The nearest microfinance institute (MFI) was in the same town as the grocery store, far off to the east.  It was in that town that some local people were able to access loans through a local MFI and also through the microfinance platform where I now work, Kiva (www.kiva.org).  I met many Kiva borrowers there before the possibility of joining the Kiva team was at all a reality for me. My favorites among the borrowers were definitely a number of friendly and hilarious boda (motorcycle taxi) drivers.  In our village, however, being as remote and rural as it was, MFIs were not accessible.  Instead, the organization that I worked for, Nuru International, helped local farmers form collective savings groups with a minimum of 10 farmers in each, pooling together their weekly shares and allowing members to have savings set aside for more costly improvements and investments, or to help them deal with unforeseen challenges as they arose.

I work mainly in the education sector, and in Kenya I was trying to ensure that rural public primary school children were able to access quality education at their local schools.  My role was not as a direct teacher of children, but as more of a teacher of teachers, working to empower local teachers to create and manage an effective program on their own.  This may seem somewhat unrelated to microfinance, but the overlaps were evident at times.  Nuru International’s goal is to have all non-local staff exit within seven years, once local staff is prepared to take over.  When teaching my team how to develop workplans and budgets, I first learned that the concepts of planning and saving as I knew them turned out to be fairly foreign concepts for most of them.  I posed a hypothetical question, ‘Pretend you are getting married.  How long will it take you to plan and save for this?’ The first answer came from my friend and colleague, John, ‘Ah, this will take at least a day!’

This is when I learned how planning in this part of rural Kenya goes. My friends explained to me that when you have a wedding to plan, people often pool what resources they have then and there, as there is rarely any extra holdings to contribute.  As another example, they said, when you want to build a house, you wait until you have a little extra money, and then you buy a few bricks and a bit of mortar.  Virtually every house in the village began this way.  Maybe six months or a year later, the family would have a little more extra money, so they would add a few more bricks and the wall would become a little taller.  I began to understand why I walked by so many seemingly abandoned piles of brick each day all around the village.  I asked why they would not just save the money until they had enough to buy bricks to build an entire house, and they all laughed, explaining that if they tried that, there would never be enough money for bricks.  Things always come up, people get sick, friends need favors.  Investing in the bricks, they said, was the only sure way of working toward building a house, especially where there are no banks.

Most of my team had never heard of loans or microloans.  When I explained what these were, many immediately thought of great business ideas and asked if they could write up plans and proposals for me to take back to America in the hopes that I could find people willing to give them loans to get started.  A few local people were actually already benefitting from microloans from their savings groups as well. I had a good friend who was a tailor and his children were (and remain) the absolute joys of my life. When I arrived, several of his children were not in school and the family was often unable to purchase medicine while the little ones continually got sick. With a small loan from one of his savings groups, my friend was able to purchase a new sewing machine and over the course of a year was able to earn enough to enroll all his children in school (except the youngest, who was still too young), buy medicine whenever anyone fell ill, and save for the future.

That is microfinance in action through one man, impacting one family, but the impact of that one loan will resonate throughout the lives of each of those children and impact their community, long after my friend has closed up shop.

I have spent the last decade working in international protection, education, and sustainable development, and it is an exciting time to be a part of this world.  Microfinance has emerged as an important empowerment tool that respects the dignity and innovation of the beneficiary and provides a hand up rather than a hand out.  For all the controversies and misuse that have affected the world of microfinance, my friend and others like him are living proof that small loans can make an immense and lasting impact in virtually no time at all..

Thank you to everyone taking part in the Month of Microfinance and all those who lend and who borrow to transform the world and alleviate poverty!

Jessica Hansen is the Education Development Manager for Kiva, and has a strong background in international education, local capacity building, and global engagement in sustainable poverty alleviation.  She heads up Kiva’s education initiative to enhance understanding, involvement, and the mobilization of students and teachers around micro-finance.  Prior to this, she worked in remote rural Kenya with Nuru International and has also worked with the U.S. Committee for Refugees & Immigrants, Mercy Corps, the IRC/Women’s Refugee Commission, UNHCR, the Centre for Refugee Research, and MSF (Doctors Without Borders).  She holds a BA of International Politics from the University of Central Oklahoma/University of Leicester and an MSW in International Social Development from the University of New South Wales in Sydney, Australia.  Her overseas work has been mainly in East Africa and Southeast Asia, and she is conversational in French, Thai, and Kiswahili.

