Emerging Challenges and Innovations in Microfinance and Financial Inclusion [1st ed.] 978-3-030-05260-7;978-3-030-05261-4

Table of contents :
Front Matter ....Pages i-xix
The Microfinance Alphabet (Marek Hudon, Marc Labie, Ariane Szafarz)....Pages 1-11
Addressing Climate Change with Microfinance Plus: Experiences in Cattle and Coffee Regions of Nicaragua (Johan Bastiaensen, Milagros Romero, Frédéric Huybrechs)....Pages 13-37
Remittances: Loan Funds for a Rural Economy? Evidence from the Kayes District (Western Mali) (Michel Namé, Philippe Lebailly)....Pages 39-59
Islamic Microfinance: Exploring the Experience of Akhuwat in Promoting Qard Hasan in Pakistan (Joana Silva Afonso, Ajaz Ahmed Khan)....Pages 61-83
Relationship Lending in Microfinance: Do Women Benefit As Much As Men? (Mathilde Bauwin)....Pages 85-122
What Happens When Microfinance Programmes Are Withdrawn? A Conceptual Framework for Analysing Causal Effects (Nargiza Alimukhamedova)....Pages 123-147
Good Customer Service Versus Bad Regulation (Mark Hannam)....Pages 149-161
Reframing Microfinance and Financial Inclusion Research: Case Studies and Synthesis (James Copestake)....Pages 163-173
Back Matter ....Pages 175-179

Citation preview

Emerging Challenges and Innovations in Microfinance and Financial Inclusion Edited by Michael O’Connor & Joana Silva Afonso

Emerging Challenges and Innovations in Microfinance and Financial Inclusion

Michael O’Connor  •  Joana Silva Afonso Editors

Emerging Challenges and Innovations in Microfinance and Financial Inclusion

Editors Michael O’Connor Portsmouth Business School University of Portsmouth Portsmouth, UK

Joana Silva Afonso Portsmouth Business School University of Portsmouth Portsmouth, UK

ISBN 978-3-030-05260-7    ISBN 978-3-030-05261-4 (eBook) https://doi.org/10.1007/978-3-030-05261-4 © The Editor(s) (if applicable) and The Author(s), under exclusive licence to Springer Nature Switzerland AG 2019 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. Cover illustration: Witthaya Prasongsin / Getty Images Cover design by Tjasa Krivec This Palgrave Macmillan imprint is published by the registered company Springer Nature Switzerland AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

Foreword

Microfinance is an unusual discipline, with one foot in the world of business and finance and another in the world of sociology and development economics. This means that the investors and practitioners from the business and finance side get to enjoy the wealth of research that accompanies the developmental side of the field, while academics gain partners and an audience beyond scholars and policymakers. This publication gathers some of the best work from the fifth European Research Conference on Microfinance, organised by the University of Portsmouth, UK, in June 2017. Appropriately for the sector, it spans a wide range of subjects—some directly applicable to practitioners, such as the effectiveness and viability of Islamic finance products, or those aimed at strengthening climate change adaptation. For those actors with a more developmental or social orientation, there is an assessment of lending practice disparity between women and men and a “natural” control study of the market effects following the withdrawal of microfinance lending in Uzbekistan. And for those focused on regulation and policy, there is a review of the impact of interest rate regulations on the quality of financial services. All this is bookended by a wonderful Microfinance Alphabet highlighting the key issues in the sector from the team that started the Research Conference series in 2009, as well as a conclusion that helps set the book’s v

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chapters into the context of broader research in the sector—thus setting the scene for future research. The European Research Conference on Microfinance, a bi-annual event that has been going strong for a decade, is a key event in the microfinance academic calendar. But it is more than that—it is a vehicle to bring together the sector’s best researchers with practitioners, investors, and others, creating a unique opportunity to cross the boundaries of the discipline. As founding partners and sponsors of the European Research Conference on Microfinance, we congratulate the authors and editors of this book for sharing the best of this Conference with the broader community and look forward to the next decade of success! European Microfinance Platform Luxembourg, Luxembourg

Daniel Rozas

Acknowledgements

This publication results from a selection of outputs from researchers who took part in the fifth European Research Conference on Microfinance that was hosted at the University of Portsmouth in June 2017. It goes without saying that without those contributing chapters, this publication would not have been possible. As editors, we are deeply appreciative of the professionalism of those involved in contributing to the publication. The editors wish to acknowledge the many organisations and individuals without whom the conference itself would not have been a success— these include Daniel Rozas, Christoph Pausch, Niamh Watters, Camille Dassy and Gabriela Erice from the European Microfinance Platform, the primary promoter and funder of the conference; Professors Ariane Szafarz, Marc Labie and Marek Hudon from the Centre of European Research in Microfinance (CERMi); as well as members of the Scientific Committee including organisers of previous iterations of the event. We also wish to thank our many conference sponsors and supporters, including ADA Microfinance, Lendwithcare, the Microfinance Gateway, the European Microfinance Network and Microfinance Centre; our many moderators, speakers and presenters together with Michael Buchan, Jinx Prowse and Music Fusion; and our many supportive colleagues at Portsmouth Business School, University of Portsmouth.

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We would like to thank the Afonso and O’Connor families for not asking too many questions together with Tula Weis and the Palgrave Macmillan team for nudging us gently towards the finishing line in completing this work.

Contents

1 The Microfinance Alphabet  1 Marek Hudon, Marc Labie, and Ariane Szafarz 2 Addressing Climate Change with Microfinance Plus: Experiences in Cattle and Coffee Regions of Nicaragua 13 Johan Bastiaensen, Milagros Romero, and Frédéric Huybrechs 3 Remittances: Loan Funds for a Rural Economy? Evidence from the Kayes District (Western Mali) 39 Michel Namé and Philippe Lebailly 4 Islamic Microfinance: Exploring the Experience of Akhuwat in Promoting Qard Hasan in Pakistan 61 Joana Silva Afonso and Ajaz Ahmed Khan 5 Relationship Lending in Microfinance: Do Women Benefit As Much As Men? 85 Mathilde Bauwin

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6 What Happens When Microfinance Programmes Are Withdrawn? A Conceptual Framework for Analysing Causal Effects123 Nargiza Alimukhamedova 7 Good Customer Service Versus Bad Regulation149 Mark Hannam 8 Reframing Microfinance and Financial Inclusion Research: Case Studies and Synthesis163 James Copestake Index175

Notes on Contributors

Nargiza Alimukhamedova  received a PhD in economics in 2014 from CERGE-EI (the Center for Economic Research and Graduate Education – Economics Institute), Charles University in Prague. She holds a researcher position in CERGE-EI and also teaching positions in the University of Economics in Prague and Westminster International University in Tashkent. Her main research areas include microfinance, development economics, economics of transition, and institutional economics. Johan Bastiaensen  is professor at the Institute of Development Policy (IOB), University of Antwerp, Belgium, and associate researcher at the Institute of Research and Development Nitlapan, Universidad Centroamericana (UCA), Managua, Nicaragua. His main research interest lies with the transformative role of microfinance for a more socially inclusive and environmentally less destructive rural-agricultural development. This research is inspired by critical institutional theory and is often done in cooperation with the Instituto Nitlapan in Nicaragua, an academic partner of the IOB since 1988. Much of the applied research is related to the policy debates in the context of the Fondo de Desarrollo Local (FDL), today one of the largest and most agricultural microfinance institutions in Nicaragua.

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Mathilde Bauwin  graduated with a PhD in development economics in 2017 from the French Institute of Demographic Studies (INED) and Paris Dauphine University. She is now working as a research project officer at Ada Microfinance, an NGO promoting responsible financial inclusion and supporting microfinance institutions all over the world. James  Copestake is Professor of International Development at the University of Bath. His research interests embrace agrarian change, development finance, impact evaluation, wellbeing assessment, and the global political economy of development. Ongoing activities include promoting qualitative impact evaluation through a non-profit company, Bath Social and Development Research, and being Director of Studies for Bath’s Professional Doctorate in Policy Research and Practice. Mark  Hannam is an associate research fellow at the Institute of Philosophy, School of Advanced Study, University of London. From 2007 to 2016, he was chair of Fair Finance, the London-based microfinance company. Marek Hudon  is professor at the Solvay Brussels School of Economics and Management (SBS-EM), Université Libre de Bruxelles (ULB), Belgium. He is also co-director of the Centre for European Research in Microfinance (CERMi), and co-director of the Centre d’Etudes Economiques et Sociales de l’Environnement (CEESE). He has initiated and is still scientific coordinator of the European Microfinance Programme (EMP). He has conducted research in India, Kenya, Mali, Morocco, Vietnam, and the Democratic Republic of Congo. His research mainly focuses on social and non-profit enterprises/entrepreneurship (microfinance and complementary currencies, particularly in the context of developing economies), sustainable development, and business ethics. Frédéric  Huybrechs is a post-doc researcher at the Institute of Development Policy (IOB), University of Antwerp, Belgium. He currently studies the role of microfinance in the advancement of the cattle-­ driven agricultural frontier in Nicaragua. In his PhD thesis, he analysed the topic of Green Microfinance from a political ecology perspective and in the context of rural development. He conducted fieldwork in Nicaragua

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in order to analyse a particular Green Microfinance project which combined green credits with payments for ecosystem services and technical assistance. He is also a member of the action group “Green Inclusive and Climate Smart Finance” of the European Microfinance Platform and has been involved in a consultancy project on Green Microfinance in Latin America for the Inter-American Development Bank. Ajaz  Ahmed  Khan is senior microfinance adviser with CARE International, an international development agency with operations in more than 90 countries. He holds a PhD in development economics and has more than two decades of practical field experience from working as an agricultural economist in Latin America, Eastern Europe, Africa, and Asia. He has helped to establish microfinance organisations in various countries which now provide financial services to tens of thousands of low-income people. He has written a number of articles and books on microfinance in general and Islamic microfinance in particular. Marc  Labie  is a professor in the Department of Management of the Warocqué School of Business and Economics at the University of Mons (UMONS), and for the European Microfinance Programme (EMP). He is co-director of the Centre for European Research in Microfinance (CERMi) and co-director of the European Microfinance Programme (EMP). Labie holds a bachelor’s degree in economics and social science, and a PhD in business administration. He has also studied for brief periods at the London School of Economics and Political Science and at the Universidad de Salamanca. He is an alumnus of the Financial Institutions for Private Enterprise Development (FIPED) programme at Harvard University in Cambridge, Massachusetts, US, in which he has also been lecturing for 11 years. His field experience includes researches and case studies in Colombia, Bolivia, Democratic Republic of Congo, Indonesia, Kenya, Madagascar, Morocco, Mexico, and Peru. His articles have appeared in journals such as Ethics and Economics, Gestion, Mondes en Développement, Management & Avenir, Management Decision, and Quarterly Review of Economics and Finance. He has ­co-­edited various books including The Handbook of Microfinance in 2011 and The Crises of Microcredit in 2015.

