2.1 What is microfinance?

Microfinance is the provision of savings, credit and/or other financial products in small amounts to primarily poor customers conventionally believed not to have the capacity to save as well as considered unwilling and unable to pay the high interest rate required to cover credit transaction costs. However, some microfinance intermediaries have achieved financial sustainability by using unconventional techniques, charging cost-recovering interest rates and obtaining high levels of repayment.

Sustainability and viability, however, remain the exception. It is guesstimated that only three dozen projects are presently sustainable representing 0.5% of the 7 000 or so existing microfinance programmes while 90% will never reach sustainability (Richard Rosenberg).

Microfinance is extended by different types of financial intermediaries (reviewed below). Some intermediaries are geared exclusively to women and others are not. Of the latter certain have reached more women customers than others but since MFIs typically target the poor, the majority of customers are women.

The poor, women, etc. are not homogenous groups and there is no magic recipe to cover the characteristics of products and delivery mechanisms demanded by these different groups. However, there is growing knowledge of the issues to be analysed in order to ensure that microfinance is equally attractive to poor men and women.

2.2 Microfinance customers

2.2.1 Who are microfinance customers?

Most Microfinance Institution (MFI) customers operate in the informal sector generating income from a range of activities. These economic units are usually referred to as Micro and Small Enterprises (MSEs) and when analysed usually (but not always) exclude primary agriculture. Generally micro enterprises are those enterprises with 10 or fewer workers, while small enterprises have from 11 to 50 workers.

Surveys of the MSE sector in several countries have uncovered surprising factors (see table below). The MSE sector is very large indeed, employing a substantial part of the working population - 16% to 27%. A sizeable proportion of MSEs are located in rural areas - 68% to 90%. And half to three quarters of households depend on MSEs for at least half of the household's income. MSEs therefore open the opportunity for employment in rural areas outside the traditional farming activities.

Country	% of labour force working in MSE sector	% of households depending on MSEs for at least half of household income	% of MSEs located in rural areas (1)
Kenya	16%	69%	78%
Zimbabwe	27%	52%	68%
Swaziland	24%	64%	77%
Malawi	21%	70%	90%
Lesotho	20%	75%	80%
source: Parker and Torres, 1993, K-Rep, p7 (1) definition of rural areas varies slightly according to the country. In Kenya it is areas with population of less than 2 000 people

Most MSEs are one-person enterprises (see table below).

Country	% of MSEs with one worker only	% of MSEs with 11 to 50 workers
Kenya	47%	1%
Zimbabwe	70%	1%
Swaziland	68%	n.a.
Malawi	60%	n.a.
Lesotho	80%	n.a.
source: Parker and Torres, 1993, K-Rep, p11

The figures below will give us an idea of the MSE sector. However, it must be recognised that the MSE sector is complex and diverse and therefore that these average figures give us an imperfect image of reality.

Based on the Kenya survey (Parker and Torres, 1993, K-Rep & Daniels, Mead and Musinga 1995, K-Rep) we learn that:

• the main area of activity in both urban and rural areas is trading - 65% and 56% respectively. This is followed by manufacturing in rural areas (38%) and services in urban areas (19%) (1995, p10)
• annual closure rates over the 1991-94 period have ranged from 8% to 21% and correlate to the state of the economy (1995, p30)
• 47% of closures are not related to business failure (1993)
• net new jobs increase by 10% per annum (1995, p60)
• most MSEs do not grow in terms of employment
• nearly one third of MSEs operate from home (1993)
• 45% of MSEs start with a capital of less than US$20 and 70% with less than US$100 (1994 prices) (1995)
• 89% of MSEs have never had access to either formal or informal credit (1995, p43)
• two thirds of MSEs are generating income below the minimum wage level and close to 20% produce returns twice the minimum wage (1995, p25 & 26)
• 20% of MSE owners have no formal education and 55% have some primary education (1995, p34)

The three main constraints MSEs face are related to the market, finance and inputs. Most MSEs have at least one of these problems:

• FINANCIAL: Getting paid by customers and having access to credit;
• MARKET: Low demand for their products in urban areas due to competition from other producers and in rural areas because of isolation from main markets;
• INPUTS: Access to and/or the price of inputs.

2.2.2 How do men and women entrepreneurs compare?

(extracted from Liedholm and Mead, GEMINI, 1995)

From surveys conducted by GEMINI in Zimbabwe, Swaziland, Botswana, Kenya, Lesotho, Malawi and the Dominican Republic, it emerged that in each country surveyed at least 45% of MSE entrepreneurs were women. In four of these countries the majority of MSEs were headed by women.

