Archives for category: Microfinance

I’ve been asked about a zillion times what is the difference between savings and credit cooperatives (SACCOs), microfinance institutions (MFIs) and commercial banks. I’ve never had time to reply properly but now I came across this table from the World Council of Credit Unions (see below) that summarizes the differences in very simple terms. If there are other issues not included in the table (I’m sure there are tons), please write them down in the comment section.

Credit Unions

Commercial Banks

Other Microfinance Institutions (MFIs)


Not-for-profit, member-owned financial cooperatives funded largely by voluntary member deposits For-profit institutions owned by stockholders Institutions typically funded by external loans, grants and/or investors


Members share a common bond, such as where they live, work or worship. Service to the poor is blended with service to a broader spectrum of the population, which allows credit unions to offer competitive rates and fees. Typically serve middle-to-high income clients. No restrictions on clientele. Target low-income members/clients, mostly women, who belong to the same community.


Credit union members elect a volunteer board of directors from their membership. Members each have one vote in board elections, regardless of their amount of savings or shares in the credit union. Stockholders vote for a paid board of directors who may not be from the community or use the bank’s services. Votes are weighted based on the amount of stock owned. Institutions are run by an appointed board of directors or salaried staff.


Net income is applied to lower interest on loans, higher interest on savings or new product and service development. Stockholders receive a pro-rata share of profits. Net income builds reserves or is divided among investors.

Products & Services

Full range of financial services, primarily savings, credit, remittances and insurance. Full range of financial services, including investment opportunities. Focus on microcredit. Some MFIs offer savings products and remittance services.

Service Delivery

Main office, shared branching, ATMs, POS devices, PDAs, cell phones, Internet Main office, shared branching, ATMs, POS devices, PDAs, cell phones, Internet Regular visits to the community group

Looking at some facts, I am inclined to say no:

There are currently an estimated 300,000 groups, which collectively hold a combined asset base of at least Ksh300-billion.

Popularly known as chamas by Kenyans (loosely translated as “committees”), investment groups became visible during the 1980s and 1990s when the country’s economy was struggling, and were formed for social welfare purposes. Chamas have matured over the years, with some registering as companies and other investment vehicles. Most of the groups initially invested at the Nairobi Securities Exchange and the real estate sector.

You might remember an interesting post on the Open Book Blog where David Roodman asks whether microfinance is a Schumpeterian dead end.  In that post, Lant Pritchett talks about a trip to India when he was asked how self-help groups work in his own country. The answer: they do not exist, therefore they can be considered a Schumpeterian dead end.

I was asked the exact same question a couple of months ago during a meeting with a group in Nairobi. I  had never thought about it before, so I was caught unprepared, but my instinctive answer was that self-help groups have not disappeared in my country; rather, at some point they evolved into other types of organization like credit unions, social enterprises or formal investment groups.

I need to read lots more on this topic. But my impression so far is that instead of being a sign of backwardness or a dead end, chamas in Kenya tend to evolve over time and to combine elements of “welfare” and “investment” as different opportunities arise -depending on the needs (and salaries) of group members. For the poor, chamas help tackling the huge problem of income volatility; for richer people, they are a vehicle for investments and business growth.

It’s fuzzy, it’s trendy, and it’s not even clear how new the whole concept really is. The passions triggered by the new breed of enterprises we now call social may even appear to some almost cultish.

They operate as private enterprises, often with a strong entrepreneurial and innovation culture, but claim to have a broader purpose than just maximizing financial returns for shareholders. They aim to be sustainable (i.e. commercially viable) though they don’t shun grant money from foundations and aid programs to get them started […]

Social enterprise investment has the potential of taking the mantle from microcredit, a movement which galvanized people from the left and the right alike around the notion that poor people could be helped to help themselves. Microcredit ultimately failed to build on its own success: products remained narrow, inflexibly designed and very expensive, and the notion that there was a causal link between microcredit and micro-entrepreneurship is proving tenuous. Social enterprise investment is a much more open-ended –and hence potentially more flexible and holistic—approach to spurring entrepreneurship at the base of the pyramid.