Before arriving in India, I learned about an economic development conference. I contacted the organizers, asked to attend, and they graciously agreed. Once at the conference, I knew I needed to use that opportunity to network, meet people in microfinance, and then see if I could volunteer or intern with their organization.

At the conference, I made and effort to me everyone in the microfinance space. When I met Rangan Varadan, CEO of Micrograam, we had a brief, candid conversation about our opinions of microfinance. The for-profit business model resonated with me and I immediately knew I wanted to work for the organization. We both agreed that micro-credit organizations need to bring a greater diversity of financial services to every level of income, and this is the driving force behind the organization that makes me excited to come to work everyday.

Although I could have never planned this unlikely series of fortunate events, there are a few things that I wish I had know while looking for a job in microfinance:

Three job hunting tips I wish I knew:

1.  Use your network: Yes, everyone says to use your network but how do you use your contacts when nobody has heard of your dream job? At first, I didn’t believe that anyone in my network knew contacts in the microfinance industry. I had an internship in the past at a microfinance organization in the US, but they had a different regional focus and I was interested in working in India. This was a foolish decision because once I did reach out to my contacts in India, I was invited to the conference were I found my job!
2.  Go to where you want to be: I knew I wanted to work abroad but I wanted a job before moving there. This was an unrealistic expectation because very few employers (outside of fellowships) are willing to sponsor an employment visa or take a chance on somebody that they have never met before. Moving to India to find a job was the best decision I’ve ever made. The determination that I had to work in microfinance at the time, embolden me to do things I would have never done before.
3.  Use Twitter: While job hunting in the US, I thought that Twitter and other forms of social media were a distraction. However, if I started using Twitter then, I would have known more about the whole ecosystem that microfinance/micro-lending organizations exists within. And as a result, I would have known about the jobs available in companies that support micro-lending and economic development; for example: social enterprise incubators, impact investing firms, and foundations. Although I knew these organizations were related, I had such narrowed my search so much that I was out of touch with the reality of microfinance- that it does not operate in isolation from other supporting industries.

Meera Sawkar is the Marketing Executive at MicroGraam. Meera studied Economics and International Affairs, concentrating on Global Development Studies at the George Washington University. Prior to moving to India to work for MicroGraam Marketplace, Meera worked at Crossfit Dashboard and Fonkoze USA.  

Credit alleviates poverty?

Historically, the focus has been on credit for productive investment. As stakeholders become more aware of the realities of how the poor manage their economic lives, we are beginning to question the assumption that taking on debt to invest in a microenterprise as a primary means to alleviate poverty. Researchers have begun to critically examine the impact credit has on people’s lives, and are beginning to acknowledge that poor people use financial services for purposes very similar to people everywhere:

That is, financial services—both savings and credit—are needed to manage cash flows and smooth erratic incomes. The amounts are tiny, the needs are often immediate, and the number of transactions high. And the reality is, small, frequent transactions are difficult for most institutions to provide sustainably.

Secondly, poor people, often by virtue of being poor, deal with large amounts of risk in their lives. Financial services—credit, savings, insurance, and payments—can contribute significantly to managing risk but again, services are often needed very quickly and potentially in amounts too small for institutions to provide, and to provide in a timely manner.

Third, poor people need financial services to help build assets, and they use a variety of financial products to do so from a variety of providers. Helping to accumulate lump sums is a fundamental need that financial services can support.

And lastly, poor people may also use financial services to invest in productive activities—which is where traditional microfinance has focused almost exclusively. Yet, it is often not the primary financial service that most people need.