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Philippe Lebailly  has a PhD in agricultural sciences. He is Professor of Economics and the research director and head of the unit of economy and rural development at Gembloux Agro-Bio Tech, University of Liege. Michel  Namé is a researcher (PhD candidate in rural economics) at Gembloux Agro-Bio Tech, University of Liege. He is an engineer in farming techniques, specialising in agricultural mechanics and rural development (High School of Agronomy—Institut National Polytechnique Félix Houphouët-Boigny). He also has a master’s degree in economic analysis and international development, specialising in sustainable development in developing countries (Centre d’Etudes et de Recherches sur le Développement International—University of Auvergne). His research relates to remittances, food security, climate change, and rural development, with his current research focussing on the ability of migrant remittances to contribute to food security and poverty alleviation. Michael O’Connor  is a Senior Lecturer in the Accounting and Financial Management subject group at the Faculty of Business and Law, University of Portsmouth. As a law graduate and finance professional, he has worked with Andersen and KPMG in Ireland as well as the European Commission in Brussels. He has significant overseas experience in Russia and China, particularly in financial training. In this regard, he has also worked as a contractor for international consultancy firms on behalf of public and private sector clients in Western Europe, West Africa, and Central Asia. He is a graduate of the European Microfinance Programme (EMP) at Université Libre de Bruxelles (Belgium) and was a co-organiser of the fifth European Research Conference on Microfinance. Milagros  Romero is a researcher at the Institute of Research and Development Nitlapan of the Universidad Centroamericana (UCA), Managua, Nicaragua, and a PhD student at the Institute of Development Policy (IOB), University of Antwerp, Belgium. Her research focuses on analysing the insertion of microfinance programmes in rural territorial dynamics in Nicaragua, addressing the opportunities and constraints in improving the social and ecological consequences of these programmes, in a setting with wide inequalities, high poverty levels, and accelerated

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environmental degradation. Her research is mainly based on the experiences of the development programmes of Nitlapan and the financial institution Fondo de Desarrollo Local (FDL), and their Microfinance Plus model combining microcredit and technical assistance services. Joana Silva Afonso  is a senior research associate in the Economics and Finance Department at the University of Portsmouth. She has experience as both practitioner and researcher in the microfinance sector. She first became involved with microfinance in Portugal where she was a microcredit officer at Associação Nacional de Direito ao Crédito (ANDC) (nongovernmental organisation—NGO) between 2005 and 2012. In 2013, she completed the European Microfinance Programme at the Université Libre de Bruxelles (Belgium), which included fieldwork in the Dominican Republic. Between 2015 and 2018, as part of her PhD at the University of Portsmouth, she conducted research on the challenges associated with impact evaluation in microfinance with fieldwork in Pakistan and Zimbabwe. She was a co-organiser of the fifth European Research Conference on Microfinance which took place in June 2017. Ariane  Szafarz  is Professor of Finance at the Solvay Brussels School of Economics and Management (SBS-EM), Université Libre de Bruxelles (ULB). She holds a PhD in mathematics and an MD in philosophy. Her research topics include microfinance, gender discrimination, and financial markets. She is co-director of the Centre for European Research in Microfinance (CERMi), co-director of the European Microfinance Programme (EMP), co-director of the SBS-EM Doctoral Programme in Management Sciences, and president of the Marie-Christine Adam Fund. She was a visiting professor at Université de Lille II, Université Catholique de Louvain, and the Luxembourg School of Finance. She sits in the editorial boards of the Brussels Economic Review and Bankers, Markets and Investors. Szafarz has authored several books and her scientific articles have appeared in, for example, Econometric Theory, Economics Letters, European Economic Review, Journal of Asset Management, Journal of Banking and Finance, Journal of Business Ethics, International Review of Law and Economics, Journal of Development Studies, Journal of Empirical Finance, Journal of International Money and Finance, Labour Economics, Nonprofit

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and Voluntary Sector Quarterly, Oxford Economic Papers, Quarterly Review of Economics and Finance, Small Business Economics, Review of Finance, and World Development. Together with co-authors Simon Cornée and Panu Kalmi, she received the 2016 Warren Samuels Prize awarded by the Association for Social Economics for the article “Selectivity and Transparency in Social Banking: Evidence from Europe” presented at the Allied Social Science Associations (ASSA) Meetings, San Francisco, USA, 2016, and now published in the Journal of Economic Issues.

List of Figures

Fig. 5.1 Evolution of financial indicators, in value and ratio (medians) 95 Fig. 5.2 Average amounts granted over credit cycles by gender 98 Fig. 5.3 Evolution of loan amounts from one credit cycle to another by gender (in ratios over the previous amount) 98 Fig. 5.4 Predictions of amounts granted from cycle 2 108 Fig. 5.5 Predictions of growth rates of loan amounts from a cycle to another (in ratio) 115 Fig. 6.1 Summary of the multi-dimensional framework 129 Fig. 6.2 Cumulative growth of non-bank MFIs in Uzbekistan, 1998– 2011139

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List of Tables

Table 4.1 Table 5.1 Table 5.2 Table 5.3 Table 5.4 Table 6.1 Table 6.2 Table 6.3 Table 6.4 Table 8.1 Table 8.2

AIM main activity indicators Average loan amount by credit cycle and by gender Estimation of amounts granted from cycle 2 (all loans) Estimation of amounts granted from cycle 2 (non-agri. and agri. loans separately) Growth rate of loan amount from one credit cycle to another (in ratio) Understanding the reasons for MFI(s) termination Respondents and objectives for in-depth interviews Difference-in-differences estimator of the impact of microfinance sector closure Microcredit and microdeposit services in Uzbekistan The scope of microfinance and financial inclusion research Mainstream, alternative and plural disciplinary perspectives on microfinance

67 97 102 105 111 130 131 137 141 165 166

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1 The Microfinance Alphabet Marek Hudon, Marc Labie, and Ariane Szafarz

The fifth European Research Conference on Microfinance was organized in 2017 at the University of Portsmouth, UK. Previously organized in Belgium (Université Libre de Bruxelles—ULB, 2009), the Netherlands (University of Groningen, 2011), Norway (Agder University, 20,013), and Switzerland (University of Geneva, 2015), the conference is a great opportunity for researchers in microfinance to exchange ideas on their common field of interest. Much has been learnt in microfinance over the last ten years. But there is yet so much to discover on how to improve financial inclusion and development. A child’s fifth birthday is a great moment to celebrate. It is also the typical moment where the child discovers the world of reading. M. Hudon (*) Solvay Brussels School of Economics and Management (SBS-EM), Université Libre de Bruxelles (ULB), Brussels, Belgium Centre for European Research in Microfinance (CERMi), Brussels, Belgium Centre d’Etudes Economiques et Sociales de l’Environnement (CEESE), Brussels, Belgium e-mail: [email protected] © The Author(s) 2019 M. O’Connor, J. Silva Afonso (eds.), Emerging Challenges and Innovations in Microfinance and Financial Inclusion, https://doi.org/10.1007/978-3-030-05261-4_1

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Likewise, we are happy to celebrate the fifth edition of the European Research Conference on Microfinance by contributing to this book with a—evidently subjective—microfinance alphabet, hoping to so provide the microfinance scientific community with an opportunity to “read together” both where we stand and where we are heading. We hope you will enjoy it! A: Asset and Liability Management (ALM) ALM refers to the way in which banks address and manage the risks attributable to potential mismatches between the assets and liabilities. Even though ALM is barely considered in the microfinance literature, it is a key challenge for microfinance institutions (MFIs) willing to develop products that meet the needs of the financially excluded. Most MFIs are reluctant to supply long-term loans, and microfinance start-ups pay much more attention to the asset side of their balance sheet—notably to the quality of their portfolio—than to their liabilities. Indeed, recently created MFIs are mostly financed by seed capital and subsidies, so that their liabilities are often not considered a priority. Later developments make, however, liabilities management necessary to address MFIs’ long-­ term needs for capital. When subsidies dry out, MFIs typically take loans from regular banks, at least in countries where commercial loans are accessible to them. In this way, MFIs can sustain their growth for a certain time, provided that the quality of their portfolio remains under control. Otherwise, commercial banks will consider MFIs too risky and cut their financing. But if an MFI’s portfolio keeps growing, its debt/equity M. Labie Warocqué School of Business and Economics at the University of Mons (UMONS), Brussels, Belgium Centre for European Research in Microfinance (CERMi), Brussels, Belgium e-mail: [email protected] A. Szafarz Solvay Brussels School of Economics and Management (SBS-EM), Université Libre de Bruxelles (ULB), Brussels, Belgium Centre for European Research in Microfinance (CERMi), Brussels, Belgium e-mail: [email protected]

