups also have their downsides from the day-to-day point of view of their clients. It is unlikely thatanyone who is reading this paper would be interest-ed in a financial service which demanded atten-dance at a meeting for an hour or more every week,as well as open discussion of all their householdsfinancial affairs, or where they were required to

guarantee loans to other customers. Group microfi-nance is a second rate product, which is justifiedbecause the customers are poor.

In addition to the risk of loss and the burdensplaced on members time and their privacy, groupsalso have a number of other less obvious but poten-tially worrisome effects, which can contribute fur-ther to client dependence. Most businesses, partic-ularly those which have the potential to grow andemploy people in addition to their founders, arestarted by one person, or sometimes by a smallteam. There are of course many successful co-oper-

ative businesses, and other enterprises started,owned and managed by larger groups or evenwhole communities, but these are exceptional.

S P A N D A J O U R N A L I , 2 /2 0 1 0 | m i c r o f i n a n c e | 1 0


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Entrepreneurship is primarily an individual phe-nomenon.

Group microfinance is successful because all themembers of a given group, indeed of all the groupsserviced by a given institution, have approximatelysimilar financial needs. If one person wants to savelarger but less regular sums than her peers, or toborrow for very different periods, it is difficult for

the system to accommodate her needs. Groups canempower their members to demand and receivemore than they could expect as individuals, butthey also reduce all their members to the lowestcommon denominator: all can advance, but only atthe pace of the slower. The slowest and least success-ful members may of course be forced todrop out, but those who remain willstill have to act more or less inconcert, in order to avoid theimbalances which willinevitably occur if one or asmall number of membershave much larger savingsor loan balances thantheir peers.

This need not be a prob-lem if microfinance insti-tutions try to help theirmore ambitious clients tograduate to individualaccounts with a regular bank.Such altruism might be good forlocal economic development, but it isnot good business for any institution to

assist its best customers to close their accounts andtake their business elsewhere. It makes sense toretain them, to maximize the profits to be madefrom their business, but not to distort the wholebusiness model on their behalf.

Groups are also grateful, whereas individuals all toooften turn and bite the hand that fed them. NGOsand other institutions which want to help the poorthrive on gratitude; it helps to raise more moneyfrom supporters, it reinforces their confidence inthe merit of what they are trying to do, and if theinstitutions sponsors have political connections,client gratitude can be turned into votes.

Women work better in groups than men. Thosemicrofinance institutions which admit men invari-ably find that male groups repayment records areworse than womens. Mens relative inability to workeffectively in groups may in part be because they arephysically stronger and more able to resist grouppressure, such as for repayment. Whatever may bethe reasons for it, however, group delivery methodsreinforce the predominance of women as microfi-nance clients. As we have seen, this has valuable

social and business benefits, but it also reinforcesthe unequal power relations between microfinanceinstitutions and their members.

T H E C O S T A N D T H E U S E S O F L O A N S

The cost of microfinance loans further strengthensclients dependence. Microfinance interest rates arerarely as high as that charged by Compartamos, butthe average annual yields on the loan portfolio are inthe region of30%. Such high rates are of little signifi-cance for an investment such as one dollar for apacket of ten cigarettes which will be sold for fifteen

cents each, or a total of one and a half dollars, in halfa day or less, or even for a hundred dollars worth ofgoods which will be sold in a week days for a profitof perhaps twenty dollars. It is possible to earnreturns such as these, of fifty per cent a day, or twenty

per cent a week, on petty trade, often by sellingbranded products from multinational

companies. The nexus of depen-dence is neatly preserved.

More productive enterpris-es, however, such as grow-ing crops on a small farmor manufacturing simpleitems in a village work-shop, require largerinvestments, they earnmuch lower rates of

return, often around thir-ty per cent per year or less,

and they may take half a yearor more to realise their profits 5.

It is unprofitable to finance suchventures with microfinance loans, and

this further marginalizes the borrowers, keep-ing them and the regions and countries fromwhich they come in a state of continuing depen-dence, both on microdebt, and on foreign sourcesfor goods to sell. The returns to capital from mar-keting branded consumer goods and from microfi-nance are generous, and the microfinance clientremains dependent on whatever value she can addby her labour alone.

Most microfinance borrowers improve their financialposition through their loans. They may, at the mostelementary level, replace a moneylender loan which

that cost perhaps ten per cent a month (similar as ithappens to the rate charged by Compartamos) witha microfinance loan costing three per cent a month.The gain of seven per cent a month, even on a loanas small as one hundred dollars, is very significantfor a household whose total earnings may be as lowas two dollars a day or even less. The switch mayinvolve some intangible gains, and losses. Somemoneylenders demand free labour as well as interest,and their loans may be informally linked to thepreservation of traditional repressive hierarchies.Many poor families, on the other hand, also rely on

their local moneylender for urgent needs, such as animmediate loan to cover the cost of emergency med-ical care. Microfinance institutions cannot usually



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match immediate services of this kind, and manyclients prefer to keep their informal credit lines openat the same time as they obtain access to formalfinancial services for the first time.

