Serving poor people with financial services entailed specific targeting for optimum benefit to the institutions as well as to poor people:
Segmenting poor populations: The early days of microfinance acknowledged that credit is a “powerful tool that is used effectively when it is made available to the creditworthy among the economically active poor participating….in a cash economy- people with ability to use loans and willingness to repay” (Robinson 2001:20). Microfinance provided a solution for poor people’s lack of collateral to secure their loans; easy accessibility to more poor people; and lending efficiencies for very small loans (Robinson 2001; Dichter 2007; Bell et al 2002; Littlefield et al 2003; Otero 1999). It was however apparent that not all poor people could use microfinance services (Robinson 2001).
Table 1.3- Robinson’s Toolbox (Robinson 2001)
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This diagram indicates that poor people engaged in economic activities would best be suited to benefit from microfinance services, and therefore the need for microfinance institutions to segment the population of poor people they target on the basis of their capacity to utilise specific services on offer. This puts premium on engaging poor people.
Gender: The gender perspective was another issue that needed to be addressed. It was generally understood that “women bear a disproportionate weight of the world’s poverty, representing 70% of the world’s poor… that women have the potential to be the engine of economic and development progress” (Trickleup 2012). The group methodology focused on providing services to women.
Identifying microfinance tensions: In order to provide much needed financial services in this difficult configuration, microfinance institutions with a social focus found themselves in a constant tension between reaching more and more poor people with financial services (outreach), ensuring that the services provided were actually moving people out of poverty (impact), and ensuring enough returns for the institution to generate a surplus that would attract more capital to serve more people (financial sustainability).
Thus the conversation of outreach, impact and sustainability became topmost for microfinance institutions. In their attempt to achieve the three objectives, microfinance
institutions needed to strike an impossible balance or live with trade-offs. Microfinance institutions have particularly experienced trade-offs between impact and financial sustainability (Zeller and Meyer 2002). Providing small loans could be as costly as it could be risky. The use of group lending methodologies is one approach that enabled
serving poor people and creation of efficiencies through volume. Generally however, these factors contribute to the complexities that microfinance managers have to navigate in order to deliver to their mission.
Participation and the Group Lending Methodology
The group lending methodology in microfinance is possible with the support of cohesive community structures. From the microfinance institution perspective, this way of engaging the community provides a buffer to risks associated with lending to opportunistic businesses that require very small loans, whose owners lack adequate collateral and ride on the limited and untested skills of low income people (Dichter 2007). The group lending methodology helps create efficiencies in that more people can be served under the supervision of very few field staff. Furthermore, the group takes on the responsibility of ensuring debt recovery, thereby reducing follow-up costs for the microfinance institution. Social capital is assumed when group members guarantee one another on loan repayments (Rankin 2002). Furthermore, the cost of providing tiny loans is mitigated by the aggregated group loan and that one loan officer can serve a lot more clients when they are in a group as opposed to serving them individually. There are certain assumptions that are made regarding the benefits that are meant to accrue to communities as they work together. Some of these are already outlined in table 1.1 on page 8.
Table 1.4- Risk-Mitigating Features of Group Lending Methodology Critical programme factor Group lending benefit Outreach- An important indicator to
demonstrate the poverty focus of an MFI. Continued donor support often depended on reaching more and more poor people.
Group methodology enables reaching large numbers as communities mobilised themselves. More groups meant reaching more people.
Efficiency- Providing small loans to individuals accounts for lower returns to an MFI. Also recipients tend to be riskier thus not cost-effective. It becomes necessary to keep costs low while increasing the volume of loans given.
The group methodology reduces cost of service delivery. For example, one field staff could cover up to 15 groups of between 25 to 40 clients. This averaged 450 clients per loan officer. Also, community participation in mobilising members and taking on some of the roles of assessing and monitoring loans, reduced costs further.
Profitability- MFIs have to secure continuity by ensuring full cost recovery. Reducing costs is one mechanism as well as ensuring full loan repayments for minimum risk of capital loss from bad debts.
Peer pressure from community participation ensured timely loan repayments and contribution to profits through interest charged.
The group methodology however is a construction of the microfinance institution and not necessarily a desired option of the people who receive the service. The perceived benefits are assumed. Robinson laments the limited influence of poor people who require microfinance services: “usually poor people are unable to inform formal markets about their creditworthiness or about their demand for services and loans” (Robinson 2001:9). The evidence of benefits accruing to poor people in some cases has not been compelling. Robinson concludes: “Those who hold the power do not understand the demand and those who understand the demand do not hold the power” (Robinson 2001:9).