For example, if a poor farmer had the ability to save or borrow an amount of money that would allow her to buy food to get through the hungry season before she harvests her crops, she could avoid “pre-selling” the harvest—which in some countries results in a 50 or 60 percent discount. If she could get through the hungry season, she could then sell her harvest at 100 percent of the market price and ideally, when prices are highest. So without actually using credit to invest in a productive business, but rather to provide food security for a couple of months, her income could rise substantially simply by not having to pre-sell her harvest.

Acknowledging the different financial service needs or poor people and working together to genuinely meet these needs in a way that is sustainable, affordable, and accessible would go a long way to improving the quality of poor people’s lives. It is likely technology will play a key role going forward but it is not enough to focus only on supply. Technology will only be the game changer if the services provided present a better value proposition than what people currently have.

I would argue, the importance of really putting clients at the forefront of our work—understanding consumer behaviour and financial service needs, and matching supply to genuinely meet those needs, is key to sustainably increasing financial inclusion.

Joanna Ledgerwood is the author and editor of The New Microfinance Handbook, published by the World Bank on February 18, which addresses the need for increased financial inclusion by examining the financial market system, beginning with client needs.

In 1971, the Vietnam War was in that stage where, as John Kerry put it, “No one wanted to be the last man to die for a mistake.”   Some of my classmates in a similar dilemma went to Canada.  Some went to jail.   I thought to myself, ‘There must be another option.”

Someone told me about the Peace Corps, where I would be eligible for a two year deferment from military service.   Anything could happen in two years, right?   I interviewed, and the Peace Corps said “You’ll do.  What country do you want to serve in.   I thought a minute.   “Jamaica?”   “No, we’re going to send you to Guatemala, where you will be a extension agent for an agricultural cooperative.”   I hesitated.   “You do realize I was born in New York City?”.

For two years, I lived and worked in an idyllic little pueblo in the highlands of Guatemala, a tropical paradise.  The members of the coop were Mayan farmers who eked out a living farming small plots of corn and beans. They knew more than I ever would about farming, but their land, after generations, was severely depleted and required fertilizers to restore productivity. Fertilizers which the coop members could not afford.

This is where I was able to help, making small loans of $50, in the form of fertilizer. The farmers were able to double and triple their yields. They were able to better feed and care for their families. And, of the 800 farmers we made loans to, 799 of them paid their loans on time and in full. The one guy who defaulted was named Apollinario Atz.   I’m still looking for him.

When it came time to leave, I went to say goodbye to all the farmers I had worked with.   I was amazed at their reaction.   “You can’t go, Don Ruperto!” they begged.   Some even wept and held my hand, as if to physically restrain me.   I thought:  “Wow, for the first time in my life, I made a difference.”

After the Peace Corps, I went on to work a variety of what felt like dead-end jobs. None made me feel as useful as I did when I worked as a credit officer job in Guatemala.   My lack of passion for them usually resulted in my getting fired.

My life would come full circle when, years later, I met John Hatch, who shared a similar passion for helping peasant farmers escape poverty. John hired me, sight unseen, with no interview, at a time when I had just finished grad school, owed a lot of money in loans, and had a baby on the way.   Together, we founded and built FINCA International, a global microfinance network providing financial services to over a million low-income entrepreneurs from 23 countries on four continents.   It’s been an incredible adventure in which I’ve been privileged to know some of the most heroic people on earth.   I haven’t been bored for a single hour for the past 40 years.

When I meet young people just embarking on their careers, I encourage them to leave some room in their lives for destiny to work its magic.  Sometimes what seems like a disaster is an opportunity in disguise.  I am humbled to be able to work for people whose every day comes down to a precarious struggle to put food on the table, clothes on their children’s backs, schoolbooks in their hands, and all the other things necessary to ensure that their grandchildren will not grow up in poverty.

Rupert Scofield, FINCA International’s President and Chief Executive Officer, is an agricultural economist with 40 years of experience in the developing countries of Africa, Latin America, Eurasia, the Middle East and South Asia. As the author of The Social Entrepreneur’s Handbook: How to Start, Build and Run a Business that Improves the World, Mr. Scofield seeks to inspire the next generation of microfinance leaders and social entrepreneurs. To learn more, visit http://rupertscofield.com/ or follow him @RupertScofield

In a little more than a year, I set up more than 1,200 business correspondence branches. This year taught me two things, first that the business correspondence model adopted by the banks to open zero balance savings account had absolutely no benefit to the people. Second, that if I want to impact under severed populations, I needed to make credit more accessible. This motivated me to develop a micro-lending organization with credit as the first product offered.