Refinancing a moneylender loan usually involvesno new skills; apart from the intangible aspectsmentioned above, there is usually a straight gain.Similarly, relatively low cost micro-debt for what

are oddly called consumption purposes such asschool fees, medical care, or house repairs (asopposed to somehow more worthy productiveinvestments in stocks of goods for resale for pettytrade, such as bottles of Coca-Cola or sachets ofSunsilk shampoo), can offers an immediate savingover the higher interest rate that might otherwisehave been paid to an informal moneylender.

Microfinance is associated with self-employment,and although many loans are used mainly for con-sumption (as above) most institutions expect theirclients to invest their loans in micro-enterprises

which can be expected to yield a high monetaryreturn and thus to cover the interest charged onthe loan, as well as to generate enough surplus indue course to pay off the principal. The rhetoric ofmicrofinance is about promoting enterprise,empowering the poor to help themselves, a hand-up and not a handout.

As we have seen, however, the scale and cost andterms of micro-loans makes them unsuitable forinvestment in anything but the smallest petty trad-ing businesses, vending, small-scale service busi-nesses and so on. This would not be too serious if

there were alternative sources of finance that weremore suitable for longer-term investments in job-creating businesses such as manufacturing or farm-ing. In too many places, however, microfinancehas become the dominant paradigm. The long-established commercial banks have often beendrastically down-sized, privatized or closed, andthe institutional space which they occupied hasbeen taken over by microfinance institutions, suchas the National Microfinance bank in Tanzania orCentenary Bank in Uganda.

Similarly, in some parts of the ex-Communist states

of Eastern Europe and Central Asia, where there isno recent history of full-service commercial bank-ing, the dominant banking approach is now micro-banking. These new institutions have been vigor-ously promoted by Western donors, with the resultthat long-established community or state-ownedindustries, or their privately owned successors, havebeen unable to access the type of banking servicesthat they need to run their businesses. Wholeeconomies are moving towards becoming micro-trading economies, dependent for finance on high-ly profitable microfinance institutions owned by

Western European, American or Japanese interests,and similarly dependent on profitable multi-national consumer goods, plantation and resource

companies for the goods which they trade. Theseemerging economies risk becoming economicsatellites of the West, in the same way as they usedto be political satellites of the East.

S O U R C E S O F F U N D S A N D O W N E R S H I P .

There are about eighty specialised funds seeking to

invest in the equity of microfinance institutions. Veryfew are based in what might be called destination

countries, where there is a major need for microfi-

nance. The majority are in wealthier countries, and

the bulk of the invested funds come from the

Netherlands, Germany and the United States.

These funds haveinvested several billion dollars inthe shares of microfinance institutions. Foreignshareholders control a significant proportion of theworlds microfinance institutions, and this propor-tion is probably increasing.

We live in a globalised world, but it neverthelessseems odd that there should be so much foreigninterest in the ownership of microfinance institu-tions, which are not usually very large, and arequintessentially local in their clientele and theirstaffing. Many of the investors, including some ofthe largest ones, are of course social investors, whoexpect reasonable economic returns from theirinvestments as well as social returns. These investorsare now being joined and to an extent supplanted,however, by institutions such as venture funds andthe large multinational commercial banks which are

more concerned with profit than society, particular-ly when profits are becoming harder to earn in theirtraditional markets.

There are very good commercial reasons why interna-tional capital is being drawn to microfinance. Theinstitutions are generally not large, but they are grow-ing very fast, and they offer high rates of return, withlimited risks, at a time when such investments are inshort supply. Commercial banks which deal withretail and corporate customers in the developedworld usually expect to earn a net return on theirtotal assets of between one and two per cent; the

returns from microfinance are much higher.As one speciali sed fund management companyputs it in an advertisement:

BlueOrchards proven track record has convinced anever-growing number of investors to choose the qualityand profitability of a win-win investment : they earna stable and competitive financial return on theirinvestments while delivering effective social impact inemerging markets by encouraging entrepreneurship atthe micro level.

And Accion, one of the pioneers in the promotionand financing of microfinance, organises regular

investment road shows in New York, London, andother financial centres, under the label Microfi-nance cracking the capital markets.



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Multinational banks, such as ABN-AMRO, HSBC andCitibank and others, lend large sums to microfi-nance institutions, sometimes in response to govern-ment or social pressure to be seen to being con-cerned for the poor. Such loans have so far proved tobe good business, as well as good public relations,and commercial debt of this kind has substantiallysupplanted clients own savings as a source of

finance. In 1998, the institutions listed in the Mix-market had about seventeen dollars of client savingsfor every ten dollars of commercial bank loans. By2010 this figure had gone down to less than a third ofthis amount (Mixmarket, ibid.). The institutions notunnaturally found it more profitable to borrow largesums at low cost from commercial sources than toincur the high transaction costs associated with pro-viding on demand pass book savings accounts atmultiple locations. Clients who are in perpetual debtare more profitable than those with their own sav-ings, for microfinance institutions as well as forinformal moneylenders.

