Two key questions about microfinane and then an amazing model for extending credit to poor, rural African farmers:
1. Does microfinance reduce poverty?
A recent study reviewed the evidence from field experiments. Recently published randomized control studies of microcredit variously found:
- business creation as well as increases in non-business (i.e., “consumption”) spending (India);
- improvements for farmers but not others; and business owners increasing savings but non-owners increasing only their consumption (Morocco);
- increases in income and food consumption in general (South Africa);
- a decrease in business activity and employment (Philippines).
Ambiguity, at least surprise, also surrounds experiments that explore non-credit applications of microfinance, including savings, technical support, and insurance. For instance,
- providing advice to business owners to keep their personal accounts separate from their business accounts helped them more than when they got more detailed accounting advice;
- farmers recognize that droughts are the most significant risk they fact, but they are very reluctant to purchase insurance, even when they receive information explaining how it works and its benefits.
Three other randomized studies focusing on the design of microfinance products showed that
- allowing a grace period before a borrower’s first loan payment is due helps some but hurts others;
- borrowers with individual versus group liability were just as likely to repay;
- fingerprinting borrowers caused borrowers with marginal credit worthiness to take smaller loans and be more likely to repay them.
To summarize: we don’t know enough to generalize about what works and in what circumstances. And, although we are far from certain about what design features are likely to “take,” design considerations seem to matter.
If the situation is not uncertain enough, let’s also ask …
2. Should microcredit be for business-building loans only?
There is ample reason to believe that the poor need credit to help them through the unpredictable, uneven (and, of course, low-income) financial lives they lead to make their lives manageable. Still, from the perspective of alleviating poverty, are loans for businesses most important? The very framing of the question seeks opinions, not facts; and there is no consensus here.
The relatively recent trajectory of extending credit seems to be away from business-only loans, as even Grameen II now permits borrowing for reasons other than starting or expanding a business. In many respects, this may reflect the reality that, after someone receives a loan, how do you prevent them from doing what they want with it?
Yet fears about poor people becoming over-indebted remain prevalent and valid. And the arguments that rising out of poverty comes from building (a business, your home), rather than consuming, has much resonance.
My microfinance class was lucky enough to hear from Nat Robinson, of Juhudi Kilimo the past week. The microfinance organization’s lending model is no less a revolution than being able to have a real-time, interactive conversation with Nat, at his office in Kenya, as my class and I did with him over Skype video. Juhudi’s model directly addresses the issues of using microfinance to lift people out of poverty, ensuring that loans go towards business rather than consumption, and preventing over-indebtedness. All are baked into the design of its microfinance products.
Juhudi Kilimo (Effort in Agriculture, in Swahili) provides loans in the form of durable assets to rural Kenyans. For instance, smallholder farmers may receive a milk cow, instead of cash. Farmers can then immediately begin to improve their income. To make this loan most productive, Juhudi provides technical training and ongoing support. By making loans in-kind, a struggling farmer has a real asset that can be sold (with Juhudi’s help) if he can’t repay his loan, and Juhudi also insures the cow against theft or death to provide further protection against over-indebtedness.
Juhudi Kilimo began in 2004 as a non-profit initiative after observing the low productivity of Kenyan farmers. Five years later, after proving its model, it became a for-profit organization in an effort to serve as many clients as possible. As it has grown, it has added supporting technology to improve efficiency. It uses Kenya’s wildly popular M-PESA system to collect payments, and is beginning to use an open source application on Android phones to replace cumbersome, manual record keeping in the field.
By raising capital, including grants and quasi-equity, within three years, Juhudi Kilimo expects to become sustainable and help lift 100,000 farmers and others with small agri-businesses out of poverty.