Soon after I left the business correspondence company, I had a conversation with a cousin, Sekhar Sarukkai that inspired me to start MicroGraam. Sekhar told me that our younger cousin, who was a very talented cricket player, wanted to become a professional player. To do so, he needed funding to move to an urban area and train with a team, however his family lacked the funds to help their son do so. Although the family was willing to take a loan for their son to pursue his dreams, not one bank would offer them credit.

As our conversation continued, I told Sekhar of my experience in rural villages. I knew there were millions of people across India with the potential to be successful who were hindered by their lack of resources and capital. Similarly to our cousin, if an entrepreneur misses out on receiving funding at a crucial time, the opportunity could be lost forever.

Sekhar and I set out to build a model that was win-win for both lenders and borrowers. At the time, in rural borrowers paid more than 30% interest while urban borrowers could get an interest around 18%. This made us wonder, “Why is there a gap between urban and rural in an age with such advanced technology?”

As Sekhar and I began to research how to start MicroGraam, we gave some loans from our own savings. In one village we gave 20 loans to women to buy dairy cows. After three months we visited and I asked one woman if she was able to provide for her two small children through the cow. She nodded and said that she earn about Rs. 2,000 a month was enough but more than the money, now she was able to give her children milk so they are growing much bigger than they did before. She paused for a moment and said, “Also, now I can offer a guest coffee when they come to my house. I have respect in my village.” Although I expected that the loan would provide her family with food and income, I did not anticipate the respect she described from her peers. Furthermore, she attributed the improvement in her life to the additional respect! This singular experience showed me that MicroGraam was worth pursuing and the multifold impact that a loan can have on a person’s life.

Rangan Varadan is the CEO and Co-founder of MicroGraam Marketplace. Previously he headed the Banking and Capital Markets technology research group at Infosys Technologies. Rangan holds a Ph.D. in finance and economics from Lehigh University, and is also a fellow of the Institute of Chartered Accountants of India. Rangan brings extensive experience in financial services domain. His current focus is on taking branchless banking services to villages in the most efficient manner through technology and field partnerships.

The New Microfinance Handbook suggests that in order to increase financial inclusion, financial markets need to work better for the poor, not just microfinance institutions. To make markets work better, stakeholders must take a market systems approach and consider both the supply of and demand for financial services (the “core” of the system where transactions take place) as well as the rules (both formal rules such as policies and regulations, and informal rules such as cultural norms) and supporting functions (infrastructure, funding, information, etc.) that contribute to making financial markets work.

In the NEW Microfinance: Taking a Financial Market System Perspective – Parts I and II, we examine the core of the market—that is the demand and supply—and acknowledge the importance of genuinely understanding the market system and the roles and functions of different actors within the core.

Outreach of Financial Services

There is no doubt that access to financial services play an important role in economic development and improving the quality of life for those who use financial services. As the seminal book Portfolios of the Poor points out, the poor may live on two dollars a day or less but they rarely receive two dollars each and every day. So they are constantly juggling trying to manage varied and erratic cash flows. Financial services that help smooth incomes and manage risk are highly valued. However services that support management of cash flows often require frequent transactions and often in tiny amounts. Thus the ability to save and borrow right in the community is fundamental—which is why so many financial services are provided in the informal sector, and may partially explain why the outreach of MFIs in many countries remains below ten percent.

Why is Access/Outreach not Greater?

Providing financial services to poorer populations, particularly to those living in rural areas, remains a challenging goal for the microfinance industry. Rural environments are typically characterized by poor communications infrastructure, low population density, low levels of literacy, relatively low profitability and/or high risk of many economic activities, and economies dominated by agriculture (meaning there is significant covariance risk and farmers tend to need financial services all at the same time). Poor urban areas suffer from many of the same problems albeit with a somewhat more diversified economic base. As a result, it has so far proved difficult for NGO microfinance institutions (MFIs), let alone commercial financial institutions to serve poor people with a variety of services that meet their needs.