Women's enterprises are concentrated and dominant in more traditional manufacturing activities such as beer, brewing, knitting, dressmaking, crocheting, and grass and cane work, as well as in retail trading.

Returns to female-dominated activities are lower than the average for the sector. In Kenya the overall average return for enterprises owned by women is only about a quarter of the level earned in enterprises owned by men (Daniels, Mead and Musinga 1995, K-Rep, p58).

45% of women-owned MSEs are home based compared to 19% for men.

Female-owned MSEs show annual start rates more than 5% points higher than the male rate in each country examined. In Zimbabwe, the five sectors with the highest percentage of women entrepreneurs had the lowest capital and skills entry barriers.

Except in the Dominican Republic, women-owned MSEs are not more likely to close than those of men if personal reasons for closure (such as childbirth) are excluded.

There are minimal female-owned enterprises in the sectors with highest growth rates, construction, transportation and personal services. Female-headed enterprises grow less rapidly, around 7% per year compared with 11% for men. Only in trading in Malawi and services in Swaziland do women-owned enterprises grow more rapidly than their male counterparts.

The primary problem cited by women entrepreneurs is market demand, closely followed by lack of access to raw materials and intermediate inputs. Men complain more about access to fixed and working capital, access to tools and equipment and constraints arising from government regulations.

In Kenya, 33% of female owners have no education compared to 10% for men. 48% of women had some primary education compared to 59% for men. There are also large differences in income. 75% of female-owned enterprises earned incomes at or below the minimum wage compared to 52% of men-owned enterprises. Also while 27% of men-owned enterprises earned incomes levels at least twice the minimum wage this was only the case for 16% of women (Daniels, Mead and Musinga 1995, K-Rep, p27 & p34).

2.2.3 Do the poorest benefit from microfinance?

Grameen Bank in Bangladesh is one of the best known examples of a microfinance intermediary targeting the poor since customers cannot own, in an agriculture based economy, more than half an acre of land.

However, even Grameen Bank has not managed to attract those referred to as the poorest or the hard-core poor who represent about half of the poor and subsist on a per capita income that is less than half that of the poverty line (Rahman, 1995 from Schneider, 1997, IFAD/OECD). For the most part these people are so destitute that either they consider themselves unable to service debt and therefore shy from borrowing or they are ostracised by group members when group guarantee is required.

It is believed, however, that even the hard-core poor have a need for savings products and some instruments, such as hire-purchase, are being developed for them (see below). Nevertheless at the moment hard-core poor are mostly excluded from microfinance.

Exclusion of the poorest from "micro-credit" is supported by a recent publication which suggests that microfinance benefits mostly people just below the poverty line rather than those well below it. - "Core poor ... receive few direct benefits from income-generating credit initiatives and so alternative assistance strategies (in finance and other sectors) need to be developed" requiring continued innovation (Hulme and Mosley, 1996, p113).

2.3 Who provides microfinance?

An MFI is sometimes defined as having average outstanding loans below the per capita annual income in the country where it is operating (GTZ, 1997, CGAP, p6). However, we will widen the definition by looking at all types of institutions that are lending to customers that would not generally be eligible for loans from a formal bank.

There are five main types of institutions directly involved in microfinance - those related to Governments, those in the private sector, NGOs, cooperative-type institutions and informal lenders (see table below). Some will change over time. Grameen Bank started as a pilot project in 1976 and evolved into a chartered bank in 1983. K-Rep in Kenya started in 1984 as an umbrella programme (APEX) to channel money to and supervise NGOs. In 1990 K-Rep became an NGO lending directly to customers to finish in 1997 as Kenya's first commercial microfinance bank among other reasons to raise savings and on-lend them.