Check out the full article. Interesting throughout.

I just noticed that my documents folder called “African development literature” is starting to look like a wildlife safari brochure: I have “Lions on the Move“, “Cheetahs VS Hippos“,”Are the Cheetahs Tracking the Tigers?“, “The Informal sector Elephant“, “Milking the Elephant“, “Stock markets in Africa: Emerging lions or white elephants?“. I haven’t seen any rhinos or giraffes, so maybe I will keep them for my dissertation title.

This morning’s addition was “Constrained Gazelles: High Potentials in West Africa’s Informal Economy” (link fixed) by Michael Grimm, Peter Knorringa and Jann Lay. Although I am not a big fan of the title, the paper does a great job in identifying a third type of entrepreneur in informal markets in addition to the well-known “survival” and “growth-oriented” businesses. The abstract:

The informal sector is typically characterised as being very heterogeneous and possibly composed by two clearly distinct segments, sometimes called the lower and upper tier. However, empirical evidence shows that even among lower tier entrepreneurs profitability can be quite high. We combine these findings and develop an innovative empirical approach to identify what we call ‘constrained gazelles’, next to the survivalists in the lower tier and growth-oriented top-performers in the upper tier. Our representative sample of informal entrepreneurs in seven West-African countries allows us to link the relative size of these three groups of entrepreneurs to the structural and macroeconomic environment in these countries.

As I mentioned in a recent post, growth-oriented enterprises emerge also in very difficult environments. The problem for academics, and even more for MFIs and banks, is to identify those who are more likely to innovate, create employment and be successful in the market, and to design specific financial products for them. Though, as the Roving Bandit reported recently, this is everything but an easy task.

Here’s an excerpt of Grimm et al ‘s  conclusions:

We empirically identify a third segment of entrepreneurs that are neither top performers nor survivalists. This group – which we label ‘constrained gazelles’ – shares many characteristics with top-performers, they even show similar managerial abilities in running their firm, but they operate with substantially lower stocks of capital. Their stock of capital is almost as low as that of most survivalists. However, they are much more productive and can thus earn much higher returns to capital than survivalists. If we take the mean value added-capital among constrained gazelles as reference, we find that an investment of Intl. $ 10 leads to a monthly increase in value added of almost Intl. $ 4.5. Amongst survivalists, in contrast, we estimate the marginal return to capital to be around Intl. $ 0.4 only, i.e. less than a tenth of it.

David Roodman’s “Due Diligence” is probably the most compelling analysis of microfinance that I’ve read recently. I am about half way through the book,  and I am loving it, but there is a recurring argument on the role of small-scale entrepreneurship that has been bugging me: are we portraying a romantic view of microenterprises? Are we overestimating their potential to alleviate poverty, create employment and promote local development?

Roodman thinks so, and he is not the only one. There is a growing consensus among experts to move away from the enterprise-centered approach in microfinance:

Poor entrepreneurs are not the agents of creative destruction whom economist Joseph Schumpeter saw as the heroes of economic development. They undertake-to revert to the root meaning of “entrepreneur”-in order to survive.” To this extent, labeling them “microentrepreneurs” romanticizes their plight and implies too much hope for their escape.

A couple of years ago, the excellent Portfolios of the Poor took a similar stance, arguing that households, not enterprises, should become the core of microfinance programs.

The poor households in the study seek loans for a multitude of uses besides business investment: to cope with emergencies, acquire household assets, pay schooling and health fees, and, in general, to better manage complicated lives. (….)

By offering general-purpose loans, matched in value and structure to the cash flows of poor households, microfinance would open up to the biggest single market it is likely to find among the poor.

I will comment more thoroughly soon. But just a couple of points.

I agree that any kind of poverty romanticism is wrong and that microfinance has a huge potential to expand its services through households.  On the other hand, as I said a few weeks ago, economists tend to portray local informal economies as a homogeneous blend of survival activities. This is wrong. My impression from the fieldwork is that upward mobility is possible within local markets and that growth oriented businesses emerge also in the most adverse environments. Supporting them should remain the key task for microfinance institutions.