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ratio will at some point reach a level such that bank loans will become difficult to obtain. It is at this point that most MFIs start thinking seriously about collecting savings, which are the only long-term source of funds that allow a financial institution to grow steadily without liquidity issues. B: Bottom Lines MFIs are usually understood as double-bottom-line institutions. While economists tend to use the social-versus-financial trade-off to describe the objective function of MFIs, management scholars designate these dual concerns by referring to welfare and market institutional logics. Yet, the actual existence of a “simple” trade-off is challenged on both sides. On the one hand, commercialization, which typically downplays the social concern, pushes towards a single business-like objective (see “C”). On the other, some argue in favour of adding a third bottom line of environmental performance, leading to the notion of green microfinance. C: Commercialization The microfinance commercialization trend is now well recognized: The Consultative Group to Assist the Poor (CGAP), a consortium of donors active in microfinance, mentioned it already in its 1990s’ five-year plans. Yet, the bulk of the commercialization wave developed during the 2000s. Cases in point include the initial public offerings of two leading MFIs: Compartamos and SKS. Some scholars consider commercialization as a pre-requisite for MFIs to address financial inclusion efficiently. By contrast, others see commercialization as a major source of mission drift observed when organizations focus on profits and move away from their social goal. The co-existence of such contrasting views probably explains why we are still lacking a broadly accepted definition of mission drift. D: Diversification of Products Microfinance started as microcredit, as illustrated by the fact that the largest meeting in the field was named “The Microcredit Summit Campaign.” Later, financial services for the disadvantaged populations were extended to savings, insurance, and money transfers, leading the industry to move from microcredit to microfinance, and more recently to financial inclusion (see “F”). Meanwhile, the conversation evolved around the advantages and drawbacks of providing financial services only—the

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so-called minimalist approach—or combining them with financial literacy, professional training, marketing support, or even business-unrelated services—the “integral” approach. E: Ethics of Randomized Control Trials (RCTs) RCTs are often considered as the gold standard of impact evaluation in microfinance. RCT results are known for their high internal validity in terms of causal linkages, associated with limited external validity due to their poor degree of generalizability. Nowadays, prestigious economic journals refrain from publishing non-RCT empirical studies due to endogeneity concerns. Strikingly, the RCT conversation focuses on methodology and the ethical issues are left aside. Yet, RCT ethics committees would gain from internationally binding guidelines based on strict, universal ethical rules as is the case in medicine when it comes to, for example, patient consent and providing ex ante equally attractive options to the treated and control groups, a rule known as equipoise. The serious history of mistreatments of third world populations by past medical experiments is a strong incentive to increase our vigilance in that regard. F: Financial Inclusion Financial inclusion is increasingly replacing microfinance in the alphabet of financial services to the poor and the unbanked. In fact, this change in language broadens the scope of the sector since it goes beyond MFIs and includes new service providers, such as fintech, and new technologies, such as mobile banking. It might, however, obscure the original objectives of poverty alleviation and empowerment of the disadvantaged populations. G: Governance Any microfinance alphabet must address MFI governance. This topic encompasses the role of the boards, which is increasingly investigated quantitatively with international datasets. Governance studies also check whether the decisions of MFI executives match the mission of the organization they serve. Top executives gain both increased legitimacy from stakeholders, such as donors and public authorities, as well as extra financial manoeuvre room from commercial fund providers. Some relevant governance mechanisms are internal, such as boards, organization charts, incentive structures, and corporate culture. Others are driven by the environment, such as accounting standards, regulation, and supervision

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requirements, as well as the due diligence of debt providers. Corporate governance in microfinance points to major risks as pinpointed by the Banana Skins reports.1 H: Human Rights and Microfinance Muhammad Yunus considers that microcredit should be a human right. He states that access to credit is instrumental to economic development, poverty alleviation, and the improved welfare of all citizens. This view is challenged by those arguing that credit is not a universal need. Moreover, credit that is too easily obtainable can have perverse effects like over-indebtedness. Meanwhile, other financial services, such as savings and money transfers, are less risky and sometimes even more useful socially than credit. I: Interest Rates The interest rates charged by MFIs have been criticized since the early days of microcredit in the 1970s. Outsiders find it hard to understand why lending to the poor is costly. MFIs must cover three types of inevitable costs: the cost of funds, the operational costs, and loan loss provisioning. Well-managed MFIs can limit both their costs of funds and loan loss provisioning, but reductions in operational costs are difficult to achieve since numerous small proximity loans imply costly features, such as multiple branch and frequent home visits. But this evidence is not a reason for charging abusive interest rates, and more so from MFIs benefitting from a monopoly/oligopoly power over financially vulnerable clients. Excessive interest rates have been exposed since the emergence of microcredit, but criticisms have grown widespread of lending practices in leading MFIs in certain countries, such as Mexico. J: Juggling with Financial Products Microfinance clients juggle with formal and informal sources of funds and financial services. They use a variety of financial tools, linked to informal networks, local merchants, family and friends, and various providers of financial services. The dark side of this resourcefulness is the risk of over-indebtedness and subsequently an increased frequency of credit defaults that can undermine the microfinance sector. K: Keeping an Open Mind Microfinance is not a panacea against poverty. And microfinance alone cannot tackle all the complex issues associated with poverty reduction.

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MFIs do, however, respond to a real demand from the poor and unbanked populations for reliable financial services. At the very least, like banks, MFIs help smooth income. The question raised by Richard Patten—“If microfinance is the answer, what is the question?”—is still relevant. L: Loan Officers Loan officers are key players in the microfinance arena. Not only are they the visible side of the organization, but they are also those who screen clients and enforce loan reimbursements. The typical day of a microfinance loan officer is made up of many house visits so that they become an integral part of the community they work in. Loan officers face conflicting challenges: They are the partners of their clients analysing their needs and providing them counselling, while also having to promote their employer’s agenda including portfolio growth—which implies pushing credits—and timely repayments—with various forms of pressure. Even though the role of loan officers is fundamental, it is only recently that scholars have started studying them specifically. M: Microfinance Promise Researchers in microfinance typically start with reading the influential and most-quoted article on the sector, “The Microfinance Promise” by Jonathan Morduch. This paper was published in 1999 in the Journal of Economic Literature, at the same time as Jonathan’s other seminal paper “The Microfinance Schism” was published in World Development. Twenty years later, these two papers are still a wonderful introduction to understanding the very essence of microfinance. N: Non-Governmental Organizations (NGOs) and Savings and Credit Cooperative Societies (SACCOs) Historically, the vast majority of MFIs started their operations as NGOs or SACCOs. NGOs have played a major role in the microfinance industry as their basic characteristics allowed them to be particularly innovative. These characteristics include being non-regulated institutions as they were not collecting savings and being largely financed by subsidy providers. Key methodological principles of microfinance, such as group lending and progressive lending, were originally tested by NGOs. Nowadays, NGOs still represent a significant segment of microfinance, but their overarching dominance has faded.

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Originally created in the nineteenth century in Germany and Britain, SACCOs have spread all over the world and are now part of the financial landscape in general, and microfinance in particular. The comparative advantages of SACCOs are twofold: They are imbedded locally, and they benefit from members’ voluntary workforce. On the flip side, their growth can be detrimental to the interactions between members and executives, resulting in threats to their governance (see “G”). O: Ohio-State-University Pioneers The pioneering contributions of Dale Adams, Claudio Gonzalez-Vega, and Richard Meyer had an influential role in the field of microfinance and financial inclusion. These scholars have left their mark on a variety of topics. They argued that “cheap credits” from donors and subsidized credit lines and grants can prevent the entry of private actors, and therefore be detrimental to the development of rural financial systems. These pioneers stressed the relevance of micro-savings and proved that some informal markets are less irrational and exploitative than originally thought. P: Portsmouth Following Brussels, Groningen, Kristiansand, and Geneva, Portsmouth was the fifth city to host the European Research Conference on Microfinance. The event was perfectly organized, and all the participants enjoyed the enthusiasm and dedication of the host institution. Portsmouth will remain present in the collective memory of the European microfinance community. We extend our special gratitude to Joana and Michael, the editors of the current volume. Q: Quantitative Models The role of models in economic theory is much debated. Regardless, the common wisdom equating mathematical modelling with the tenets of neoclassical economics is misleading. Mathematical models can be adapted to various objective functions, provided that they are formally well-defined. Microfinance models have addressed relevant issues, such as the consequences of the double-bottom-line approach (see “B”) to financial services in the context of informational asymmetries. By making trade-offs explicit, mathematical models can bring to light the real challenges facing MFIs and help go beyond the often-simplistic rhetoric of unconstrained “good-doing.” Even though most—if not all—arguments

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can be made without any equation, the role of mathematics stems from its capacity of holding the formal strictness of reasoning. Importantly, the purpose of mathematical modelling is to address a theoretical research question with minimal working assumptions rather than reflect the full complexity of the real world. R: Regulation and Supervision Originally, public authorities viewed reluctantly the development of MFIs. They thought that, if lending to the poor was a feasible and sustainable economic activity, it would already have existed for a long time. This attitude evolved with the success of major MFIs worldwide. Nowadays, authorities are contemplating ways of nurturing microfinance, notably thanks to specific non-banking financial institutions (NBFIs). Typical regulatory frameworks permit various types of MFIs: Simple institutions cannot collect public savings and are therefore only lightly controlled, while those providing multiple financial services are subject to rules similar to those imposed on banks. Altogether, many countries have invested significant effort in microfinance regulations. But the same cannot be said about supervision: Most authorities lack properly trained manpower. As a result, officially supervised MFIs do sometimes look safer than they are. S: Subsidies Subsidies have always played an important role in the funding of MFIs. Most microfinance pioneers were supported by grants or concessionary loans. After decades of microfinance practice, many MFIs still receive significant subsidies and are even subsidy-dependent. Only a minority of MFIs are true commercial actors and totally un-subsidized. While grants and concessionary loans still exist, subsidized equity—equity holders with below market expectations—represents the largest type of subsidy. T: Time-Inconsistency Procrastination, under-saving, and over-consuming are typical features of human behaviour, grouped by economists under the label of time-­ inconsistency. These features contrast with the textbook characteristics of the so-called homo economicus who makes time-consistent decisions. Even though time-inconsistency affects agents with any income level, its consequences are far more harmful to cash-constrained individuals than to those who are better off. MFIs address the hypothetical time-­inconsistency of their clients by supplying illiquid financial products meant to disci-

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pline financial impulses. While discipline can be a useful commitment device to counteract temptations, they are counter-productive for poor people confronted by adverse shocks. Poor households are coping not only with income variability and unpredictability but also with ­uninsured idiosyncratic risks, such as sickness and robbery, as well as systemic risks, including the consequences of climate change and political unrest. To address these tough issues, the poor badly need access to flexible products. U: Unfair Discrimination in Lending Discrimination in lending against vulnerable groups—such as women and minorities identified by their ethnicity, religion, caste, disability, and sexual orientation—refers to unfair stereotypical criteria used in loan allocation. The most common definition of discriminatory loan allocation relates to a lender’s practice of deviating from profit-maximization logic. According to this view, a biased lender is identified by the fact that it denies loans to the targeted group members more frequently than to the other applicants, all else being equal. The problem with this approach arises from its implicit assumption that both the group members and the other loan applicants are equally creditworthy. In some cases, however, this assumption can be wrong. For instance, evidence in microfinance suggests that women tend to reimburse their loans more swiftly than men, for reasons that are still obscure and not captured by the usual control variables used to stick to the “all else equal” statistical requirement. If the assumption of equal creditworthiness does not hold, then even equal denial to both groups, with all else being equal, can end up being unfair. V: Village Banking Village banks come under various forms. Some are old and have hardly changed in decades. It is the case of the Indonesian BKD (Badan Kredit Desa—literally, village credit organizations), which is among the oldest worldwide. Other village banks, such as Finca, were initiated more recently by international players. All village banks share the ideas of starting small, at the village level, and being collectively managed. In some cases, the bylaws impose that the leader of the bank is a locally elected person, such as the village’s mayor. Village banks are stable institutions, able to provide financial services to customers typically disregarded by other MFIs. The main challenge facing village banks founded with international support is surviving the sponsor’s exit.