In order to increase outreach we need to better understand what financial services poor people need and use and how they access these services. I suggest that most of our work and focus over the last 20 years has been too much about how institutions can be sustainable, how they can increase outreach, and how they can serve poorer people. Often the discussion ends up focused on product development, and often based on assumptions rather than real evidence. For the most part we talk about what institutions can do for clients rather than really focusing on client behaviour and needs. The difference may be subtle but by focusing primarily on institutions as the solution, we may miss identifying constraints (and opportunities) in other areas of the market system. While this is certainly changing and there is a lot of discussion about being ‘client-centric’, I do think we need to go a bit further and in the first instance, put aside the institutional agenda and focus on understanding better how the poor currently use financial services—what types of services, from what types of providers, and how—and let that have a much greater influence in how we think about increasing financial inclusion.

We need to take a more holistic view acknowledging the multitude of financial service providers that serve poorer populations. This requires looking beyond the formal sector and understanding the informal sector better. Broadening our thinking from a focus on moving poor people into the formal system to also understanding and thinking about how community-based providers can be improved and facilitated, I think would be of great benefit. As the table below shows, there is a large variety of providers that can meet the needs of low-income populations.

Source: The New Microfinance Handbook: A Financial Market System Perspective

I think the research through financial diaries brilliantly documented in Portfolio’s of the Poor and other studies goes a long way to understanding who the poor are and their behaviour—specifically the number and variety of financial services and providers they use to manage very complicated lives.

Altogether, acknowledging that people living in poverty have a number of financial service needs which are met by a multitude of financial service providers—both formal and informal—will go a long way to better understanding how to increase financial inclusion.

Joanna Ledgerwood is the author and editor of The New Microfinance Handbook, published by the World Bank on February 18, which addresses the need for increased financial inclusion by examining the financial market system, beginning with client needs.

My husband had a full-time contract elsewhere, so my plan was to offer my skills and experience for free, in exchange for access to operations information and management-level learning.

In short, with a little research and outreach, my plan worked. I started working part-time for Phakamani Foundation in 2011. Phakamani provides training, micro-enterprise loans and group support to very poor women in rural areas. What I found and learned were so many things, but these are the key ones I want to pass on to the students following Month of Microfinance (bravo, by the way, for this initiative):

• Microcredit for microenterprise development – the original kind based on Mohammad Yunus’ principles  – does work to improve people’s lives if the programs are well-designed and include safeguards to ensure no harm. In South Africa we call this “development microfinance” to distinguish it from other things going on in the market (e.g. pay-day loans to the poor.)
• Microfinance ain’t for sissies! It’s hard work that demands incredible heart, starting with the field officers who walk the village roads every day.  It also demands firm resolve. In the face of so much need, not everyone will be an appropriate client and sometimes the clients do struggle.

LESSON #1:  Recognize that business is business, and give due respect to the clients.

Being a successful micro entrepreneur or micro business owner is really no different than being a “regular” entrepreneur whose business may be formalized and measured in larger amounts of money. In both cases, it takes hard work, savvy, attention to cash flow, savings, stock and investment to make ends meet. The difference is not in the business, it is in the fact that the very poor person has a harder time getting started, and can face severe personal and family vulnerability if things go wrong.

LESSON #2:  Grow thick skin, patience, and if you are working for a facilitating agency, remember that small NGOs have real restraints in terms of human capacity and available skills.

What I want to convey is how much corporate, academic and “international organization” baggage I had to shed in order to accept and work within the operational realities of a small NGO striving for sustainability.  I was not totally naïve … but still, when you are wooed by this dream of helping women and the great idea of “taking it to scale”, getting down to the nitty gritty of what it takes to grow is a shift of several gears. It is, however, invaluable experience.