Yes, but probably in a positive way.

If you have missed the recent news, the Central Bank of Kenya (CBK) increased its key lending rate by a shocking 11.75% in only 3 months. Besides granting Njuguna Ndung’u the title of Africa’s least effective central bank governor, this move will force local financial institutions like Equity Bank, Cooperative Bank or Family Bank to increase interest rates on loans from around 19% to 25%. The SME sector will be badly hit by the new rates.

Though, microfinance institutions might gain a competitive advantage in this adverse scenario.

The MFIs—which are generally funded through concessionary loans from international development institutions— have been spared the high cost of funds that banks have suffered following successive interest rate increases by the Central Bank of Kenya.

This has enabled the MFIs to hold their lending rates at just below 20 per cent, affording their customers lower cost of loans than what the commercial banks are charging.

This situation might bring some fresh air to the Kenyan MFI industry over the short term. Though, my opinion is that the CBK lending rates will decrease over the next few months as inflationary pressures ease down. Furthermore, although MFIs interest rate might be temporarily lower than commercial banks, they are still high in absolute terms for the profits made by informal sector businesses, which are decreasing because of high inflation.

Saving up’, or setting money aside until it grows into a usefully large sum, is hard to do. An alternative is to ‘save down’ – to set money aside to repay a loan rather than build a pot of savings. A loan is, essentially, an advance against future savings, and for a number of reasons saving down (borrowing) can help ensure that those savings really are made.

Somehow I missed this excellent blog post by Stuart Rutherford from a few months back.  He argues that “saving down” (i.e. borrowing and repaying a loan) has a variety of advantages in low-income contexts, although many people prefer to save rather than be indebted with a MFI.

First, borrowing provides you outside help with the discipline you need to make the savings, since the lender has a strong interest in getting you to (re)pay and will take steps to make sure you do. Second, with a loan you get the lump sum up-front, so borrowing provides you with certainty that the lump sum that you will build through saving is indeed created, and not lost, stolen or blocked. Third, borrowing is timely: you get the lump sum now, when you need it, not after a laborious and uncertain saving effort.

He takes the example of SafeSave, his project in a slum in Bangladesh

SafeSave clients borrow-and-repay much more than they save-and-withdraw. Why?

Many clients tell SafeSave researchers that they’d like to save more and borrow less: it’s less stressful, cheaper, provides a greater sense of security, and lump sums formed that way don’t need to be repaid. But they constantly fall into a liquidity trap. They save, but when the next urgent spending need arrives their accumulated savings aren’t enough to satisfy it, so they borrow. Now, with the need to make repayments added to the constant pressure of regular expenditure, their capacity to save is constrained even further, and so the cycle deepens and repeats

After last week’s post on microfinance vs credit cooperatives we want to talk more about the “socio-financial landscape” in urban economies in Kenya. The fieldwork we are doing in Kariobangi is telling us some interesting stories.

First, we are realizing that the term “unbanked” depicts a completely wrong image of what’s happening in local economies: most entrepreneurs in Kariobangi, both informal and semi-formal, have one or more bank accounts. This might be the particular case of Kenya where the financial sector has deepened in the low-income population. Furthermore, banks must find their market segments in complex preexisting financial structures: in addition to bank accounts, entrepreneurs use a variety of other (mostly unconventional) financial instruments. In a certain way, the term “hyper-banked” seems more appropriate than “unbanked”.

So what are the “financial portfolios” of MSEs?

Starting from the informal side of the spectrum, the most common socio-financial instruments are the so-called ROSCAs (Rotating saving and credit associations) and ASCAs (Accumulating Savings and Credit Associations). ROSCAs are also known as “mery-go-round”: members of the groups meet regularly and contribute a certain amount. Then the entire “pot” (or lump-sum) of money collected goes to one member at each meeting on a rotating basis. ASCAs work on a similar way, but the money collected is given as a loan, not a lump-sum, to the members who apply for it, who have to pay it back to the group with interest over an agreed period. At the end of the year, all the money collected by the group plus interests on loans is divided among the group members.