Community-owned financial institutions generallyrely on their members savings as their main sourceof funds. This is partly because they may not havethe financial strength to justify borrowing frombanks, particularly in the early stages of their exis-tence before they have built up share capital frommembers contributions. It also, however, reflectstheir members priorities: more people need to save,more, and more often, than need to borrow. Thebalance between the savings and the loans portfoliosof retail banks, such as Bank Rakhyat Indonesia,reflect this reality. Most microfinance institutions

start as NGOs or as non-bank finance companies,and are therefore, quite rightly, not permitted tomobilise demand deposits from the public. They,and their multinational capital supporters, haveappreciated that it is more profitable to continue tofocus on providing debt, and to treat savings prod-ucts as a qualification or security for loans, not as aservice to their customers in its own right.

Only a small number of the institutions listed bythe MicroBanking Bulletin are community owned.This is to be expected, since such institutions offerno opportunities for equity shareholdings, and

they have less need for bulk debt, since they canrely on their members savings balances. They mayserve their members interest better than theircommercially driven competitors, but, as with co-operative retail shops, co-operative farms and everyother type of community enterprise, the tide isrunning against them.

A T E N T A T I V E N E O - M A R X I S T D I A G N O S I S

Marx proposed that modern society is based on acapitalist mode of production, whereby those whohave control over capital can dominate and exploit

those who have to sell their labour to those whocontrol the means of production, through theircapital. He came to this view in the context of

large manufacturing industries, owned by capital-ists and employing vast numbers of workers. Hebelieved that these workers would in time unite tothrow off the yoke of capital, and would usher in anew form of society which was ruled by labour.

This belief was not unreasonable, and modern labourmovements, which have done so much to improvethe conditions of workers, have indeed had their ori-

gins in factories where large numbers of workers haveto be assembled together in order to use capital effi-ciently. They have to work together, but they can alsoprotest, strike or even rebel together.

Microfinance offers a more subtle and potentiallymore durable means whereby those who controlcapital can exploit those who have only their labourto sell. The means of production is no longermachines which require many workers to cometogether to operate them, and possibly also to uniteagainst their employer. Microfinanciers can nowprovide capital, in the form of microcredit, whichborrowers use to purchase the tiny amounts of

stocks or simple tools, which they need to runmicro-enterprises. The surplus they can earn isbarely sufficient for survival, but because theinvestments are so small the borrowers can affordto pay very high rates of interest on their loans.Capitalists no longer have to organise and managelabour. They can extract a higher return on theircapital not by directly employing people, but byfinancing their petty businesses under the guise ofassisting them to become entrepreneurs. Betterstill, these entrepreneurs will compete against oneanother rather than combining against capital.

A large proportion of the merchandise and toolswhich are used by these micro-entrepreneurs ismade in factories which maintain the mode of pro-duction with which Marx was familiar, so that areturn can be earned from both manufacturing andfrom money-lending. The micro-entrepreneurs aremainly women, which leaves their husbands free tomigrate to other places within and outside theirown countries to work in factories or service indus-tries that must be located near to their customers.The Compartamos story with which we startedseems to bear this out.

Compartamos capital is mainly owned by investorsin the United States, or by their fellow-elites in Mex-ico. They have already benefited hugely from thesuccess of the institution, and they presumably aimto benefit more in the future. Compartamos chargesinterest rates of nearly one hundred per cent, andmost of its clients are women, many of whose hus-bands are working for relatively low wages north ofthe Rio Grande, also in the United States.

The small loans from Compartamos enable thesewomen to finance micro-businesses, often peddlingconsumer goods produced and marketed by multi-national companies based in the United States. The

amounts, the terms and the interest rates of theloans are such as to make productive farming ormanufacturing investments much less attractive, so



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the borrowers husbands have to remain away fromhome, working for businesses whose owners haveaccess to more flexible sources of finance.

The women may enjoy the ritualised ceremonies ofthe weekly client meetings, as some distraction fromthe grind of their everyday existence, and their pettybusinesses can earn them enough to keep themselvesand their children during the periods between the

arrival of remittances from the North. These remit-tances are most likely sent at high cost through USA-based agencies such as Western Union, or throughless costly but more risky informal intermediaries,and Compartamos itself provides an internationalremittance service to its clients, to add to the insur-ance and other products which customers areencouraged to purchase 6.

Marxs proposed solution to the problem of socialinjustice has not worked well in practice; his diag-nosis, however, seems to have stood the test of time.

