1 Evaluation of Microfinance Institutions and Projects Microfinance as a Successful Approach for Poverty Reduction? Bileam Bader M.A. ([email protected]) Matthias Nöckel ([email protected]) Angela Preißer ([email protected]) Miriam Steinlein B.A. ([email protected]) University of Trier, Germany Anthony Kagiri ([email protected]) Patricia Mutai ([email protected]) Julia Muthiga ([email protected]) Kenyatta University Nairobi, Kenya Julian Frede, Dipl.Volksw. ([email protected]) University of Trier, Germany, research assistant Date: November 1, 2012 Abstract This paper is concerned with the question whether microfinance is an effective approach to sustainable poverty reduction and the challenges encountered by microfinance institutions (MFIs). The findings presented in the following research result from over 70 qualitative interviews with loan takers from Kenya as well as expert interviews with representatives of various microfinance institutions. The study will be structured as follows: After a short introduction to the concept of microfinance with a presentation of both positive and negative effects widely discussed in academic literature, the survey design of the research will be described in detail. The main focus will then lie on the case studies of two MFIs – Musoni Kenya and DISC INITIATIVE – as well as the evaluation of other microloan programmes, such as Vision Afrika Sacco Ltd., using both client and expert experiences. Each case study will consist of the evaluation of client interviews, a SWOT Analysis for each MFI and proposals for the institutional evaluation. To conclude the paper, an overall assessment of microfinancial services will be given in detail. This will be done by looking at possible impacts of microfinance on the loan takers financial and personal situation, and the challenges MFIs are facing from their clients’ point of view. Keywords: Microfinance, Evaluation, Microfinance Institutions.
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Evaluation of Microfinance Institutions and Projects
Microfinance as a Successful Approach for Poverty Reduction?
In most developing countries the poor have to fight a daily battle for survival and are unable to free
themselves from the poverty trap they were born into. This is also due to the fact that they are denied access to
financial services such as loans to start up their own businesses or to receive a proper education. As the labour
force of many developing countries comprises to more than 50% of the self-employed (cf. Microcredit
Summit Campaign 2009) it is important to give the whole of a country's population the opportunity of starting
up their own businesses. The idea of microcredits was introduced as a tool to give the poorest the opportunity
to take part in the banking system even without any collateral. In theory, this should enable them to become
creative and free themselves independently from their poverty by investing in an own business. Therefore,
microlending is, in accordance with the idea of Muhammad Yunus, meant to give the poor and the very poor a
chance to improve their own situation. Professor Muhammad Yunus was one of the first to launch a
microfinance project. His Grameen Bank, commonly known as the “flagship of the international microfinance
movement” (e.g. Morduch 1998: 2), was established in 1976 with the purpose of extending “banking facilities
to poor men and women” by enabling them to obtain microloans of up to 1,000 Euros, and of eliminating “the
exploitation of the poor by money lenders” (cf. Grameen Bank – Bank for the Poor: 2012). In recognition for
his contribution to the fight against poverty he received the Nobel Peace Prize in 2006.
Microfinance is a highly discussed topic within the research field of development politics and poverty
reduction in third world countries. Advocates of microcredits argue that this concept is the only sustainable
way to escape extreme poverty (cf. Chemin 2008: 463). Furthermore, as already mentioned, access to
financial services such as loans is essential for economic development and to fight the poverty trap. Matthieu
Chemin goes one step further stating that, “finding ways to give loans to poor people without collateral could
lift a country out of poverty” (ibd.: 464). Furthermore, microcredits resolve the exclusion of the poor from the
banking and financial system and therefore promote and foster social integration. Additionally, they
encourage entrepreneurship as well as self-reliance and, as the United Nations Department of Economic and
Social Affairs (DESA) observes, “create employment opportunities and engage women in economically
productive activities” (DESA 1998: 3). In fact, microcredits are widely considered to be an effective tool of
the empowerment of women (cf. Deshmukh-Ranadive; Murthy 2005: 33). Women are seen as “the most
appropriate targeted beneficiaries, since […] they are reputed to be more reliable than men when it comes to
repayments” (ibid.). Thus, by granting loans to women they are given economic and social independence, as
well as self-confidence. This, of course, only applies to countries in which equal rights for men and women
have not yet been achieved. Another benefit of microfinance is to be found in the field of education. Since
microfinance institutions (MFIs) such as the Grameen Bank also offer educational loans at low interest rates,
it is hoped that this will allow more people to attend school or receive proper vocational training (cf.
Becchetti; Conzo 2010: 19). Likewise, access to loans could also increase “child enrolment in school if the
opportunity cost of school decreases due to increased parental wealth,” as Chemin (2008: 464) suggests. The
last point to mention is that microloans give people the opportunity to help themselves break out of the vicious
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cycle of poverty without making them dependent on development funds. Thus, microcredits serve as an aid
for self-help (cf. Woolcock 1999: 18).