TABLE 2: TYPES OF INSTITUTIONS INVOLVED IN MICROFINANCE Types of institutions involved 'directly' in microfinance 1. Government-related: -BRI, Indonesia, is a state-owned bank with 2.5 million loans outstanding (1996) -Grameen Bank (ex-pilot project), Bangladesh is a parastatal (25% of the equity held by the Government and 75% by borrowers) with nearly 2 million customers 2. Privately owned: -Barclays Bank of Kenya Limited and Kenya Commercial Bank offer some small loans including to the informal sector -Commercial Bank of Zimbabwe provides approx. US$300 loans to urban clients using solidarity group methodology -ADEMI, Dominican Republic, is a non-profit organisation managed by a board of trustees with 16 000 customers (1995) -K-Rep commercial microfinance bank (ex NGO) with nearly 10 000 customers (1994) - BancoSol (ex NGO, PRODEM), Bolivia private company with 46 000 customers 3. NGOs (Ownership unclear): -CARE, Niger with 12 600 customers (1994) -Others include Accion, Oxfam, Opportunity Trust 4. Cooperatively owned: -Credit Unions -Village banks: e.g. FINCA in Uganda with 4 900 customers (1997) -Self-help groups/associations 5. Individuals: Moneylenders/friends/relatives/suppliers Types of institutions involved 'indirectly' in microfinance APEX organisations, Micro Bankers Trust in Zambia working with eight members, NGOs and private companies Commercial banks extending lines of credit to MFIs Development Banks who extend credit lines to, and take equity positions in, MFIs Donors & intermediaries such as the EC and WWB which provide funding and guarantees

The number of borrowers varies considerably from one MFI to another. There are several MFIs in Asia working with in excess of 100 000 customers and two with 2 million or more customers. In Latin America there are some MFIs extending loans to around 50 000 clients. However, most MFIs operate well below the 10 000 borrowers level.

Although institutions involved in microfinance have different institutional types, ownership and origins they run surprisingly similar operations. The vast majority provide credit on a solidarity group-lending basis without collateral, often referred to as Grameen-type lending. Some provide loans to individuals after appraising the borrower and requiring some guarantee either real or in the form of a guarantor. Village banks are a mixture of the two method, lending to individuals but usually not requiring collateral.

The average loan sizes declines as one moves from individual lending to group lending and to village bank lending.

Group-lending

The group-lending method is the most common and is offered by some government-related institutions, privately owned institutions and NGOs. It has been a breakthrough approach to lending small amounts of money to a large number of customers who are poor and cannot offer collateral.

There are variations in the way group-lending is operated. Group sizes vary but most are in the four to eight members range. Either the group receives a loan, or loans are granted to some members first and then to the others. The principle is that the group self-selects its members of similar background and shows solidarity for a certain amount of time before obtaining a loan. Most institutions require a percentage of the loan to be saved in advance to indicate ability to make regular payments and serve as collateral. Group members are responsible for the repayment of each others loans and usually meet weekly to collect repayments. In case of default group members will not be allowed to borrow again. The creditworthiness of the borrower is therefore determined by the members rather than the institution. It is not unusual for an institution to require several groups to come together in a centre (from 20 to 70 members) which provides a second level of collective liability. Most institutions promise another even larger loan as an incentive to repayment referred to as progressive lending.

Group-lending is therefore based on transferring most of the financial administration onto members and transferring the risk of non-repayment from the institutions to the group through peer pressure and joint liability.

Average loans generally range from US$100 to US$200 and are extended for an average of 3 to12 months and repayable at short regular intervals.

Some non-formal financial institutions collect voluntary savings and on-lend them which is often illegal and so far generally unregulated with the risk of poor people's savings being lost through fraud or bad management.

The best known group-lending and savings institution is Grameen Bank in Bangladesh which has some two million members spread over half of all the villages of Bangladesh and with a recovery rate exceeding 95%. Grameen targets women on the basis that they are better repayers than men and that loans extended to women benefit all the household members more with improved level of food intake, health and education.

Individual lending (Hulme and Mosley, 1996; Lefgerwood and Burnett, Calmeadow, 1995)

"The absence of peer pressure and joint liability arrangements" in the case of individual-lending organisations, "has not impaired their loan recovery performance and has permitted staff to focus their efforts on financial rather than social intermediation (namely, group mobilisation and group education)". Loan performance has been secured through a combination of "positive incentives to repay, in terms of repeat loan eligibility based on repayment performance and cash rebates and refunds for on-time completion of repayments", and "a set disincentives to default" by requiring collateral (various types), character reference and /or a guarantor. (Hulme and Mosley, 1996, p133)

The best known successful individual lenders are BRI in Indonesia and ADEMI in the Dominican Republic. ADEMI has more women borrowers (40%) than BRI (24%) although neither specifically target women. The reason seems to be that ADEMI will take the best collateral it can which in some cases means none while BRI requests collateral and a loan co-signer who is usually the wife and presumably excludes her from borrowing. However, it is said that in the case of BRI some men have taken out loans on behalf of women.