R E M E D I E S

The main purpose of this paper is to promote self-questioning and to provoke discussion. It is easy toidentify feasible remedies to most of the problemsthat have been identified, but it is more difficult toidentify who will carry them out. It is unlikely thatprospective investors, or fund managers, will wantto promote community-owned institutions, or thatmicrofinance managers will willingly hand overtheir best customers to their competitors, or empha-sise client savings as a source of funds when theyknow that bulk loans from commercial banks are

less expensive and less trouble.I shall nevertheless conclude with a short list ofchanges which can make a difference, in the hopethat some readers who are in a position to imple-ment them will do so, even when this may reduceprofitability or require subsidy.

C L I E N T S

~ Microfinance institutions should attempt toredress the gender imbalance in their client pro-file, by including more men, and when neces-

sary adapting existing products and deliverymethods to suit male customers better;

~ the institutions should carefully monitor thosewho drop out from their groups, and shouldeither themselves attempt to assist such peopleto improve their position or introduce them toother institutions which can offer suitable pro-grammes for them;

~ more ambitious clients should be encouragedand assisted to fly out and if necessary to trans-fer to competing institutions which will be ableto serve their needs more effectively.

Products and their delivery:~ flexible, accessible, voluntary and remunerative

savings facilities should be offered to all clients,

irrespective of their need or desire for loans. Ifthe microfinance institution is not itself permit-ted to take demand deposits, arrangementsshould be made to act as agent for an institu-tion that is a regulated savings institution;

~ services should be offered to clients irrespective ofwhether or not they are or profess to intend to beself-employed. Clients should be allowed to use

their loans as they wish, so long as they can berepaid, and the distinction between consumptionand productive purposes should be dropped;

~ clients should be allowed and encouraged toremain on the books of microfinance institutionsirrespective of whether they are borrowing or not;

~ group methods of intermediation should beregarded as a temporary second-rate expedient,from which clients should be encouraged tomove as soon as they can to more dignified andless onerous individual services;

~ the various forms of group intermediation should

themselves be treated as complementary steps ona ladder, not as competitive products. Clientsshould be encouraged to climb from Grameen-type solidarity groups, to self-help groups, tosmaller joint liability groups and thence to indi-vidual accounts, even if this means that they willmove from one institution to another.

F U N D S A N D O W N E R S H I P

~ Client savings should be regarded as the opti-mum main source of funds for microfinanceinstitutions, even if they are more expensive toraise and manage than bulk loans from com-mercial banks or other sources;

~ local rather than foreign equity shareholdersshould be preferred whenever possible;

~ community-owned microfinance institutionsshould be promoted and assisted in preferenceto local private for-profit finance companies orbanks.

1 See, for instance, Navajas, S. ~ Schreiner, M. ~

Meyer, R. ~ Gonzalez-Vega, C. ~ Rodriguez-Meza, J.,Microcredit and the Poorest of the Poor: Theory andEvidence from Bolivia, in World Development, 28(1): 333-346, and Islam, Tazul, Microcredit and Poverty Alleviation,Ashgate: London, 2007.

2 Wright G.A.N., MicroSave Briefing Note No. 8,Dropouts and Graduates: What Do They Mean ForMFIs?,Microsave: Nairobi, 2002.

3 Sinha F. et al.,Microfinance Self help groups in India:Living up to their Promise?, PA Publishing: Rugby, 2008.

4 Harper, A., Microfinance Peer Lending Groups;Empowering the Poor or Perpetuating Inequality?Unpub-lished MSC thesis, SOAS, London 2000.

5 Dichter, T. ~ Harper, M., Whats wrong with microfi-nance, PAP Rugby and Rawat Jaipur, 2007: 89.

6 Business Week, 13.12.2007.



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Jennifer Brinkerhoff is professor ofPublic administration, Internationalbusiness and International affairs.She holds a PhD in Public adminis-tration from the University of South-ern California, and anMA in Public

Administration from the MontereyInstitute of International Studies.She teaches courses on public service,international development policyand administration, developmentmanagement, and organizationalbehaviour.She consults for multilateral develop-ment banks, bilateral assistance agen-cies, NGOs, and foundations. Com-bining her research with this work,she published Partnership for Inter-national Development: Rhetoric or

Results? (Lynne Rienner Publishers,2002), as well as numerous articlesand book chapters on topics rangingfrom evaluati on, to NGOs, failedstates, governance, and diasporas. Sheis the author of Digital Diasporas:Identity and Transnational Engagement (Cambridge Uni-versity Press, forthcoming), the editor of Diasporas andDevelopment: Exploring the Potential (Lynne RiennerPublishers,2008), and the editor of the Lynne Rienner Pub-lishers book series on Diasporas in World Politics. She is theco-Director and co-founder of GWs Diaspora Research Pro-gram, a multidisciplinary research program on diasporas,identity, policy, and development; and co-founded the GW

InternationalNGOteam and co-editedNGOs and the Mil-lennium Development Goals: Citizen Action to ReducePoverty(New York: Palgrave MacMillan,2007).Dr Brinkerhoffs applied work encompasses partnership, civilsociety, institutional development, development management,and training methodologies, and includes work for the Ministryof Foreign Affairs, the Netherlands; and in Africa, China,Mongolia, Central Asia, and Russia for theUSAgency forInternational Development and the World Bank.