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W: Women’s Empowerment Many MFIs claim to target women. Nevertheless, recent evidence suggests that microfinance commercialization is associated with a decline in the share of female clients. A possible explanation is that women are poorer than men on average and are therefore less profitable clients. Accordingly, female borrowers and savers would be less attractive to profit-oriented financial institutions. Another, and potentially complementary, rationale is that commercialization brings along the typical biases plaguing the banking industry, such as unfair discrimination (see “U”) of some groups of loan applicants. When women’s empowerment stops being viewed as a moral priority, the common stereotype that links business capacities and masculine traits makes it more difficult for female entrepreneurs to raise capital and business loans. Further developments on this issue could pay more attention to the characteristics, including gender, of microfinance leaders, managers, and loan officers (see “L”) who are willing to empower women. Hypothetically, gender affinity— and, more generally, homophily—is a promising theoretical avenue to understand the determinants of the segments served by MFIs. X: The Unknown Author Who Will Answer All Our Questions and Doubts What is the future of microfinance? Are most MFIs doomed to become either another type of bank or philanthropic institution? Will microfinance institutions still exist in twenty years or will mobile banking and traditional financial providers overtake the microfinance market? Will subsidies in microfinance dry up soon? Will RCTs adopt generally agreed ethical rules? Is green microfinance going to scale up and have a strong environmental impact (see “B”)? Will anybody be able to be Yunus’s (see “Y”) successor? Will commercialized microfinance actors totally integrate the mainstream financial sector? Should MFIs focus on remittances? Will the double-bottom-line narrative survive the move towards financial inclusion? Will pro-social financial institutions learn from corporate-­ governance crises? How should governments supervise MFIs properly? These questions and many others are awaiting X! Y: Yunus, Muhammad Muhammad Yunus is the iconic figure of microfinance. Born in 1940 in Bangladesh, he was awarded the 2006 Nobel Peace Prize, together

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with the Grameen Bank, for promoting the concept of microcredit. His notoriety allowed the microfinance community to become a priority for donors and enter business circles. Yunus is not only the central figure of microfinance, but is also seen as the poster child for social ­entrepreneurship and one of the most well-known among the Fellows of the famous Ashoka network of social entrepreneurs. Z: Zero Default A striking figure of microcredit is, crises aside, its overall low probability of default. Many leading MFIs have experienced a low portfolio at risk compared to traditional commercial banks active in the same country. Does this mean that zero default is the ultimate goal? Certainly not, for two reasons: First, lending money is a risky business, and a zero-default score would signal an overly restrictive lending technology. Targeting zero default means taking very low risks, which can eventually harm the social bottom line of MFIs. Second, a loan portfolio with zero default sounds too good to be true, and probably is.

Note 1. The Banana Skins reports are published by the Centre for the Study of Financial Innovation (CSFI), a non-profit think-tank, established in 1993. They provide a barometer of the risks facing the banking, insurance, and microfinance industries (CSFI website, consulted on 3 December 2018).

2 Addressing Climate Change with Microfinance Plus: Experiences in Cattle and Coffee Regions of Nicaragua Johan Bastiaensen, Milagros Romero, and Frédéric Huybrechs

This chapter reflects on the role of rural microfinance in the context of climate change. It develops a conceptual framework to inform strategies of microfinance institutions (MFIs). This framework avoids too simple standard panaceas and acknowledges these strategies’ inevitable taking part in complex context-specific institutional bricolage, thus highlighting J. Bastiaensen (*) • M. Romero Institute of Development Policy (IOB), University of Antwerp, Antwerp, Belgium Institute of Research and Development Nitlapan, Universidad Centroamericana (UCA), Managua, Nicaragua e-mail: [email protected]; [email protected] F. Huybrechs Institute of Development Policy (IOB), University of Antwerp, Antwerp, Belgium e-mail: [email protected] © The Author(s) 2019 M. O’Connor, J. Silva Afonso (eds.), Emerging Challenges and Innovations in Microfinance and Financial Inclusion, https://doi.org/10.1007/978-3-030-05261-4_2

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the importance of path-dependent local embeddedness. We illustrate the framework with an analysis of the ‘green Microfinance Plus’ approach of the Fondo de Desarrollo Local (FDL) and the institute Nitlapan-UCA (Universidad Centroamericana) in Nicaragua. Their approach consists of the combination of short term and/or investment credit with compulsory technical assistance (which is partially or entirely paid by the clients, depending on their wealth level). In some instances, it is also combined with Payments for Ecosystem Services (PES). We first introduce our analytical framework and then present two cases in cattle and coffee regions. The chapter concludes with insights about the role of microfinance in the context of climate change.

2.1 C  hallenges of Climate Change Policies in Rural Territories Given the complexity and uncertainties involved in climate change, mitigation and adaptation cannot be translated into straightforward policies or top-down social engineering of socio-institutional arrangements. Attempts to promote either mitigation or adaptation will unavoidably give rise to complex and interactive processes of ‘institutional bricolage’, reflecting that different stakeholders will piece together justifying principles and other authoritative resources, informing evolving rules-in-use as well as local social and individual practices (Cleaver, 2001). Path-­ dependent and interactive institutional bricolage takes place in many different ‘political arenas’1 involving a variegated set of local and outside stakeholders with unequal resources, knowledge and power. The outcomes of institutional bricolage will condition the social ecological system, that is the way in which nature and human livelihoods recursively interact and co-shape the societal and ecological processes in a specific territory (Ostrom & Cox, 2010), and thus contribute or not to mitigation or adaptation. In the face of adaptation and mitigation, we are “dealing with the complex dynamics of social and ecological processes, and the high degrees of

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uncertainty in planning for sustainability in the current era” (Wise et al., 2014, p. 327). This implies that we should avoid “to ‘close down’ too rapidly to a small set of decision alternatives by reconfiguring uncertainty into more manageable, but inappropriately narrow, calculations of risk and cost-benefit equations” and rather open up “policy processes to wider participation, thus increasing the diversity of values and ideas, as well as equity in decisionmaking (Stirling, 2006)” (Wise et al., 2014, p. 327). In this perspective, Leach, Scoones, and Stirling (2010) speak of sustainabilities (plural) and the need for different pathways to sustainability, that is “alternative possible trajectories for knowledge, intervention and change which prioritise different goals, values and functions” (Leach et al., 2010, p. 5). It is important to acknowledge that institutions, social structure and perceptions are not exogenous but endogenous to the evolution of the social ecological system (Bromley, 2012). One cannot identify any exogenous ‘nature’, nor objective scientific knowledge on the ‘optimal pathway of change’ to keep the social ecological system on a sustainable path. There is significant room for inputs from scientific knowledge, as “the human mind is indeed capable of constructing many different models of nature, which it may then use to act upon nature, but this does not preclude that ‘nature will talk back’ to our conceptions of it” (Van Hecken, Bastiaensen, & Windey, 2015, p.  120). This ‘talking back’ will lead human beings to ‘update their beliefs about nature’ (Bromley, 2012) and come up with adjusted models to address humannature interrelations. We can thus envisage a socio-culturally embedded and dynamic-­ evolutionary process of adaptive governance taking place to address the perceived challenges of climate change. Whereas Leach et al. (2010) use the concept ‘pathways to sustainability’ metaphorically, opening up a set of imaginaries informing the multiplicity of ‘sustainabilities’, we give it a more operational content. Inspired by De Haan and Zoomers (2005) and ideas from the ‘Territorial Rural Development’ paradigm (Berdegué & Schejtman, 2008), we adopt a complexity perspective to the meso-­ level rural ‘territory’ (Ambrosio-Albalá & Bastiaensen, 2010), where development pathways emerge as dominant over others as the outcome

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of dynamic interactions of global and local actors with different ideas and knowledge, (perceived) interests, resources and power within local ‘political arenas’ and geographical spaces characterised by concrete biophysical conditions. The interactions between actors, and between actors and their physical environments, take place within the earlier-mentioned process of power-­ laden institutional bricolage (Cleaver, 2012; Van Hecken, Bastiaensen, & Huybrechs, 2015) conditioning pathways grounded in “a set of shared ideas that inspire the actions of the actors, their organisations and their social networks, and rules of the game that govern the interactions among the actors around certain economic activities” (Bastiaensen, Merlet, & Flores, 2015). These pathways generate opportunities for certain household trajectories while limiting others and dynamically incorporate feedbacks from those trajectories reproducing or changing prevailing ideas, networks, organisations and rules of the game (Bastiaensen, Merlet, & Flores, 2015; De Haan & Zoomers, 2005). The emerging pathways obviously also condition the ecological outcomes of the aggregated human activities in the rural territory. The ‘territorial pathway’ concept contextualises individual decision-making and opportunities as an at least partially collective and not always fully conscious process, where individual strategies are connected to shared livelihood styles, that is “a specific cultural repertoire composed of shared experiences, knowledge, insights, interests, prospects and interpretations of the context; an integrated set of practices and artefacts (crop varieties, instruments, cattle); a specific ordering of the interrelations with the markets, technology and institutions, and responses to policies” (De Haan & Zoomers, 2005, p. 40). This approach explains why and how behaviour of producers and households is dependent upon territorial structural conditions beyond mere individual-household knowledge and access to resources. Promoting transformations that address the challenges of climate change thus requires a thorough understanding of the dynamics of these pathways processes to identify relevant inroads for feasible socially embedded (path-dependent) change processes. This insight is crucial for our reflection about the role of microfinance in addressing the challenges of climate change in rural territories.