The benefits of microcredit cannot be denied. However, there is always another side to the coin and
the effectiveness and sustainability of microloans is to be seen controversial. Problems with which microloan
takers are struggling are not only a high pressure through weekly or monthly repayments, but also social
exclusion and compulsion through group-lending. Besides individual lending, the lending of money to a group
of people without collateral, but whose members act as a guarantee for each other, is also a commonly used
concept of microfinance institutes. Since the whole group guarantees for each other, the pressure of repaying
in time becomes a social one, additionally to a financial one. This problem of peer pressure in microcredit
schemes is a commonly examined research topic in academic literature and is discussed quite controversial
(e.g. Montgomery 1996). Another problem that occurred with the introduction of microloans to the formerly
unbanked society is the over-indebtedness and on-going impoverishment of the ones who had taken up a loan
and were unable to repay in time. Some loan takers even take up an extension loan to repay their first loan and
thus get caught in the micro-debt-trap. One scholar who argues that microloans are a catalyst for
impoverishment is the British professor for economics Paul Mosley (2001). This is a common problem which
might be due to the fact that most developing countries lack a credit registry which documents given loans.
However, such a registry is in a pilot phase in Kenya right now and is to be introduced in the years 2013/14.
After all, the evidence of micro loans increasing income is to be seen controversial. That is why the
following research is concerned with evaluating the effectiveness and sustainability of micro credits. It wants
to answer the question whether microfinance is an approach to successfully fight poverty. The evaluation
focuses on the socioeconomic situation of microloan takers. By means of qualitative interviews it points out in
which ways their financial and personal situation has been affected by taking up a microloan.
2. Survey Design
As the main focus of this research was on the clients’ situation of Microfinance Institutions, the research
group decided to use a qualitative research approach (Flick, 2003).
The main tools of evaluation were individual interviews, which were supported by group discussions with
the clients, as well as several interviews with experts from the affected MFIs.
Within the individual interviews, there was a short questionnaire in order to gather personal client data
such as age, gender, family situation and education. The following part of the interview was an interview
based on a guideline (Helferich, 2009). The main objectives of the interviews were to get personal information
about the clients’ points of view and their experiences with microloans/microfinance. The interview was
structured as it follows:
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1. Introduction:
The clients were asked about their personal data, such as age, gender etc.
2. Loan:
It was asked how the client got to know about the MFI, for which purpose the client took up a loan at
the mentioned MFI and of which amount the loan was. Furthermore, it was asked whether the client
believed that it was a good decision to have taken up the credit and in which way it affected his/her
business.
3. Repayment:
This question aimed at gaining knowledge about the client’s repayment conditions, such as the
repayment period, as well as if he/she had any problems with repaying the loan.
4. Evaluation of the MFI:
This paragraph is concerned with the question whether the MFI provided enough training for its
clients and if these training sessions were helpful and sufficient. In addition, it was asked if the MFI
itself is helpful and open to questions and demands of its clients. Finally, the clients were asked to
give recommendations to their MFI and if they could imagine anything that might improve the service
of the MFI.
5. Evaluation of personal situation:
The clients were asked to explain in which way their personal and financial situation had been
affected by their decision to have taken up a loan. The focus was thereby set on income and family
issues such as the ability to pay for school fees, housing situation etc.
6. Future expectations/dreams:
In the last category, the clients were asked about their future expectations, their dreams and hopes, as
well as the (in)ability of microfinancial services to help them with achieving those dreams.
For documentation all the information given by the client was written down in notes during the
interview. Usually there was one interviewer who asked the questions and another person recording. In some
cases it was necessary that a person translated while someone else kept notes. The notes that were taken were
always in English. Furthermore the handwritten notes were typed. These typewritten notes are available if you
send a request to the authors of this paper.
To evaluate the interviews, first, they were categorised by the MFI under examination. Within these
categories, they were further divided into subcategories which represented the specific lending-groups. In
addition to these subcategories stand the group discussions and the expert interviews for each MFI in order to
get a complete picture. So, the evaluation was divided into a single one for each MFI, which consisted of the
evaluations of the single cases as well as the analysis of the lending-groups. To sum up the evaluation of the
conducted interviews, an assessment of the various types of MFIs were made as well as one for urban and
rural areas. This renders it possible to give an overall evaluation of the findings.