When you are building an organization, you often don’t have the basic tools that larger or older organizations have – or even that a typical American university student might have in his/her laptop. Our field officers don’t have smart phones, laptops or Internet access.  Phakamani’s management team has good systems in place by now but all people must wear many hats, often building or adapting tools (like software) or acquiring new skills to get the basics done in some new area, or taking time (and money) to find out who can deliver what is needed next (meanwhile literally praying that somebody will just know and come to us instead.)

Meanwhile, you can NEVER take your eye off the ball of the core operation and mission. Every dollar spent on overhead is a dollar not spent recruiting or training new micro entrepreneurs and building revenue for long-term sustainability. There are many demands from donors (understandably.) Tempting opportunities come up that you know could help your beneficiaries but will diffuse your focus. People who want to “help” come along with big ideas – but might not understand that what you need are not just ideas but the money or hands to implement the basics as well as the big ideas.

So, I have had to learn patience and perseverance.  It’s a classic conundrum for all small businesses and NGOs but it burns inside when you just want to see something good expand faster.  To stay motivated, I think about the women entrepreneurs in our program:  how proud they are of their work, how much better off they are when they can generate their own income, and how some of them won’t leave their kids behind to become underpaid maids in the city.

LESSON #3:  Learn some accounting, financial basics applicable to this sector.

Understanding the financial side of MFIs is critical if you aspire to management-level positions in this field. Microfinance institutions large and small, including the “kindest” of NGOs, need people who understand what will make them grow, what will make them sink, and how to use the numbers to spot small problems in the process before they become big ones.

If you want to work for donor programs or do other types of outreach for larger institutions, an understanding of the finances will also help.  Besides being a more understanding/better donor, your ability to read financial ratios and truly evaluate what is going on inside your MFI partner will be very helpful and ultimately advance the cause.

You don’t have to do an MBA in social enterprise (although it can help.) But if you do not have any accounting or financial background (or even if you do) then at some point in your experience, I would recommend at least a short course focused on MFI management. That’s what I did, at the University of Pretoria’s Centre for Inclusive Banking in Africa. It was a real boost. CGAP lists a number of institutions that offer such courses, perhaps even online.

LESSON #4: Language skills can differentiate you.

If you already speak more than one language then you will know how much can be lost in translation. I do speak more than one but I did not happen to speak isiZulu or Tsonga when I joined Phakamani Foundation, two of the languages used by many of the women in Phakamani’s program. I found this incredibly frustrating – not just because of my work in communications but it is important when it comes to looking at client feedback, program design, impact measurement, and everything else.

At Phakamani, all of our field officers and branch managers are required to know the local language and we deal with clients in their own languages. In fact, the loans officers and most of the management team are drawn from the local area, which makes sense from many perspectives. Thanks to their interpretive skills and goodwill, I was able to get my job done but it took longer and I felt handicapped. Luckily for me, it has not required much in the way of language skills to personally see and understand how appreciative and proud Phakamani’s clients are. I am so grateful and humbled by this experience.

Allison Scuriatti joined Phakamani Foundation in 2011 as a part-time volunteer to assist the CEO in developing strategic communications, external partnerships, funding, impact monitoring, and industry relationships. She has nearly 20 years of professional experience in international organizations, non-profits, as well as the private sector. She holds a Masters of International Relations from the Graduate Institute of International Studies at the University of Geneva, in Switzerland. She was raised in Canada but maintains her permanent home and independent consulting business in Washington, DC.

The group took off from there. The Veredas microloan project began lending to Vicki and her partners in 2010, as they finished a three-year course in personal development and business. To date, Vicki and her partners have received two loans from Veredas at 2-3% interest, both of which they used for basic materials for their corn products and paid off within three months. “We had already started making tortillas, but the loan helped us expand our business,” Vicki said. Now, the women are looking for larger loans to allow them to expand their business more quickly: “We would like to see bigger loans, so that we can build a new kitchen and tortilla-making area. For instance, right now I have to work outside because there is not enough room in my kitchen to make the tortillas.”

Vicki and her partners also work with a few other women in a cooperative called Siempre Viva, which formed around the same time as the tortilla-making enterprise. Siempre Viva specializes in making herbal soaps and shampoos, and has also received loans through Veredas.