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2.1.1 T  he Role of Rural Microfinance in a Climate Change Context The relatively recent  debate about the role of microfinance in climate change action is part of the broader argument about a third environmental bottom-line and ‘green microfinance’ (Fenton, Paavola, & Tallontire, 2015; Hammill, Matthew, & McCarter, 2008; Huybrechs, Bastiaensen, & Forcella, 2015; Schuite & Pater, 2008). The initial models about the environmental impact of microfinance (e.g. Agrawala & Carraro, 2010; Fenton, Paavola, & Tallontire, 2017) distinguish a public and a private policy realm. Speaking about adaptation, Fenton et al. (2017) introduce the distinction between ‘planned’ and ‘autonomous’ adaptation, with the former pertaining to the sphere of national states and its bi- and multilateral allies (mobilising the needed funding) and the latter to the sphere of households and enterprises. The role of microfinance is connected to autonomous adaptation, as “microfinance is one key way of mobilizing private finance (and channelling public finance) for autonomous household adaptation” (Fenton et al., 2015, quoted from Fenton et al., 2017, p. 192). Credit and other financial products are to strengthen autonomous adaptation capacity of (poorer) households and enterprises, enabling them to invest in adjusted livelihood activities and enhancing resilience in the face of vulnerability and (survival) risk. Regarding mitigation, conditional (subsidised) credit is expected to increase the capacity of households/enterprises to invest in environmentally sound productive adjustments and can be used to push activities in a desired direction (Cranford & Mourato, 2014). Microfinance can be combined with other ‘plus’ services and incentives such as awareness raising, technical assistance and PES. Such ‘Microfinance Plus’ configurations are set up to strengthen or guide households and enterprises in the ‘right’ direction, contributing to motivations, perceptions and knowledge, while modifying incentives. Mainstream thinking about climate-related behavioural change builds upon an individualistic economic-psychological conception of behaviour (Shove, 2010), where policy interventions aim to affect either the resources and economic incentives or the cognitive-­motivational framework of the individual clients involved, neglecting the socio-institutional

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processes which contribute decisively to both. The individualistic models of autonomous adaptation/mitigation actions are not necessarily incorrect, but clearly insufficient—considering the complex development pathways described in the previous section. They suffer from what Ostrom and Cox (2010) have called the panacea-problem, that is, uncritical use of reductionist models to apprehend complex interactive processes which are ultimately inadequate to understand what really matters.2 An individualistic approach will not be able to sufficiently contribute to the required profound processes of social ecological transformation (Shove, 2010, p. 1278).

2.2 C  limate Change in Coffee and Cattle in Nicaragua: Evolving Knowledge Frames and Emerging Actions We present two cases regarding microfinance and climate change in rural Nicaragua. They are based on experiences of the Fondo de Desarrollo Local (FDL), one of the largest microfinance institutions in Nicaragua. Our analysis is based on field research in the coffee region of La Dalia (see Bastiaensen, Huybrechs, Forcella, & Van Hecken, 2015; Huybrechs, Bastiaensen, Forcella, & Van Hecken, 2016; Romero et al., 2016) and in the cattle region of Matiguás-Rio Blanco (see Bastiaensen, Merlet, & Flores, 2015; Polvorosa, 2013). FDL has a strong commitment to agriculture, currently destining 35% of its portfolio to primary agricultural production. Given its proximity to peasants, FDL has constantly faced the risks of agriculture: variability in yields and prices and a high vulnerability with regards to plagues, diseases, weather conditions and conditions for access to markets (Peck & Pearce, 2005). Rather than avoid agriculture, FDL has tried to reduce the risk of its agricultural portfolio, in collaboration with the research and development institute Nitlapan-UCA, specialised in providing technical assistance and doing research in rural territories. From the combined perspective of risk management and sustainable development, FDL and Nitlapan-UCA have developed a Microfinance

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Plus approach promoting silvopastoral and agroforestal production systems. This model consists in delivering a combination of credit (by FDL) and technical assistance (by Nitlapan-UCA). In some cases, this model also included benefits such as reduced interest rates and/or economic incentives conditional upon specific land-use changes (similar to the idea of PES). The increasing threat of climate change and its effect on rural families´ vulnerability motivates both institutions to keep expanding and improving their Microfinance Plus approach and to act towards climate change mitigation and adaptation. In addition to their own efforts, both institutions have also been involved in international projects which allowed them to experiment and learn. These include the Global Environment Facility’s Central American Markets for Biodiversity (CAMBio), a green microfinance project which ran from 2009 until 2013. Nitlapan-UCA also participated in the Regional Integrated Silvopastoral Management Programme (RISEMP), which was a World Bank-Global Environment Facility PES project running from 2002 to 2007.

2.2.1 Climate Change Adaptation in Coffee 2.2.1.1  Climate Change and Coffee Production In the Nicaraguan coffee producing regions, climate change is mainly considered from an adaptation perspective. Coffee production is less often associated to deforestation and greenhouse gas (GHG) emissions, especially in comparison to cattle raising. When associated to mitigation efforts, coffee is rather perceived as a potential positive contribution to carbon capture as compared to the rivalling food staple, vegetables or cattle production.3 With regards to adaptation, the key perceived problem is the (present and expected) gradual rise in temperature and an increase in rainfall variability. These evolutions make the future of coffee production in Nicaragua increasingly uncertain. The International Center for Tropical Agriculture (CIAT) estimated that with the forecasted annual rise of 2.1 degree Celsius by 2050 it will no longer be possible to produce coffee in Nicaragua under 700 m.a.s.l. (Läderach et al., 2012); a ­threshold

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below which a large portion of coffee production is currently located. This expected impact of climate change also threatens hundreds of livelihoods in the coffee producing region of La Dalia, the municipality in Northern-Central Nicaragua where our research took place. Subsequently, it poses a risk to the predominant coffee portfolio of the MFIs in that region. In 2016, around 90% of all FDL loans in La Dalia were destined to coffee production. Local farmers and MFIs no longer perceive climate change as a merely hypothetical, medium-term threat. Indeed, present-day negative effects on coffee yields are attributed to rising temperatures and rainfall variability (Ramírez, Ordaz, Mora, Acosta, & Serna, 2010). Changes in temperature and rainfall patterns are expected to alter the production cycle (flowering, berry growth and ripening), which in turn would result in fewer, smaller and lower quality grains and consequently reduce coffee income (Bedmar Villanueva, López Noriega, Bucardo, & van Zonneveld, 2016). Furthermore, altering weather conditions also induce a higher incidence of diseases, leading to yield reductions and the loss of plantations. The most severe crisis in the Central American coffee sector in years—the roya or coffee leaf rust outbreak—is often being attributed to climate change (Avelino et al., 2015; Mendoza, 2013). After the 2011–2012 harvest, the disease left 20% of national coffee in need of renovation (Avelino & Rivas, 2013). Clearly, these real and perceived negative effects of climate change further complicate the inclusion of poor families in the coffee sector. Indeed, coffee farmers were already facing vulnerability to price fluctuations, challenging market access conditions and poor governance and lack of transparency in cooperatives (Mendoza, 2017). The dominant reaction to the coffee rust was the conversion of ‘old plantations’ into intensified monoculture coffee plantations. It promoted an aggressive change to higher yielding and more input-dependent coffee varieties (in particular Catimor), also held to be resistant to roya. Given higher plant densities, these varieties are also considered adequate to address reduced productivity. An alliance of local (chemical) input suppliers, mainstream processing-exporting companies and (larger) entrepreneurial coffee plantation owners promoted this conversion. This alliance represents the actor coalition which engendered the ‘monoculture

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p ­ athway’, which focuses on producing high volumes of undifferentiated coffee.4 This is the dominant pathway in most of the coffee territories of northern Nicaragua. There are several factors that led to this monoculture production system becoming the dominant development pathway. First, this production system contributes to export-oriented production, where the concentration of power in the value chain lies in few processing and trade companies. Furthermore, the monoculture coffee production system aligns with expectations of cheap food products and short-term productivity thinking (IPES-FOOD, 2016). However, field observation has indicated that the promotion of this development pathway also implicitly generates exclusion from significant outside support of families of smaller peasant producers. They cannot or do not want to follow the monoculture pathway. This can be due to having insufficient means to keep up with the required technical-managerial practices and/or having other complementary motivations and values, including food security and risk-­ reducing strategies. One can also observe that the search for greater short-­ term production does not consider the negative effects this generates in the short and long term, in terms of land concentration, soil fertility, loss of biodiversity, water pollution and so on, which are associated with the high use of agrochemicals and the relative reduction of shadow trees which the high yield, intensive monoculture requires.