E S PI T E T H E T H EO R ET I CA L P O SS IB I LI T Y , ERADICATING

poverty or even halving it by 2015 as

intended by the first Millennium Develop-ment Goal1 is a daunting and perhaps

unrealistic endeavour. Since the inception of the

international development industry, systematicefforts have been made to reduce poverty. Withinnation states such efforts have a much longer history.So why, with all of our technology, have we failed toeliminate poverty? The easy answers refer to contex-tual factors, including political will. A more nuanced

response calls attention to theintractability of poverty. Specifi-cally, Smith (2005) calls atten-tion to sixteen poverty traps,which demonstrate the interde-pendence of a range of factorsthat contribute to poverty andprevent its escape. These factorsinclude, among other things,illiteracy and/or low educationand skills levels; lack of access toworking capital, insurance, andinformation; high debt; poorphysical and mental health;high fertility; child labour; thepriority of subsistence; andpowerlessness. The develop-ment industry has developedtargeted approaches to respond

to many of these challenges ona case-by-case basis, sometimeswith highly complex assessmentand response tools. So while wemay not be able to eradicate

poverty on a global level, we certainly do know alot about how to maximize the efficiency and effec-tiveness of targeted efforts to do so. Yet a remainingquestion is who does what to address this broadrange of factors?

The interdependence of poverty traps and the les-son that addressing only one or a few factors is too

often insufficient for facilitating escape from povertyhave led many development organisations to con-sider how best to acknowledge or include comple-mentary services. Options include: 1) remainingspecialised to maximize organisational efficiencythrough comparative advantage; 2) developingmulti-sectoral organisations and programs; and 3)accessing complementary services through partner-ship with other organisations and programs. Thereare trade-offs to each of these options. This articleexplores options for organisational scope, specificallywith respect to partnership approaches.

No one option will be ideal to all contexts. To bestgauge the potential of the partnership option, it isfirst necessary to explore its advantages, as well as


M A X I M I S I N G T H E E F F E C T I V E N E S SOF MICROENTERPRISE DEVELOPMENT: THE PARTNERSHIP OPTION

J E N N I F E R M . B R I N K E R H O F F

D

No strangerto trouble

myself ,

I am learning

to care for

the unhappy.

V I R G I L

| A L T E R N A T I V E S


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possible contextual constraints. Building on my pre-vious research (Brinkerhoff, 2002a, 2002b), I will firstdefine partnership, specify its comparative advantagesespecially as they concern available governance mech-anisms, and present potential contextual constraintsto its operationalization. Next, I will describe theexperience of a range of microenterprise develop-ment experiences, as presented byUS-based practi-

tioners. I will then explore how these experiencescorrespond to our general knowledge of partnershippractice. I conclude with recommendations forwhen the partnership option may be most effectivein combating poverty traps.

M A K I N G T H E C A S E F O R P A R T N E R S H I P

P A R T N E R S H I P D E F I N E D

The potential advantages of partnership are many.The nature and scale of poverty traps are impossi-ble to address in isolation. Partnership can provide

a means of developing strategic direction and coor-dination in this context, affording a scale and inte-gration of services that is impossible for any actoroperating alone. Without the cooperation of mul-tiple and diverse actors, each with their own per-spective and comparative advantages, we risk treat-ing symptoms rather than causes and becomingfrustrated by systemic forces that preserve the sta-tus quo (Brown and Ashman, 1996).

Literature and experience combine to suggest thattwo dimensions are salient for defining partner-ship. Mutuality encompasses the spirit of partner-

ship principles; and organisation identity capturesthe rationale for selecting particular partners, andits maintenance is the basis of partnerships value-added. Mutuality refers to mutual dependence,and entails respective rights and responsibilities ofeach actor to the others (see Kellner and Thackray,1999). These rights and responsibilities seek tomaximize benefits for each party, subject to limitsposed by the expediency of meeting joint objec-tives. Embedded in mutuality is a strong mutualcommitment to partnership goals and objectives,and an assumption that these joint objectives areconsistent and supportive of each partner organisa-

tion mission and objectives. Mutuality meanssome degree of equality in decision-making, asopposed to domination of one or more partners.All partners have an opportunity to influence theirshared objectives, processes, outcomes, and evalua-tion. Mutuality can be distinguished as horizontal, asopposed to hierarchical, coordination and account-ability. The ideal-type partnership also includes prin-ciples such as jointly agreed purpose and values;and mutual trust and respect.

organisation identity generally refers to that whichis distinctive and enduring in a particular organisa-

tion. It is generally believed that the creation andmaintenance of organisation identity is essential tolong term success (see Gioia et al., 2000; see also

Albert and Whetten, 1985). The key is not to main-tain organisation systems, processes, and strategiesover time, but to maintain their core values andconstituencies. Gagliardi (1986) argues that success-ful organisations change in response to turbulentenvironments precisely in order to maintain theiridentity over time.