Vicki and her partners have learned a lot through their work. Vicki says, “I’ve learned lots of new recipes that our clients give us, and through Siempre Viva, we learned about natural remedies that we can make to sell and use for our families.” According to the women, they now grow their own beans, corn, fruit, and vegetables; have improved nutrition; and spend less money visiting the doctor than they did before.

For the Díaz women, the opportunity to work together as a family in their own business has been a blessing. All the women have their own consistent costumers for the corn products they sell, but when any of them receive a large order or have to prepare products for a citywide event, they join together to help out. Living close to each other, they explain, they can easily meet to talk through problems or conflicts. Vicki suggests that it would be helpful for other microfinance recipients to work in groups: “Clients should form a group; all members should be responsible and punctual and do what they say they are going to do. This way, microfinance can benefit the whole group.”

Vicki also has some advice for microfinance practitioners: “We would ask people involved in microfinance that there continue to be confidence in us, in our ability to do our work, to expand our business, and to be responsible. We will continue working.” She also believes that the loan officer is an important part of the microfinance experience: “A loan officer should be responsible, friendly, and understand us as human beings. Knowing about business is good, but mostly, she must be willing to learn as we go along, as part of the process.” For the most part, Vicki and her partners have had good experiences with their loan officer. She says, “We always laugh when we have our meetings with her [our loan officer]; the meetings are always friendly and relaxed, and we laugh about lots of things as we are getting our work done.”

Vicki not only collaborates on a successful corn products business; she is active in her community and she can often be found raising awareness around important issues with corn hybrids and or conducting trainings for other groups of women. With her partners, she also works at a small restaurant run by another cooperative. It’s easy to find Vicki and the rest of the Grupo Díaz at any community event in San Cristóbal, selling their renowned tamales and chatting with the crowd.

by Anita Smart & Roisin Duffy-Gideon, Veredas/Natik

Broader and deeper financial inclusion means that households have more financial management options.  How does a household benefit from having more options?

There are many, many well-documented cases in which poor households invest their loans or savings or both in microenterprises that grow and yield enough profit to substantially increase the household’s income and consumption, sometimes even enough to rise above the national and international poverty lines. But these cases are a minority of the households that participate in microfinance.  There are surprisingly few data on just how sizeable the minority is, but they are still a minority.

Benefits for enterprise development do not describe the full value of microfinance for the majority of poor households who participate. Yet participate they do – at least 150 million, maybe 200 million relatively poor households.  What is in it for them?  What in fact doesmicrofinance reliably do for poor households?  The answer provides the overall rationale for massive investment in the infrastructure and operations of microfinance.

In a recent post on The Evidence Project blog, I reviewed 12 reports of recent randomized trials and found that 10, maybe 11, offer solid evidence that people use microfinance to reduce their vulnerability; i.e., to manage the risk of consumption interruptions and financial shocks for their households. Enterprise investment can be seen as just one of a suite of tools that people use to reduce their vulnerability.

Unlike other risk management tools, investment in microenterprise can have the happy consequence of actually raising total household income, as well as smoothing income through the year as part of a diverse portfolio of revenue streams.  However, as we know from at least two recent, excellent books, Portfolios of the Poor and Poor Economics, most households are not counting on this poverty-reduction effect of microenterprise investment; they just do business as one of several ways to keep the wolves of hunger and ill health at bay, to clothe and shelter themselves, and to have a little enjoyment in their lives, too. Call this poverty alleviation—reducing the uncertainties and stress of being poor. Not so many are using microfinance in a way that will raise them from the ranks of the poor—povertyreduction—because there just aren’t that many opportunities for thriving enterprise in the absence of robust local economic development.

What optimistic yet realistic theory of change can be crafted from this evidence? Consider this formulation (mostly drawn from page 93 of the year 2000 paper by Sebstad and Cohen):

People from poor households tap microfinance services to smooth consumption and build assets to protect against risks ahead of time and cope with shocks and economic stress events after they occur—leading to poverty alleviation.