2.2.1.2  Th  e Microfinance Plus Approach to Support Coffee Farmers’ Adaptation to Climate Change For its importance as one of the main export products in Nicaragua, the coffee sector has a privileged position in credit markets. It is one of the rural sectors with most access to credit, including microcredit. The coffee rust crisis, exacerbated by production loss due to excessive rainfall during coffee ripening in 2015, generated concern in the microfinance sector. As a reaction to these crises, FDL expanded its Microfinance Plus package (credit and technical assistance) to all its coffee credits. Already before the coffee rust crisis, FDL and Nitlapan-UCA had been implementing this

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model in the context of the CAMBio project. This project aimed at enhancing biodiversity in Central America through environmentally conditioned microfinance. In this  project, FDL’s strategy consisted in complementing credit and technical assistance with environmentally conditioned grants (bio-premiums, as some sort of PES amounting to 14% of the loan principal) for the establishment of agroforest systems in coffee plantations. In 2013, because of the coffee rust crisis and the end of the CAMBio project, the declared aim was adjusted. Whereas the earlier Microfinance Plus package focused on promoting biodiversity and good environmental practices, the strategy now mainly aimed at helping families cope with climate change-related hazards. More concretely, FDL and NitlapanUCA wanted to help reduce the families’ income vulnerability—related to yield reductions or damages in the plantations—through the renovation of coffee plantations and the improvement of their productivity. This also included a change to the allegedly more rust-resistant Catimor variety. The yield-oriented Nitlapan-UCA technicians had already promoted this variety before the crisis for its capacity to adapt to higher temperatures and its higher yield  when  the right techniques are adopted. This ‘technification’ includes an increased exposure to sun and the utilisation of more chemical inputs to guarantee at least two fertilisations and two leaf protection cycles. To make this technical assistance model financially sustainable for the technical assistance provider, there are in principle four to five farm visits per client of which the producers pay between 50% and 100% of the costs, depending on the credit amount. The credit official’s performance is measured in terms of credit allocation and repayment, and the technician’s performance is measured in terms of yields increased. Therefore, to guarantee the expected targets, the topics of the visits are defined beforehand by the technical staff, while the last visit consists in a yield estimation. The model strives for a synergy between technical assistance and client monitoring in view of risk reduction, both for the farmer and for the MFI. Despite methodological difficulties to determine what changes can be attributed to the financial and technical services, Marín (2016) suggests that the FDL and Nitlapan-UCA model had a positive impact on coffee yields during 2013–2016. Indeed, the model appeared to have a

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clear positive impact for FDL in terms of repayment rates as well as a reduction of its transaction costs. The visits of the extension officer— mostly paid by the producers—reduce the number of visits by credit officials, moderate the incidence of coffee rust in existing plantations (Mendoza, 2013) and make the renewal of loans faster (Marín, 2016; Romero, Flores, & Bastiaensen, 2016). The analysis of this experience in La Dalia showed that these policies were very much in line with the reaction to the coffee rust crisis through denser and input-intensive Catimor plantations, which is the kind of solution proposed by the powerful coffee stakeholders who are wed to the dominant coffee monoculture pathway we discussed earlier. This has both social and ecological implications. Socially, this approach tends to exclude smaller farmers who face many constraints to adopt and benefit from coffee monoculture (Bastiaensen, Huybrechs, Forcella, & Van Hecken, 2015; Bastiaensen et al., 2016) and who often have more variegated motivations. Therefore, they historically tend to prefer more diversified, agroforestry production systems, crystallised in what could be identified as a subaltern diversification pathway, which features cocoa, plantains, fruits, staples and/or cattle besides coffee (sometimes ‘specialty’ coffee) as an integrated production system (Bastiaensen, Huybrechs, Forcella, & Van Hecken, 2015). FDL’s original Microfinance Plus package does not match well with these peasant strategies, but rather illustrates how the dominant pathway approach to the coffee rust crisis becomes ‘naturalised’ and garnered decisive support from FDL/Nitlapan-UCA. This becomes clearer when we look at the distribution of credits and evaluate the lenses with which FDL/Nitlapan-UCA look at their credit and technical assistance strategies. The proportion of clients classified as ‘subsistence farmers’5 in the portfolio is higher in areas where also subsistence farmers are more prone to focusing on coffee rather than the more diversified pathway (Romero et  al., 2016). This strong inclination towards supporting farmers who have a stronger focus on coffee production rather than the ones with a more diversified strategy indicates the problems of the narrow, standardised response model. It  promotes only one exclusive strategy for adaptation to the climate change-related coffee crisis and is incapable to match the variegated strategies, motivations and perspectives of the different types of families present. Hence, poorer producers can be excluded

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due to the observed mismatch between the promoted model and the endogenous local dynamics. Additionally, they face barriers in being ­recognised as creditworthy, as the cash crop coffee is the main measure for estimating the repayment capacity. From an ecological point of view, the adopted one-size-fits-all response to the coffee rust outbreak and the expected changes in climatic conditions pose serious questions and have generated concerns and doubts about the adequacy of the initial standardised response, both in general and in the FDL specifically. In light of the (uncertainty of ) climate change impacts and the earlier-described preferences and limitations of small-­ scale coffee/diversified farmers, increasing farmers’ dependency on coffee and fertilisation could even be considered as a maladaptation strategy (Fenton et al., 2017) or a negative adaptation strategy (Ellis, 2000). It reduces households’ flexibility to adapt and it makes them more vulnerable to future crises (Bacon, Sundstrom, Stewart, & Beezer, 2017). For instance, there have been recent reports of coffee leaf rust affecting supposedly more resistant Catimor plantations (Martínez, 2017). The incidence of rust in this variety would be devastating given the increasing importance and high presence that this variety currently has gained in the region. Additionally, the focus on coffee rust has tended to have a blinding effect on other diseases and plagues (such as ojo de gallo) which can also be devastating to the roya-resistant varietals. Regardless of suchlike sanitary crises, the future of coffee production in certain (lower) areas is questionable altogether, hence the need to consider a more integrated and radical approach (Bacon et al., 2017). Another indication of a tendency to stick to a given intervention or prescription is at the level of the technical assistance. If producers are not able or willing to implement all the technician’s recommendations, and therefore do not obtain the expected result, this is generally not interpreted as a failure of the model to actually help them to adapt to climate change. Rather, it is often attributed as a failure caused by alternative perceptions or motivations, understood as a cultural resistance of the families to change and progress. However, with the technical assistance topics being defined beforehand and applied in a standardised fashion in different regions, the conditions for the intended two-way dialogue between producers and technicians are absent. In practice, this often ends up becoming a sort of monologue where the

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technicians impose standardised one-size-fits-all prescriptions to all types of producers. Receiving a relatively expensive ‘prescription’ (in terms of agrochemical inputs), with a high uncertainty of its pertinence to the farm’s agro-­ecological characteristics and the family’s needs, may restrict the farmers to adopt the recommendations. In fact, an increasing number of clients ask for the inclusion of soil studies as part of the technical assistance, in order to have more appropriate and tailored recommendations. Moreover, families take several factors into account, such as food security, availability of family labour force or less stationary income. These variegated factors are at the core of the diversification pathway and show that the adoption of a given technology may not depend exclusively on the certainty of being functional and/or profitable. The understanding of these factors requires more dialogue than what has so far been observed in the technical assistance and the policy prescription of credits for higher yielding coffee. It requires a better match to the context-specific socio-­institutional dynamics, while avoiding the exclusive adoption of standard panacea. This initial response might thus represent a classical example of the “‘clos[ing] down’ too rapidly to a small set of decision alternatives” (Wise, et al 2014: 327). It also makes an excellent case for ‘opening up’ “policy processes to wider participation, thus increasing the diversity of values and ideas in decision-making”. Clearly, the neglected ‘diversification pathway’—which is preferred by the poorer peasant farmers and sometimes stigmatised as a remnant of an undesirable, backward past—regains relevance. With increasing concerns over low altitude coffee, FDL and Nitlapan-UCA are increasingly conscious of the risks that an exclusive dependence on coffee engenders for their clients, their social mission and their own financial sustainability. Currently, FDL is therefore opening up space in its portfolio for diversification strategies and is trying to discern changes needed in terms of financial products and practices. In La Dalia, cocoa production now receives increasing attention as an alternative adaptation strategy. However, there is a clear risk of falling into the trap of thinking about this strategy with the same monoculture logic, pretending that cocoa will become the coffee substitute in areas where it will not be possible to continue producing coffee. It could be wiser to ‘open up’ perspectives for different views on ‘pathways to sustainability’.

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FDL and Nitlapan-UCA face strong short-term barriers to change the tendency to define a small set of straightforward policies. One of them is the financial sustainability of the provision of technical assistance. The inclusion of other kind of studies, such as soil studies and spending more time in the territories to be embedded of its dynamics, increases the transaction and operational costs in the short term and further increases the heavy work load of the technicians. Nevertheless, changes in the conceptual framework of the model also imply changes in the operational strategy, where less expensive and more collective strategies could be found. As this would involve the inclusion of other stakeholders with similar objectives this could contribute to a cost reduction.

2.2.2 M  itigation in Cattle Raising in Nicaraguan Agricultural Frontier 2.2.2.1  The Environmental Pressure of Cattle Production The problem of cattle raising in Nicaraguan agricultural frontiers is more often related to mitigation than adaptation. This does not mean that adaptation measures are not necessary; in the expanding dry zones, livestock is affected by water scarcity, climate irregularities and temperature changes. However, one of the country’s biggest environmental problems is the accelerated rate of forest destruction by the advancement of the agricultural frontier, due to exploitation of timber and extensive livestock production. This threatens some of  the  largest biosphere reserves in Central America (the Bosawas Reserve in the North and the Indio-Maiz Reserve in the South). The conversion of dense rainforest into crop land and natural pastures contributes significantly to GHG emissions, while methane emissions from poorly fed cattle add to the negative global warming balance. Historically, the availability of abundant land (Maldidier, 1993), the consolidation of extractive export-oriented meat markets (Myers, 1981) and patronage governance that involve dynamic interactions of actors with unequal resources, knowledge and power (Maldidier & Martínez, 2015; Merlet, Collado Solís, Lemoine, & Polvorosa Narváez, 2015;

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Polvorosa, 2013) are part of the institutional bricolage that engendered a dominant ‘extensive livestock pathway’ in the agricultural frontier. In this pathway, the guiding idea for a ‘successful producer’ is that of a (very) large landholder with over hundred heads of cattle moving around in huge farms in different climate zones, practising transhumance to deal with rainy and dry seasons without any need to invest in on-farm fodder production. A lack of (wage) labourers constrains on-farm intensification, in particular in potentially more rewarding dairy production requiring significant labour for milking, better grazing management and/or fodder crop production and provisioning (Polvorosa, 2013). The route to achieve this ‘success’ is the permanent accumulation of land and cattle. As land remains relatively cheap (something that is slowly changing), the strategy to accumulate land outcompetes any strategy to produce more value added per unit of land (Maldidier, 1993). Economic incentives and cognitive-motivational systems induce farmers to buy more land, usually from more capital-constrained smaller farmers that face soil fertility issues (due to insufficient rotation) and/or need more land to guarantee their children’s heritage (Merlet et  al., 2015). Given capital constraints, these poorer farmers are dependent upon clientelistic patronage relationships through which they can obtain cattle in a share-­ cropping arrangement from the larger cattle ranchers allowing them to make use of the underutilised pastures on eroded soils. These arrangements consolidate the advantages of the larger cattle ranchers, appropriating the larger part of the value added, thus often converting clientelistic patronage into a prelude of future land purchase when the smaller farmer decides to move further east (Merlet et al., 2015). The influential capital-rich cattle ranchers that buy more land also have decisive capacity to condition outsiders’ actions, thus generating a socio-institutional dynamic that consolidates the ‘extensive livestock pathway’. This pathway generates opportunities for a small number of large cattle ranchers, while imposing barriers to alternative pathways for smaller producers. Many of them participate in an emergent cocoa value chain, which offers a new high value-added alternative that allows consolidation of viable livelihoods with less land (Maldidier & Martínez, 2015).