organisation identity can be examined at two levels

(Brinkerhoff, 2002a). First, an individual organisa-tion has its own mission, values, and identified con-stituencies to which it is accountable and respon-sive. The maintenance of organisation identity is theextent to which an organisation remains consistentand committed to its mission, core values, and con-stituencies.Second, from a broader institutional view,organisation identity also refers to the maintenance of characteristics particularly comparative advantages reflective of the sector or organisational type fromwhich the organisation originates. A primary driverfor partnerships is accessing key resources needed

to reach objectives, but lacking or insufficient with-in one actors individual reserves. Such assets canentail the hard resources of money and materials, aswell as important soft resources, such as managerialand technical skills, information, contacts, andcredibility/legitimacy.

Based on these two dimensions, partnership in prac-tice is identified as a matter of degree. The ideal typewould maximize organisation identity and mutuality,including equality of decision making. Since com-promises to support and respect the identity of onespartners is inevitable, and as exact equality of power

in decision making is unrealistic, partnership is a rel-ative practice. Nevertheless, these dimensions can beused to contrast partnership (high organisation iden-tity, high mutuality) from other types of inter-organ-isationalrelationships, such as contracting (highorganisation identity, low mutuality), extension (loworganisation identity, low mutuality), and cooptationor gradual absorption (low organisation identity, highmutuality) (Brinkerhoff, 2002a).

I N T E R - O R G A N I S A T I O N A L R E L A T I O N S H I P

G O V E R N A N C E M E C H A N I S M S

Governance mechanism refers to the approach andenforceability of rules and associated desired behav-iour. Governance requires recourse in the eventthat rules are broken or expectations are not met.Governance mechanisms include market, bureau-cratic, or culture approaches, or some combinationof all three 2. The most effective organisations com-bine these three mechanisms (see, for example, Cos-ton 1998; Peters 1998). At the same time, each has itsadvantages and disadvantages, as well as limits tofeasibility. For example, market mechanisms (e.g.,contracts) are not always possible (a price must be

specifiable) and are, like any market, subject to mar-ket failures. Bureaucratic mechanisms (e.g., rules,regulations, and standard operating procedures) can



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be costly to monitor and enforce and often restrictflexibility. And, because they are based on trust,culture mechanisms, are not as easily enforceable.Recourse in the event of their violation is notalways immediate or specifiable.

Partnerships, by definition, are not based on hier-archy. Therefore, while they may combine all threegovernance mechanisms, they are likely to rely

more heavily on culture mechanisms than othertypes of inter-organisational relationships. Underculture mechanisms enforcement and complianceare based on trust and expectations rooted in a senseof belonging. Culture mechanisms can become the

glue that bonds different actors, ensuring compli-ance not only with expected norms of behaviour,but also maximising the efficiency and effectivenessof other governance mechanisms (Coston 1998).Because they are voluntary, they also are the mostflexible and lowest cost mechanism.

T H E P O T E N T I A L A D V A N T A G E S O F P A R T N E R S H I P

Partnerships value-added is rooted in its definingdimensions. organisation identity is the impetus forinitiating a partnership strategy. Partnerships withother actors are pursued precisely because theseactors have something unique to offer, whetherresources, skills, relationships, or consent. If organi-sation identity is lost, by definition comparativeadvantages are lost, the organisation loses legitima-cy in the eyes of its defined constituencies, and itseffectiveness wanes. Mutuality can reinforce organi-sation identity. The opportunity to participate andinfluence equally means that each actor can moreeasily protect its organisation identity, and hencethe efficiency, effectiveness, and synergistic rewards

of the partnership. At the outset, no one organisa-tion can understand the implications of its or thepartnerships actions for members organisation

identity. Mutuality at least affords partner organisa-tions the opportunity to consider and explain theseimplications and potentially defend their distinc-tive advantages, skills, and legitimacy all of whichare necessary for the partnerships success.

Reliance on culture governance mechanisms affordspartnerships a greater degree of flexibility in max-imising the application of comparative advantages

and flexibly responding to environmental con-straints (to be discussed below). organisations andalliances characterised by a strong reliance on cul-ture mechanisms are seen to be organic in theirstructure, as opposed to mechanistic (see Burns and

Stalker 1961). Advantages of organic structuresinclude:

~ fluid division of labour based on specialisedknowledge and experience;

~ emphasis on application of knowledge to contributeto organisational effectiveness (i.e., mission);

~ continual redefinition and adjustment of indi-vidual tasks through interaction;

~ individual responsibility for contributing tooverall organisation effectiveness;

~ commitment to organisation mission;

~ knowledge about the organisation technicalnature and effectiveness can be located any-where in the network;

~ fluid interaction, contingent on the informa-tion/skills required in the moment;

~ emphasis in communications on informationand advice (not instructions and decisions);

~ innovation, creative thinking, and knowledge ofinterdependence highly valued; and

~ decisions made through participation (Brinker-

hoff, 2002b).