This is also the narrative coming out of the financial diaries reviewed by Portfolios of the Poorand the research summarized in Poor Economics and Due Diligence. A new theory of change is emerging for microfinance. It is shaped not only by the results of research.  More or less independently, perhaps in spite of that research, the microfinance industry has been adjusting in this direction toward supporting risk mitigation strategies of the poor as it has become more sensitive to client demand – by moving toward a mix of loan, saving and other services and greater flexibility and choice to accommodate the use of microfinance for supporting household resilience rather than focusing just on the needs of microentrepreneurs.

Many consider consumption smoothing, or even the resilience it reflects, a consolation prize at best in the quest to eliminate world poverty. But what could be more fundamental to poverty reduction than helping the poor make sure they have enough to eat and other basic necessities throughout the week, the month and the year? From that stable ground, the poor are in a much better position to seize whatever opportunities are provided by health and education services and a decent economy. Though financial services by themselves cannot provide these opportunities, they do seem quite capable of helping the poor provide the stable ground to stand and build upon. That is the significance of consumption-smoothing, risk mitigation and resilience in poor households.

Assuming more, confirming evidence will come soon from properly targeted research, we must pose this question to ourselves and the larger world we live in: Is this resilience-building benefit of financial inclusion enough to justify the massive investment of public and private funds in the infrastructure and operations of microfinance and related financial service providers?  This question–and the underpinning research–prompt us to put financial services for the poor into proper perspective as part of the larger development narrative. The old narrative of the microentrepreneur who, by removing capital constraints, is enabled to grasp business opportunities and lift a whole family from poverty isn’t wrong; it is just one way people use financial services.

— Chris Dunford is the former president of Freedom from Hunger and the editor of The Evidence Project.

Photo credit: Mohammad Ponir Hossain

How did you get into the MF field?

Before I started working [with FAC] I was working with a bank in the area of micro-finances. There, I received training on this topic and that is how I started working in the field of micro-finances.

How did you know that micro-finances was something you were interested in?

I like numbers all around and since micro-finances involve keeping records of payments, balances, and interest rates that is why it caught my attention and it is something I feel comfortable working with.

Do you believe in MF? Do you believe MF really helps people in the end?

If they are handled correctly yes but it is a double-edged sword. You can see bad example of this with credit cards. In a case like this if the credit is not handled correctly you can end up in a worse situation than you were before. A good way to handled credit, now that I know both sides of the coin, starts with finding a good institution to get the credit from. I would definitely choose an institution like [FAC] to get my credit instead of a bank.  Then you have to use the money to make an investment, in a business for example, and then taking care of your investment. Sadly, from our experience, we have seen that people not always have a commitment with the business. That is why micro-enterprises are not very profitable or don’t last longer because people don’t put the effort or commitment that is needed. In summary, a good way that MF helps people is if they make a good investment, take care of it and also take care of the money they make, their income and also their expenses.

How would you describe a client-centered MFI?

Here we can mention the differences between [our MFI] and a bank. A bank’s focus is the money. Maybe when you contact them they treat you very well but, after the disbursement has been made the credits official that was working with you loses connection with you because his interest is to find another client to give another loan. That means he is not concerned about how you invested your money or if you are doing well with your investment. What we are doing is different from a bank. We also work with money but our main objective is to take care of people, their needs and how we can help with these.

How did you think your experience with MF was going to be when you started? Were there any surprises?

This relates to what I mentioned before, seeing the difference between how a bank works and how we work, focusing on people instead money and just finding the next client.

A surprise or eye-opener moment was when I was working in the bank, where I learned a lot of the concepts which I use now.  There I learned that after giving a credit to a person, they took full responsibility for the money and the use of it, if you use it wrong you still have to pay it, this means there is a risk of ending worse than you were before if you could not pay it back. The surprise I had here was understanding the importance of knowing how to manage money because this could lift you up or bring you down especially when managing money that is not yours.

Which are the biggest challenges that MF faces today?

I personally see it this way, when you talk to someone about MF the first thing they relate it with is debt because they do not understand what it is. So, one of the biggest challenges I see is people understanding what MF really is.

Nestor Sicajá is a credit officer with FAC International. The interview was conducted and translated by Samuel Brizuela.