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2.2.2.2  Microfinance Plus to Transform Extensive Cattle More land-intensive, silvopastoral cattle systems offer an alternative to reconvert livestock production into a more environment-friendly system, while helping poorer farmers consolidate their farms and slow down the advancement of the agricultural frontier (Pagiola et  al., 2007). The silvopastoral strategy consists in increasing trees in pastures (fences and shadow trees), improving pasture management with more divisions and rotational grazing as well as the cultivation of fodder crops (Pagiola et al., 2007). The proposed change aims to increase onfarm carbon capture and to protect water sources and soil fertility. These technical changes produce better environmental outcomes (in particular an expected decrease in farm expansion and deforestation) and enhance livestock productivity, increasing the extremely low current carrying capacity (less than one animal per hectare). Given these perceived advantages, environmentally concerned stakeholders (nongovernmental organisations—NGOs; associations; cooperatives) promote the ‘silvopastoral package’ as both sound sustainable business and good stewardship. In line with these perspectives, FDL and Nitlapan-UCA have been providing credit and technical assistance to cattle producers. Aware of the environmental and social pitfalls of the ‘extensive livestock pathway’, they are concerned about a risk to indirectly finance the advancement of the agricultural frontier and have therefore adopted a stringent ‘Microfinance Plus’ approach in which cattle credit is conditioned to silvopastoral intensification and related technical assistance. Policies prohibiting loans for the purchase of land and a ‘no credit’ buffer zone of ten miles around the Bosawas nature reserve were also adopted. There is also increasing support for agroforestry diversification (including cacao). As it has been argued that the improvement of farm profitability, protection of water sources, carbon capture and soil fertility through introduction of the silvopastoral systems may not be enough to incentivise producers (Pagiola et al., 2007), the Microfinance Plus approach has been complemented with PES when possible (in particular in the RISEMP and CAMBio pilot projects).

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However, the results of these policies are not satisfactory. Despite the widely supported technical model, most producers seem to doubt its usefulness. It has indeed been difficult to find sufficient producers-clients, really wanting to buy into the conditioned credit-technical assistance package, with many of them often paying for, but not complying with the silvopastoral technical recommendations. The RISEMP project produced substantial changes towards silvopastoral practices, allowing it to be used as an exemplary success story promoting market-based PES (Pagiola et al., 2007; Van Hecken, Bastiaensen, & Windey, 2015). Yet, the changes cannot be strictly attributed to the economic incentives or to the technical assistance provided by the project (Van Hecken & Bastiaensen, 2010). The project indeed benefited from a broader dynamic of dairy production caused by the expansion of collection centres and good prices for milk. The conclusion that behavioural changes were solely motivated by individual PES-related economic incentives and/or technical assistance was also mistaken. Indeed, the presence of the project generated a collective local cognitive process, where information and motivations were widely shared, thereby shaping all producers’ behaviour, as proven by the fact that producers who received neither PES-incentives nor technical assistance introduced equally important changes (Van Hecken & Bastiaensen, 2010). The significant temporal presence of the PES project strongly influenced the overall acceptability and circulation of silvopastoral ideas about the cattle-dairy production of the future. However, despite the substantial positive changes, the longer term contribution of the project was less evident than suggested in its ‘epistemic circulation’ as a successful PES pilot project. Five years after the RISEMP project ended, it was found that many silvopastoral investments (pasture improvements and fodder crops) did not receive maintenance and disappeared (Huybrechs, Bastiaensen, Forcella, & Van Hecken, 2015). After the end of the project, dominant ideas and narratives about cattle raising slipped back in line with the extensive model (e.g. arguing that water scarcity did not allow to sustain improved pastures and fodder crops). Furthermore, the 2009–2010 negative shock in meat prices and the related debt crisis (Bastiaensen, Marchetti, Mendoza, & Pérez, 2013)

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brought farmers to re-exploit their ‘conservation areas’ and to sell trees (Huybrechs, Bastiaensen, Forcella, & Van Hecken, 2015). Most significantly, only five years after the termination of RISEMP, 29 of the 123 participants— with one exception all small (18) and medium-sized (10) producers—had sold their farms to larger producers and moved further east. So even while RISEMP focused silvopastoral intensification upon smaller and mediumsized producers, it was not successful in avoiding the logic of land concentration and the related out-migration of smaller farmers to the agrarian frontier (Huybrechs, Bastiaensen, Forcella, & Van Hecken, 2015). Following this analysis, we argue that change cannot be promoted solely by a Microfinance Plus intervention at the individual client level. Behavioural change will only be possible and sustained if broader social, political and cultural transformations in the emergent territorial pathways can be achieved, such that cognitive-motivational frameworks as well as economic incentives are changed and no longer push the expansion of the extensive system. To be more successful, the FDL/ Nitlapan-­UCA Microfinance Plus approach should therefore articulate with other local and external stakeholders, helping to reshape territorial governance. Producer strategies are not shaped from individual interest and motivations only; local and national institutions and the territorial governance also influence what is desirable and feasible for them to do or not. Although credit, technical assistance and incentives are definitely relevant and necessary to help families make the required investments to consolidate alternative pathways, those services cannot be simply designed from the outside and expect to succeed in promoting change within the local communities (Van Hecken, Bastiaensen, & Huybrechs, 2015). Policies looking to mitigate the environmental impact of livestock production need to become embedded into the existing socio-institutional arrangements which condition local governance and producer’s behaviour (Bermúdez et al., 2015; Van Hecken, Bastiaensen, & Windey, 2015). Here it is needed to understand the different dynamics and identify different pathways to sustainability, according to families’ motivations, interest and values and the context in which they develop their strategies.

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2.3 Conclusions Both the coffee and the livestock case-study have similar lessons about the role of microfinance in climate change mitigation and/or adaptation. First, it is clear that a merely individualistic technical-economic client-­ oriented approach falls short of capturing the crucial links between the changes in individual behaviour that are promoted through access to financial and non-financial services and its interconnection with the broader enabling and constraining territorial pathways in which they are inevitably embedded. Substantial and sustainable changes in livelihood strategies as well as impact on a required territorial scale depend upon the transformation of these pathways. Clearly, it is beyond the scope of microfinance alone, and even beyond that of ‘Microfinance Plus’ alone, to engender such a more encompassing transformation of the dominant territorial pathways. Yet, since microfinance’s  environmental impact depends upon the interaction of its services with the pathway dynamics, it cannot ignore these. Also, microfinance inevitably interacts with, and thus also affects, the relevant power-laden processes of institutional bricolage. This implies that microfinance can (attempt to) play a role in helping to change prevailing local perceptions and to redress prevailing power imbalances, allying with less powerful stakeholders. Similarly, it could also fall into the trap of (un) consciously siding with the more powerful stakeholders promoting the dominant, naturalised pathways. Another important dimension of the role of microfinance (plus) in the context of climate change is that many issues concerning the best way to adapt to the consequences and to mitigate the causes of climate change are not clear at all. We face a challenge with intrinsic uncertainty as well as variegated perceptions and interests with respect to what has to be done. In the face of the perceived threat of rising temperature, should we adapt coffee production systems or diversify and even abandon coffee altogether? Or similarly, in the face of deforestation and cattle-related GHG emissions, should we change the nature of monoculture cattle raising, promote diversified agricultural-cattle systems or even abandon cattle

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altogether? Some of the emerging literature about the role of microfinance in climate change adaptation or mitigation often implicitly (but wrongly) assumes that the stakeholders know and agree what to do in reaction to the emergent problems. In practice, this is clearly not the case as we are in a realm of adaptive governance with gradual learning, evolving perceptions and shifting consensus, mediated by differentiated—local and possibly global—(perceived) interests and motivations. Here, one key lesson is to avoid “closing down too quickly and narrowly” on specific strategies, in particular if they are promoted as ‘the’ solution to the emerging climate change problems or opportunities. This risks a too exclusive support for particular (almost by definition more powerful) stakeholders, while not necessarily contributing to increase the capacity of local societies in the face of the climate change challenges. We know from complexity science that resilience of a system depends upon its diversity and its flexibility, not upon its being wed to one particular rigid ‘solution’. A more diverse approach is thus advised and often will have the additional advantage of being able to build on and ally with a more diverse set of stakeholders, including the less visible and less powerful ones who tend to be neglected in the dominant territorial pathways. This diverse approach can not only involve individual producers, technicians and microfinance institutions; it requires the involvement of a more diverse set of stakeholders, value chain actors, local and national governments, NGOs, cooperatives, among others, which shape overall local territorial dynamics.