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E N V I R O N M E N T A L C O N S T R A I N T S

Environmental factors influence the extent towhich partnership is desirable or feasible. In devel-opment contexts, there are many factors and actorsat play at various levels, each of which affects theothers to greater or lesser degrees. I focus here onthe immediate partnership environment ratherthan the broader context; that is, those features that

directly impact the inputs, processes, and outputsof partnership systems.

Drawing on a decade of fieldwork consisting ofcase analysis and expert interviews, I delineate ninekey environmental hostility factors those thatcan inhibit or enhance achievement of mutualityand organisational identity in partnership relationsinvolvingNGOs (Brinkerhoff, 2002b). These includefactors related to the actors involved, both individ-uals and organisations; the specific partnershipobjective; stakeholders; and general contextual fea-tures. The nine factors follow:

1 ~ Partnership Champions: the possibility ofdynamic, entrepreneurial, and potentially charis-matic personalities with the capacity to champion

the partnership effort. The immediate context mayalso present salient drivers to inspire such individ-uals to champion partnership approaches.

2 ~ Institutional Linkages: Pre-existence of strongand supportive relationships among partners; part-ners know and understand each others missionand track record.

3 ~ Characteristics of Partner organisations: organi-sations with identified comparative advantages, req-uisite capacity, strong organisation identity, support-ive stakeholders and constituents, perceived as legiti-mate and trustworthy among constituents, have

strong drivers to participate in the particular partner-ship, share the partnership vision, and have broadsupport within the organisation for the partnership.

~ Partnership Objective: Does not greatly chal-lenge vested interests or implicate a wide numberof government agencies; outcomes will be directlyfelt at the local level and can be readily identified;and there is a ready demand for the good or ser-vice to be produced.

~ Partnership Stakeholders: Relatively homoge-neous, organised, and have influencing capacity.

~ Supportive Legal Frameworks: Partnership andits chosen activities are legal, and legal frameworkis flexible. Partners have discretion in the designand structure of the partnership.

~ Stability: There is minimal staff turnover withthe partner organisations, and stakeholder interestsand demands remain relatively stable.

~ Flexibility: Partner organisations are flexible inpursuing new structures and procedures and/ormaking adjustments in existing ones to supportthe partnership and partner organisations identity.

~ Artificiality3: Low levels of distortion. The part-

nership is characterised by local ownership andmutual agreements and relationships.

The absence of these factors contributes to envi-

ronmental hostility. The lack of one or more ofthese factors does not, in itself, prevent effectivepartnership. Rather, it makes it more difficult,and, in some cases, much more costly. They arealso not all of equal importance or malleability.While the characterist ics of cer tain objectivesmight make partnership work very complex andchallenging, the importance of those objectivesand/or their beneficiaries may outweigh these diffi-culties. Some of these contextual features are sub-ject to influence, others are not. The identificationof these factors can inform cost-benefit analyses to

determine the appropriateness of a partnershipapproach. However, the relative valuation of theequation will necessarily be subjective, depending,



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in part, on the mission of the initiating organisa-tion and its corresponding operational values.

E X A M P L E S O F M I C R O E N T E R P R I S E

D E V E L O P M E N T : T H E O P T I O N S I N P R A C T I C E

The following vignettes are taken from practitioner

remarks at the George Washington University Inter-

national NGO Team Roundtable on The Effective-ness of Multiplex vs. specialised Approaches to

Microenterprise Development (April 8, 2005).

F I N C A I N T E R N A T I O N A L4

FINCA is known as the founding organisation forvillage banking. Not only does it provide micro-credit to the poor, it helps to create community-run, community-focused credit and savings associ-ations, particularly in areas untouched by the formal

financial industry (FINCA, 2005). FINCAInternational

is a network of program affiliates in four regions

(Latin America, Africa, Eastern Europe, and Central

Asia). According to 2005 estimates, 60-70% of its2,800 employees worldwide were children of poverty,that is, children who, having observed their mothersattending village bank meetings, eventually becamecredit officers. This development highlights a keypriority for FINCAnow and into the future: to raiseawareness among microfinance institutions of theneed to reach beyond the borrowing parents toexpand their client bases to include the educatedchildren of these borrowers, making available busi-ness loans and microfranchises.

In thinking about using microfinance to alleviate

poverty, Hatch (2005) emphasises the importance ofpartnership with the poor: If you provide resourcesto the poor, give them the flexibility and the

responsibility for making their own decisions abouthow theyre going to take advantage of thoseopportunities. They are capable of doing incredi-bly effective, good stuff, in terms of fixing them-selves and their own poverty. Its the financialgrease in the wheel of the household that givesthem those options they didnt have before. Itsalways been my feeling that the ideal integrators are

the poor families. They know what they need. Aslong as they have access to information aboutwhere they can get assistance, they are the ideal,least cost, and best integrator we have.