Other common group types are the so-called saving clubs, where members simply keep their savings for future use; the investment clubs, where the money is used for investment in business, property or stock markets. Then there are the welfare associations, which operate as informal insurance companies. Moneys collected by groups are used only for emergencies, such as hospitalizations or funerals.

On the more formal side of the spectrum, there are the institutions that everybody knows: banks, microfinance institutions (MFIs) and credit cooperatives (SACCOs). We are noticing a growing hostility towards MFIs because of the high interest rates and the “harassment” of debtors when they are late with the repayments. Though, many businesses said that MFIs were very important for the growth of their business, but they can’t afford to borrow repeatedly over time. Some businesses also secured loans from banks such as Equity Bank and Co-operative Bank. Though, it is only a minority of businesses.

The book “Portfolios of the Poor” (if you don’t know it, get it!) gave us an unprecedented account of how poor households live with less than 2 dollars a day. They discovered that contrarily from popular belief the poor manage their finances with a complex set of financial instruments by relying on informal networks and other non-formal institutions instead of living “hand to mouth”.

We want to translate this approach to the analysis of local markets –the part of the economy often called “informal sector”- which tends to be misrepresented in all possible ways. First, just to name one, it is often described as a financial and institutional “vacuum”, as if businesses operated in an unorganized and unregulated environment.  This logic oversimplifies the financial dynamics existing in a hugely complex low-income market like Kenya, where social structures coexist with a relatively developed financial sector as well as booming mobile banking technologies.

Second, instead of lacking access to financial services, the reality that we are observing in Kariobangi is that small businesses choose between a plethora of (mostly unconventional) instruments, both formal and informal, market and non-market, according to the firms’ needs and opportunities. Banking with the “unbanked” is therefore more complex than expected because financial institutions have to compete with a variety of other mechanisms in terms of credit, savings and insurance.

Another relevant factor is that local markets are diversified, not only in terms of sectors but also in terms of size and growth potential. This view is in contrast with the traditional representation of local markets as a homogeneous blend of survival activities. Different segments do exist and must be identified in order to design appropriate policies and financial products.

UPDATE:  here are the differences between SACCOs, MFIs and banks summarized in a table format.

Today we had an interesting discussion with one of the village elders in Korogocho – who also has a small retail business and lots of experience in local markets – about the credit “options” available to micro-enterprises. He was particularly keen to discuss the differences between microfinance institutions (MFIs) and credit cooperatives (SACCOs), and the difference between “necessity” loans (i.e. need for cash in the short term) and consistent financial planning.

He made us realize that an overlooked area of research is how entrepreneurs choose their source of credit. Once upon a time, the infamous “informal sector paradigm” hypnotized us with the idea that micro enterprises completely lacked access to credit (because they do not have legal property rights), but the reality is that local firms not only have access to credit, but they also can choose between a multitude of suboptimal credit sources, both formal and informal, market and non-market, but we still don’t know what factors make people choose between a credit institution or the other.

As the financial sector in Kenya is increasingly embedded into local communities, entrepreneurs have a wide spectrum of financial options: from informal saving clubs and rotating credit schemes to credit cooperative and MFIs. Banks are targeting the low income population as well, and they are spreading in urban areas.

According to the elder in Korogocho, the choice between credit sources is simply a matter of entrepreneurial time/financial management. MFIs provide loans in a shorter amount of time, as low as 6 to 8 weeks of regular savings, but they charge higher interest rates for loans, up to 20 percent. SACCOs require a much longer time before they provide credit, up to 6 months, but the interest rate is often minimal and the repayment period is much longer, even two years! Other informal credit networks and saving clubs are a pillar of local economies, but they often lack flexibility.

The “immediate necessity” for cash seems to be the main driver for choosing MFIs whereas “good” (i.e. long term) financial planning make entrepreneurs go for SACCOs. The “necessity” factor is well known in local markets, and that’s probably why MFIs do not have a great reputation. On the other hand, flexible loans are very important for growth-oriented microenterprises, especially those who intend to make “high-return, higher-risk” investments in their business.