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Microfinance: how a little goes a long way

Accountants are vital to small-scale loan providers in countries without inclusive financial service frameworks, not just to deliver financing but also to limit the risks of fraud, writes David Adams.

Micro-entrepreneurs and organisations looking to develop their businesses in jurisdictions without an established, inclusive financial services sector look to microfinance as a lifeline. When provided in a financially sustainable way by a well-managed provider, it stimulates and supports economic activity, helping to alleviate poverty and increase financial inclusion. But if delivered carelessly, or exploitatively, it can also have negative consequences. Its success or failure depends in part on the financial expertise available to providers and their clients – and some of that expertise may be offered by accountants, working for or alongside microfinance providers, in paid or voluntary roles.

“Microfinance has been the pioneering instrument advancing financial inclusion during the last 30 years,” says Wasim Tahir, Sector Strategist, Financial Institutions, at CDC Group, a development investment organisation funded by the UK government, which invests directly and indirectly in microfinance provision.

Since 2002 the Microloan Foundation has provided loans and business training to more than 200,000 women living in Malawi, Zambia and Zimbabwe. Loans tend to be provided to women because they are more likely to be engaged in small-scale, often informal business activities related to farming or crafts. It is also generally accepted that women have a better record than men for completing repayments. The smallest loans are provided to groups of clients who already know each other and form what is termed a solidarity group: each is, in theory, acting as a guarantor for every other member’s loan, providing a strong incentive to complete repayments.

Many of these clients survive on less than the equivalent of £1 per day, and live in remote rural locations not served by any other regulated financial provider. The Microloan Foundation provides financial training to help them manage their finances. “The training we provide is our unique selling point,” says Medha Wilson, a chartered accountant and Global Director of Microfinance at the organisation. “It’s free, providing training on literacy and understanding financial products. It also encourages people to save.”

Solidarity groups consist of 5 to 10 people who may be selling agricultural produce such as groundnuts, soya or maize, or making or trading other goods such as clothes. As well as completing training, each group must complete a rigorous assessment process to establish it will function properly and make repayments. Loan officers stay in touch with the group throughout the loan period, which usually lasts for three to six months. The average loan amount is worth about $65 (£50).

The organisation uses a so-called social performance management framework to assess its impact, based on an assessment of the economic situation within a household before and after the provision of the service. It considers, for example, whether an individual client has any savings, their financial resilience, the quality of their housing and whether or not they can afford to send their children to school. Wilson says this measure suggests that 50% of clients escape poverty, 97% of clients are able to save money after using microfinance, and 98% can afford medical treatment.

On the other side of the Atlantic Ocean, Fonkoze Financial Services (Sèvis Finansye Fonkoze, or SFF) offers microfinance and other financial services. It has also supported the work of the not-for-profit Fonkoze Foundation (Fondasyon Kole Zepol) since 2004. Both organisations are helped by Fonkoze USA, based in Washington DC, which fundraises and seeks to attract investment in Fonkoze’s loan fund.

“We didn’t start out aiming to be a microfinance institution,” says Brigitte Rousseau, Chief Financial Officer at SFF, and a US-trained accountant. “We started out aiming to help less fortunate women in Haiti in rural areas become more financially independent. But the organisation evolved to become a credit and savings organisation by 2004.” The financial services arm was then separated from the foundation, but the two organisations continue to work closely together. Fonkoze now aims to help clients climb a “staircase out of poverty”, with confidence-building and health services provided on the bottom step, education and the formation of solidarity groups on the second step, lending to solidarity groups on the third step, culminating in further business development services and loans to individuals on the top step.

Most loans provided to solidarity groups by Fonkoze have a term of six months and are of sums ranging from under $100 (£76) to $1,000 (£758). The organisation also measures social performance to assess its impact. “There are some rural areas where we are effectively the only private financial institution,” says Rousseau. “We even have other microfinance institutions that deposit with us. Haitians trust Fonkoze.”

But some microfinance providers charge very high interest rates, trapping borrowers in a cycle of borrowing and repayment. People who end up deeply in debt may then be blacklisted by financial providers, meaning the potential benefits of using microfinance are lost to them forever.
“We have to ask what is going to help people live a more financially resilient life,” says Philippa Kelly, Head of Financial Services at ICAEW. “That isn’t necessarily a capital finance injection, but something that facilitates money management and getting used to an income stream. Just expecting lending to be almost the end of the intervention isn’t enough.”