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Musoni Established in: 2010
No. of clients: ~8,000
No. of employees: ~70
Branches: 5
Status: MFI, 4 Share-holders
Area: Mainly urban
To receive a broader picture of microfinance in Kenya, the MFIs were sampled into different types of
institutions, like small NGOs, established MFIs (Tier 2-3)1, formal banks and so called “Savings and Credit
Cooperatives” (SACCOs). Of each type, at least one institution was examined. Another level of sampling was
the area. As mentioned above, MFIs from both rural and urban areas were evaluated in order to gather
information about benefits and disadvantages in those different areas. Further more, within each MFI various
lending groups were analysed to also see the differences within one MFI. Those groups were investigated by
conducting at least one individual interview and a group discussion.
3. First Case Study – Musoni
3.1 About Musoni
Musoni is an MFI which was only established in 2010 and claims to
provide „Next Generation Microfinance“. 2 Special about Musoni is that they
operate completely cash free. Loans are received and paid back through
mobile phones, using the client’s Mpesa-account.3 This system brings benefits
for both sides: Clients can receive their loans fast and wherever they are and
Musoni does not have to invest in security infrastructure like safe rooms.
Musoni is hold by the Dutch investment fund Musoni BV Holland,
with Grameen Bank, KfW and Microvest acting as further shareholders. There are five branches in Kenya
(Zimmerman, Gikombe, Kitengela, Thika, Naivasha), which are located in Kenya’s capital Nairobi or less
than one hour away from Nairobi. Through these five branches Musoni serves a total of 8,000 customers,
mainly in urban and suburban areas. To provide financial service for the unbanked and the underbanked, is
the aim of the company. To do so profitably the company will have to grow above the number of 8,000
customers by expanding into rural areas and offering more products. At this time, only the possibility of group
lending is given to customers who want to do their first steps into the financial system. The new, more
profitable products will include individual lending, which grounds on a deeper knowledge of the client’s
financial history. This knowledge is not available at this stage.
One can divide the organisational structure of Musoni into three levels. On the highest level there is
the headquarter in Nairobi, which is in control of the overall financial situation of the company. One level
underneath are the managers of the five branches, who are concerned with the general wellbeing of their
department but do not have direct contact to the clients either. The direct contact takes place on the lowest
1 MFIs often are categorized into the so called Tier levels. These levels reach from Tier 1, which stands for small MFIs, NGOs etc.,
over Tier 2, for medium sized/growing MFIs, up to Tier 3, which stands for big and profitable MFIs (cf. Microfinenza 2011). 2 Usoni is Swahili for future, the M stands for mobile. 3 Mpesa is a mobile-phone based money transfer service by Safaricom and Vodafone. It functions like a small bank account and
allows to transfer money safely via mobile phone. The system is very common in Kenya, so that you can pay via Mpesa in most of
the shops even in rural areas.
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structural level of Musoni, the level of the loan officers or „Wealth Creation Officers“ (WCO) as they are
called in Musoni. They know every customer personally and attend the weekly group meetings.
3.2 Steps to the First Loan4
To understand the Musoni system one has to know how clients can get a loan. There are some steps
every client has to go through before he can receive any money from the company. They assure Musoni that
the applicant is capable of repaying the loan. The ten steps, that are listed below, include different checks and
analysis of the applicants’ personal and financial situation. Through this elaborated process Musoni wants to
minimize its risks and to lower the number of customers who are not able to repay their loans.
1. Invasion: The WCOs go out to talk to people and to invite them to an information meeting.
2. Information Meeting: WCOs familiarise the potential clients with the lending procedure and inform
themselves about the client’s personal- and business details.
3. Unscheduled Site Visit: WCOs visit the applicant’s businesses and check the information provided by
the applicants. Most applicants drop out at this stage.
4. Individual Registration: Applicants register with their Mpesa identity.
5. Group Registration: A group of at least ten members who have to know each other personally has to
be formed and to be registered.
6. Training: WCOs train the group weekly for four weeks about the terms and conditions of Musoni. In
that period chairman, treasurer, and a secretary of the group have to be elected, a group constitution
has to be put up, and the weekly savings with Co-operative bank must be started.
7. Site Visit: The WCO visits and assets the businesses again. In addition, the WCO does a Cash Flow
Analysis and each client has to make a Collateral Pledge.
8. Group Site Visit: The group visits the businesses of each group member and discusses if they want to
guarantee for the respective member.
9. Credit Committee: The Credit Committee consists of the branch manager and at least two WCOs. The
WCO whose client applies for the loan has to defend the application. He or she is questioned about
details of the application. Furthermore, the applicant’s weekly savings are being checked.