In 1992, BRI loans ranged from US$15 to US$2 700 with an average of US$625 and were available between 3 to 24 months for working capital and 3 years for investment loans. In 1994, ADEMI loans averaged US$248 for their small borrowers (20% of customers) and US$107 000 for their largest customers (O.4%). Lending terms ranged from 6 to 12 months for working capital and 3 to 5 years for capital goods investment.

Only a small number of traditional financial institutions provide loans to microfinance customers for one or more of the following reasons: practical reasons (they are not geared to dealing with a large number of customers), image reasons (executing the guarantee of a poor person would not look good, nor does charging higher interest rates to the poor), regulatory reasons (100% provisioning is required for uncollateralised loans), usury acts (putting a ceiling on interest rates that can be charged which is usually below rates required for microfinance), pollution reasons (they cannot compete with grant funds and hand-outs), attitude reasons (risk averse), profit reasons (they think large customers offer a better risk/profit ratio ) and liquidity reasons (high levels of liquidity have to maintained by banks for regulatory reasons and some are short of funds).

Barclays Bank in Kenya has a credit line for female customers that graduate from KWFT and is guaranteed by WWB. Some branches have not disbursed this money because of resistant bank managers. The collateral requirement is another barrier to successful women entrepreneurs getting a commercial loan. Barclays is looking at the possibility of replacing collateral by an insurance premium (Olney and Binns, 1997, RIO).

While some banks are willing to enter the microfinance market, pollution and regulations remain important constraints. Furthermore profitability of microfinance is still too recent, not fully proven and badly publicised probably explaining why Micro Bankers Trust in Zambia could not convince a bank representative to be a trustee on its board (Olney and Binns, 1997, RIO).

Credit Unions (Otero and Rhyne, 1994; Women and Credit Unions, 1991)

Credit Unions are cooperative financial institutions which started operating in the 50's and are represented world-wide. In developing countries credit unions have 9 million members, 60% of which are in Africa and the Caribbean. They collect savings and provide short-term credit.

MSE lending represents a small but significant share of credit unions' portfolio in most developing countries - 10 to 20%. It is estimated that credit unions provide 860 000 MSE customers with an average loan of US$176.

The demand for loans exceeds the supply of savings and therefore queuing for loans or limiting the member's loan to a relatively low multiple of savings is usual. Security is in the form of prior savings and the use of other members as cosigners. Collateral is also sometimes required.

Women have not benefited much from credit unions because they cannot save the amount required and provide security.

Village banking (Nelson et al, UNIFEM, 1996)

Village banking was developed during the 80's as an alternative to rural credit in Bolivia "based on the assumption that village communities would make the best managers of their own banking system" (p5).

The purpose was "to organise informal banks which could use a line of credit from a financial intermediary to provide non-collateralized loans to members, a place to invest savings and promote social solidarity" (p5). In 1984 the Foundation for International Community Assistance (FINCA) was established to expand village banking through the creation of local affiliates to whom FINCA would provide technical and financial support.

"Village banks can invest their savings in local business ventures or community development projects, lend them out, or place them on deposit in commercial interest-bearing bank accounts. Some village banks allow members to borrow for personal as well as business purposes (p5)." Members are generally required to save a certain percentage of their loans.

Loans range from US$25 to US$1 500 but most are in the US$50 to US$100 range. They are usually granted for a period of three to six months.

At the end of 1994 there were some 3 499 recorded village banks with 90 754 members, 95% of which were women. The 87 586 borrowers had average loans of US$90 and a repayment rate of 95%. Africa has the second highest concentration of village banks (535). 92% of its 16 652 members were women, average loan sizes were US$58 and repayment rates 99%.

Village banks "in rural areas" have more difficulty in building "trust and solidarity" (p29). In rural areas they suffer from large numbers of members leaving (for reasons not yet understood) and low levels of literacy not enabling all members to have the same control over the organisation and sometimes requiring prior literacy training. Where the clients profile is not homogenous there has been abuse by dominant members.

Self-help groups/associations

Rotating Savings and Credit Associations (ROSCAS) are probably the best known and most common form of associative self-help groups. They are predominantly female organisations who save usually very small amounts and can borrow these savings on a rotating basis.

ROSCAS and other self-help groups have sometimes been used by MFIs for group lending.

There is a need for an array of financial institutions and all should be supported if they reach the targeted customers.

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