Organisations like the Microloan Foundation and Fonkoze argue strongly that they provide much more than just loans. But some observers suggest other ways to reduce poverty can be much more effective than microfinance. They include Dr Jason Hickel, a Senior Lecturer in anthropology at Goldsmiths, University of London, and author of books including The Divide: A Brief Guide to Global Inequality and Its Solutions.

“It’s true that some microfinance projects do improve people’s lives, but in aggregate there is a net-zero effect,” Hickel suggests. “Every major empirical study that has examined this question has drawn the same conclusion. Even in cases where the majority of loan recipients do benefit, this tells us nothing of what happens in the wider community. In poor communities people don’t have enough money to buy the things that new businesses might want to sell.”

Hickel would rather see governments being encouraged to address the causes of poverty, to subsidise growing businesses and to improve welfare systems. He suggests that in many situations direct cash grants are a better option than a loan.

“In every case for which we have data, it’s clear that zero-interest loans or grants are more effective,” he says. “Community-wide cash transfers – basic income programmes – are even better at improving net development outcomes. When people have more cash in hand, there’s enough demand to support new small businesses.”

CDC Group’s Tahir agrees that such approaches may be useful, but he insists microfinance has an important role to play. “The perception that you give people microcredit, then their small businesses scale up … Research shows that hasn’t materialised to the extent that people thought it would,” he concedes. “But there is also a resilience pathway: if people experience shock and distress, using microfinance can help them manage illness, or survive climate-related catastrophe.”

Meanwhile, provision of microfinance is spreading today in part because it is now possible to offer services in digital forms, accessed via the mobile phones that so many people now own, even in impoverished communities. Many of these services use software developed by Musoni Systems: its cloud-based banking system is used by more than 100 microfinance providers. Musoni first developed a mobile-based microfinance service in Kenya, in 2009, and the service has been supporting thousands of clients there ever since, before starting to sell its software to other providers.

Digital microfinance removes the need to store large amounts of cash, meaning opening offices is much less expensive. “That means we can push into rural areas where there’s more need for financial services,” says Musoni Chief Financial Officer and chartered accountant Andrew Taylor. Digital technology also tells the provider immediately which individual borrowers are or are not up to date with repayments, rather than suffering from the time lag associated with collecting and accounting for physical cash.

Microfinance can have a positive impact in developed countries too, as has been the case following the establishment of Grameen America, a US offshoot of the Bangladesh microfinance institution. Over 94% of 1,500 New Jersey women who applied to the programme in 2018 saw their financial position improve, according to a report funded by New York-based anti-poverty organisation Robin Hood, which invests in and supports other anti-poverty organisations.

In the UK, the government effectively supports a version of microfinance through the network of financial services providers supported by the government-owned British Business Bank. Its Start Up Loans programme can provide personal loans as small as £500, at a fixed interest rate of 6%, for small businesses that might find it difficult to access finance elsewhere. Between 2012 and 2019 the programme issued more than 69,201 loans, providing £558m in funding.

“Microfinance can be the enabler that helps start or scale a business that would otherwise not exist,” says Andy Fishburn, Managing Director of Virgin StartUp, one of the partners delivering the loans. “But funding, particularly when it comes to starting a business, is only part of the equation: it’s the combination of funding and support that ultimately means founders not only start up and survive, but thrive.” His organisation has provided over £45m in loan funding to 3,500 entrepreneurs, alongside business workshops, training and mentoring.

Participating in the start-up loans programme, through employers or as individuals, is one way UK-based chartered accountants can help deliver microfinance. They can also help to improve microfinance services overseas.

In 2016, Musoni’s Taylor spent six weeks working as a volunteer for Anza, a small business accelerator that provides finance, training and other support services to entrepreneurs. Taylor helped Anza set up a microfinance facility and recruit a financial controller.

He found his placement through Accounting for International Development (AfID), which offers accountants a range of volunteering opportunities in more than 50 countries, with assignments as short as two weeks, or lasting for a year or longer.

Medha Wilson’s career is also a case study in how accountancy training can be a boon for someone working in this industry. Having qualified as an ACA in 2009, she worked briefly in the private sector before switching to work in the development field, at first for microfinance operator/investor Agora, in Asia, India and Africa.

“For an accountant it’s not moving away from your core expertise: you’re just applying it in a slightly different context,” she says. “In some countries, human capital is always a challenge.” One person’s expertise may seem insignificant, but in the right context a little bit of help offering a little bit of money to more people could make a very big difference.