10. Loan: The client receives the loan in a period of 72 hours on his or her mobile phone.
4 The steps can vary between the branches. The following steps are based on the procedure in the Naivasha branch.
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3.3 SWOT Analysis of Musoni
To give a good overview of Musoni, we made a simple SWOT analysis in the following. Thereby we
summarized Strengths, Weaknesses, Opportunities and Threats. The clients’ point of view and the institutional
point are thereby mixed, in order to show where Musoni has challenges to work at and potentials which can be
used to achieve its goals faster.
Strengths Weaknesses
Offers a low interest rate
Comparably good services for clients
Very quick and cheap money-system due
to using MPESA
Proficient client selection process
Long term oriented shareholders who
give a strong financial support
Decreasing risk structures
Some clients use Musoni credits to repay
other credits (credit cycles)
Not enough products for savings and
special loan purposes
Not enough trainings for clients whose
businesses grew bigger
Some WCOs got negative ratings from
their clients
Company is not yet profit generating
Musoni only uses the system of group
lending, this limits their range of
potential clients.
Opportunities Threats
Demand of more products can be used to
gain more clients and refinance cheaply
Possibility to use financial support from
Musoni’s shareholders to grow slowly
but sustainably
A national credit observation tool can
lead to a better control of clients who
have credits at multiple MFIs
Loosing clients because of offering to
less products and almost no individual
loans
Too less turnovers and frequent losses
can lead to the insolvency of Musoni
Through the growth of the microfinancial
market and the expenditure of MPESA,
Musoni can lose its uniqueness in their
money-system and the advantage of their
low interest rate
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3.4 Evaluation of Musoni Kitengela
Faraja Group (hope/joy)
Group members 13
Loan cycle First to Second
Gender Mixed
Establishment of group November 2011
Members individually interviewed 2
Range of Age -
This group was one of the first to be founded within the Musoni Kitengela branch. In the time we
visited them, the members were in their first or second cycle of taking loans and had already gained a lot of
experience with Musoni. Most clients of this group said that they joined Musoni because of a low interest rate
and better repayment conditions than with most other MFIs. All members confirmed that taking up the loan
and investing the money into their businesses improved their financial situation and that non member had
struggles yet to repay. Some of them also answered that they used some of the money for private purposes like
school fees which also improved their family situation. Over the time, the group grew together and they got to
know each other much better. One of the members complained that the training they received from Musoni
was not adequate. Another interviewee reported that he/she would like to have more training on how to
adequately run a bigger business, since his/her business grew with the help of Musoni. Both told us that the
system of group guaranteeing was a good idea, as they have access to a loan much easier; and their WCO is
very open to problems and questions.
Mlolongo Group (Starlight)
Group members 14
Loan cycle First to Second
Gender Mixed
Establishment of group -
Members individually interviewed 2
Range of Age Approx. 27-43 years
The Clients said that they preferred Musoni to other MFIs because it delivers fast credits through
MPESA and has a quite low interest rate. The clients have different occupations, such as running a shop,
butchery, or a beauty salon etc. The repayment conditions were suitable for all group members and all of them
claimed that taking up the loan improved their business as well as their financial situation. The Musoni staff,
especially the WCOs, present an overall positive image. The group was in favour for the group guarantee and
told that they benefited from the mixed group characters. The two individually interviewed persons also
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suggested that they would like to have further loan and saving products for purposes like school fees, medical
covers or to buy a bigger asset like an own vehicle. One of the interviewed clients recommended that there
should also be more training on savings in order to create awareness and a culture of saving.
Mwanzilishi Group (Starter/Beginner)
Group members 15
Loan cycle Fourth
Gender Only female
Establishment of group October 2011
Members individually interviewed 0
Range of Age Approx. 24-50 years
This group is also one of the oldest groups for Musoni Kitengela branch. It is an women-only group
and is already in the 4th cycle of giving out loans. The clients all said that taking up the loan improved their
businesses, but the improvement always depends on the demand of their customers. The group had some
struggles with the repayment but together with their WCO they solved all problems up to now. They all
recommended that taking up a group loan was far better than having an individual loan, especially because of
their up to now struggles.
Baraka Sokoni Group (“blessed market”)
Group members 18
Loan cycle Third
Gender Mixed
Establishment of group -
Members individually interviewed 2
Range of Age Approx. 24-50 years
The group has 18 members, of whom some were already clients of other MFIs before they joined
Musoni. These said that they preferred Musoni mainly because of the quick loan giving system. The group
feels much pressurised to ensure that each member pays back their loan. This feeling is mainly due to the fact
that one of the members went away and left the group with repaying the whole sum to Musoni since they
guaranteed for the defaulter. Overall, their financial situation has improved since taking up the loan. The
clients all pointed out that the loans helped to improve their businesses. However, the two individually
interviewed members pointed out that it would be better to have a longer repayment rate and more financial
products. Furthermore, they complained that they had no concrete knowledge about their repayment