FINCAhas developed an evaluation instrument togauge improvements in the quality of life of theirclients. The ten minute, palm pilot assisted inter-view measures seven indicators, starting withmoney metrics, to assess expenditure patterns inorder to determine ifFINCAis reaching the poorestof the poor, and moving to six social metrics: foodsecurity, health, housing, education, empower-ment, and social capital. FINCAplans to use theresults to assess its effectiveness in meeting a doublebottom line for its clients: financial, as well as social

improvements in quality of life.

S A V E T H E C H I L D R E N 5

Save the Children (Save) is a multi-sectoral organi-sation that operates in approximately fifty coun-tries. Its programs encompass health, HIV/AIDS,education, food security, and economic opportuni-ties, mostly in the form of microfinance. Savesapproach to microfinance is group-guaranteed lend-ing and savings. In establishing micro-finance insti-tutions (MFIs), Save starts with a very specialised

focus (i.e., a limited array of services) with an aimto attain operational sustainability. Once that isachieved, the emphasis is on financial sustainability,



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and, eventually, institutional independence fromSave. Resulting institutions follow whatever thelocal legal framework allows. Hence the priority forsustainability and independence trumps any consid-eration of offering complementary services. The aimis to make the institution capable of operating with-out any subsidies into the long run.

Because of its multi-sectoral nature, Save the Chil-

dren has opportunities to consider and even experi-ment with integrated programming. This was thesubject of its 2005 Program Learning Group, anannual event to reflect on Save the Childrens prac-tice and potential paths for innovation and improve-ment. Staff opinions varied and official conclusionswere still pending as of this writing.Conly (2005) summarised the vari-ous viewpoints. First is the perspec-tive that the institutions shouldremain focused on financial services;diversification muddles the objec-tives and can overwhelm staff capac-

ity/skills, damaging effectivenessand efficiency. Second, businessdevelopment skills might be appro-priate to integrate, given their natur-al fit with the objectives of the MFIsand the ambitions of their clientele.A final perspective argues for theprovision of social services alongsidemicrofinance. Preliminary conclu-sions support the integration ofthose financial services that maxi-mize complementarity, specificallystrengthening microfinance, withthe caveat that these, too, must befinancially sustainable; some ser-vices can be delivered in coopera-tion with the microfinance services,but should be under the purview ofother providers, or possibly otherdivisions within Save; and these ser-vices should not be required, as they may detractfrom the clients economic priorities pertaining totheir microenterprise (e.g., requiring time and atten-tion away from the business).

W O R L D V I S I O N 6

Like Save, World Vision is a multi-sectoral organi-sation, but it operates through specialised pro-grams, taking advantage of complementaritiesacross activities. This is mostly achieved through itsmulti-sectoral area development programs (ADPs),which include health, education, and leadershipdevelopment. In 2005, World Vision introducedbusiness development services related to access tomarket. The MFIs are separate legal entities, thoughthey benefit from the World Vision reputation vis--vis donors and other service providers.

At the national office, the separate structure of thearea development program staff and related specialists,and the microfinance staff poses opportunities and

challenges for ensuring holistic service provision forcombating poverty traps.ADPs often do pre-enterprisework, targeting the poorest of the poor. As long termprograms (approximately15 years in each location),the ADPs establish trust through long term relation-ships between local staff and targeted communities.Microfinance programming can capitalise on thistrust perhaps to more quickly initiate and reach sus-tainability ofMFIs. On the other hand, the ADPemphasis on the poorest of the poor means that oftentarget areas for development pose the greatest chal-lenges to microenterprise development: poverty,which limits consumption potential; environmentalfeatures, which limit agricultural production poten-

tial; and remoteness, which poseschallenges to market access.

Also similar to Saves programming,World Visions microfinance pro-gramming is driven by the four Ss:separate, specialised, sustainable(within four years), and of signifi-

cant scale. The latter seeks to capi-talise on the time and energyrequired to establish each MFI. Theprovision of services is also demanddriven. Other donors may be avail-able and known to clients for theirspecialisation in other types of ser-vices. In some instances, WorldVision may partner with theseother providers, for example, underlarge HIV/AIDS grants. Complemen-tarity among partners can be either

geographic or sectoral.Conly (2005) summarises WorldVisions perspective on the scopequestion with the following: MFIsshould remain specialised; integra-tion of services is most beneficialwhen it concerns business develop-

ment services (e.g., access to markets), and wherethere are already multi-sectoral interventions inspecific geographic zones (i.e., ADPs); and partner-ships should be pursued when large grants are avail-able (e.g., HIV/AIDS, food programming), where

consortiums can maximize effectiveness.

M I C R O F I N A N C E N E T W O R K7

The Microfinance Network is a global MFI associa-tion. Membership is diverse, including networksand individual institutions, with different method-ologies, but all are committed to improving thelives of low-income people through provision ofcredit, savings, and other financial services (Hattel,2005). The membership represents all three scopeoptions: 1) pr

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