Notes 1. Concept taken from Bierschenk and Olivier de Sardan (1998, p.  240), defined as “a place of concrete confrontation between social actors interacting on common issues”. The concept underlines that bargaining processes do not only take place within ‘political’ bodies, like parliaments or village councils, but in every ‘real’ meeting place of actors around resources or opportunities. 2. This resonates with the well-known finding that ‘microcredit alone’ is not a panacea for poverty reduction and that attributing impact is difficult

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due to complex interactions with mediating processes (Garikipati, Johnson, & Guérin, 2017). 3. Although specialised studies (Van Rikxoort & Schroth, 2014) indicate differences between different types of coffee production systems in terms of their contribution to carbon capture—with a clear advantage for more diversified, dense peasant systems over monocropping coffee plantations—this is not very present in the current debate on the ground. 4. The alternative strategy, often promoted in the Fair Trade cooperative movement, is to build upon differentiated ‘specialty’ coffee with social, ecological or other attributes. This strategy is less focused on increasing yield and aims to increase value added per unit of coffee produced. 5. FDL categorises its clients on the base of their estimated total capital: campesino de subsistencia (subsistence peasant), campesino finquero (peasant farmer), finquero (capitalised farmer) (Romero et al., 2016).

References Agrawala, S., & Carraro, M. (2010). Assessing the Role of Microfinance in Fostering Adaptation to Climate Change. OECD Environmental Working Paper No. 15, OECD Publishing. Ambrosio-Albalá, M., & Bastiaensen, J. (2010). The New Territorial Paradigm of Rural Development: Theoretical Foundations from Systems and Institutional Theories. Antwerp: IOB Discussion Paper 2010.02. Avelino, J., Cristancho, M., Georgiou, S., Imbach, P., Aguilar, L., Bornemann, G., et al. (2015). The Coffee Rust Crises in Colombia and Central America (2008–2013): Impacts, Plausible Causes and Proposed Solutions. Food Security, 7(2), 303–321. Avelino, J., & Rivas, G. (2013). La roya anaranjada del cafeto. Retrieved from http://hal.archives-ouvertes.fr/hal-01071036 Bacon, C., Sundstrom, W., Stewart, I., & Beezer, D. (2017). Vulnerability to Cumulative Hazards: Coping with the Coffee Leaf Rust Outbreak, Drought, and Food Insecurity in Nicaragua. World Development, 93, 136–152. Bastiaensen, J., Huybrechs, F., Forcella, D., & Van Hecken, G. (2015). Microfinance Plus for Ecosystem Services: A Territorial Perspective on Proyecto CAMBio in Nicaragua. Enterprise Development and Microfinance, 26(3), 292–306.

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Bastiaensen, J., Marchetti, P., Mendoza, R., & Pérez, F. (2013). After the Nicaraguan Non-Payment Crisis: Alternatives to Microfinance Narcissism. Development and Change, 44(4), 861–885. Bastiaensen, J., Merlet, P., & Flores, S. (2015). Rutas de Desarrollo en Territorios Humanos: Las Dinámicas de la Vía Láctea en Nicaragua. Managua: UCA Publicaciones. Bastiaensen, J., Huybrechs, F., Bermúdez, M., Flores, M., Romero, M., & Ramírez, J. (2016). Planting the Seeds of Inclusion: An Alternative Pathway for Coffee Productions. Passerelles, 3, 19–25. Bedmar Villanueva, A., López Noriega, I., Bucardo, E., & van Zonneveld, M. (2016). Caficultura y cambio climático en Nicaragua: Reflexiones sobre el papel de las políticas públicas y las cooperativas. Rome: Bioversity International. Berdegué, J., & Schejtman, A. (2008). Towards a Territorial Approach for Rural Development. Manchester: IDPM, School of Environment & Development. Bermúdez, M., Flores, S., Romero, M., Bastiensen, J., Merlet, P., Huybrechs, F., et al. (2015). ¿Es posible financiar la gandería en la fronter agrícola de Nicaragua de manera sostenible? Managua: Policy Brief, Nitlapan. Bierschenk, T., & Olivier de Sardan, J. (1998). Les Pouvoirs au Village: Le Bénin Rural entre Démocratization et Décentralisation. Paris: Karthala. Bromley, D.  W. (2012). Environmental Governance as Stochastic Belief Updating: Crafting Rules to Live. Ecology and Society, 17(3), 14. Cleaver, F. (2001). Institutional Bricolage, Conflict and Cooperation in Usangu, Tanzania. IDS Bulleting, 32(4), 26. Cleaver, F. (2012). Development Through Bricolage: Rethinking Institutions for Natural Resource Management. Abingdon: Routledge. Cranford, M., & Mourato, S. (2014). Credit-Based Payments for Ecosystem Services: Evidence from a Choice Experiment in Ecuador. World Development, 64, 503–520. De Haan, L., & Zoomers, A. (2005). Exploring the Frontier of Livelihoods Research. Oxford: Institute of Development Studies. Ellis, F. (2000). A Framework for Livelihood Analysis. In F. Ellis (Ed.), Rural Livelihoods and Diversity in Developing Countries (pp.  28–51). Oxford: Oxford University Press. Fenton, A., Paavola, J., & Tallontire, A. (2015). Microfinance and Climate Change Adaptation: An Overview of the Current Literature. Enterprise Development and Microfinance, 26(3), 262–273. Fenton, A., Paavola, J., & Tallontire, A. (2017). The Role of Microfinance in Household Livelihood Adaptation in Satkhira District, Southwest Bangladesh. World Development, 92, 192–202.

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Garikipati, S., Johnson, S., Guérin, I., & Szafarz, A. (2017). Microfinance and Gender: Issue, Challenges and the Road Ahead. The Journal of Development Studies, 53(5), 641–648. Hammill, A., Matthew, E., & McCarter, E. (2008, September). Microfinance and Climate Change Adaptation. IDS Bulletin, 39(4). Huybrechs, F., Bastiaensen, J., & Forcella, D. (2015). Guest Editorial: An Introduction to the Special Issue on Green Microfinance. Enterprise Development and Microfinance, 26(3), 211–214. Huybrechs, F., Bastiaensen, J., Forcella, D., & Van Hecken, G. (2015). Enfrentando la vía ganadera extensiva: potencialidades y limitaciones de los pagos por servicios ambientales y de las microfinanzas verdes. In J. Bastiaensen, P. Merlet, & S. Flores (Eds.), Ruta de desarrollo en territorios Humanos: Las dinámicas de la vía láctea en Nicaragua (pp.  373–402). Managua: UCA Publicaciones. Huybrechs, F., Bastiaensen, J., Forcella, D., & Van Hecken, G. (2016). La microfinance pour les services environnementaux: Enseignements en matiere de politiques du Proyecto CAMBio au Nicaragua. Revue Tiers Monde, 125–154. IPES-FOOD. (2016). From Uniformity to Diversity: A Paradigm Shift from Industrial Agriculture to Diversified Agroecological Systems. International Panel of Experts on Sustainable Food Systems. Läderach, P., Zelaya, C., Ovalle, O., Garcia, S., Eitzinger, A., & Baca, M. (2012). Escenarios del impacto del clima futuro en áreas de cultivo de café en Nicaragua. Cali, Colombia: CIAT. Leach, M., Scoones, I., & Stirling, A. (2010). Dynamic Sustainabilities: Technology, Environment, Social Justice. London: Earthscan. Maldidier, C. (1993). Tedencias actuales de la frontera agrícola en Nicaragua. Managua: Nitlapan. Maldidier, C., & Martínez, S. (2015). Apoyar una ruta campesina de desarrollo en una antigua frontera agrícola: dinámicas territoriales y prácticas de desarrollo en Río Blanco. In J. Bastiaensen, P. Merlet, & S. Flores (Eds.), Rutas de Desarrollo en territorios humanos: Las dinámicas de la vía Láctea en Nicaragua (pp. 313–351). Managua: UCA-Publicaciones. Marín, Y. (2016). Evaluando la sinergia entre los servicios financieros y no financieros en la producción cafetalera. Managua: Nitlapan – UCA. Martínez, L.  E. (2017, Abril 23). Alerta por amenazas a plantíos de café en Jinotega y Matagalpa. La Prensa. Retrieved from http://www.laprensa.com. ni/2017/04/23/departamentales/2218524-alerta-amenazas-plantios-cafejinotega-matagalpa

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Mendoza, R. (2013). El Café en tiempos de la roya. Envío Ed. 372. Mendoza, R. (2017). Toward the Reinvention of ‘Fair Trade’. Retrieved from http://peacewinds.org/wp-content/uploads/2017/02/articulo-comerciojusto-version1-ene-2017-1-eng.pdf Merlet, P., Collado Solís, C., Lemoine, L., & Polvorosa Narváez, J.  (2015). Acceso a tierra y rutas de desarollo en el municipio de Río Blanco. In J. Bastiaensen, P. Merlet, & S. Flores (Eds.), Rutas de desarrollo en territorios humanos: Las dinámicas de la vía láctea en Nicaragua (pp. 191–228). Managua: UCA Publicaciones. Myers, N. (1981). The Hamburger Connection: How Central America’s Forest Become North America’s Hamburgers. Ambio, 10(1), 3–8. Ostrom, E., & Cox, M. (2010). Moving Beyond Panaceas: A Multi-Tiered Diagnostic Approach for Social-Ecological Analysis. Environmental Conservation, 37(4), 451–463. Pagiola, S., Ramírez, E., Gobbi, J., de Haan, C., Ibrahim, M., Murgueitio, E., et al. (2007). Paying for Environmental Services of Silvopastoral Practices in Nicaragua. Ecological Economics, 64, 374–385. Peck, C., & Pearce, D. (2005). Gestión de riesgos y diseño de productos para las microfinanzas agrícolas: Características de un modelo emergente. Estudio Especiales CGAP, (11), 1–60. Polvorosa, J. (2013). Opportunities and Constraints for Small and Medium-Sized Farmers in the Context of Booming Dairy Value Chains in Nicaragua: Case-­ Study of Matiguás. Antwerp: University of Antwerp, IOB. Ramírez, D., Ordaz, J., Mora, J., Acosta, A., & Serna, B. (2010). Nicaragua: Efectos del cambio climático sobre la agricultura. México: CEPAL. Romero, M., Flores, S., & Bastiaensen, J. (2016). Entendiendo las complejidades del territorio, las oportunidades de desarrollo y los desafíos para las microfinanzas Plus. Managua: Cuaderno de Investigación No. 53. UCA Publicaciones. Schuite, G., & Pater, A. (2008, December). The Triple Bottom Line for Microfinance. Microfinance Getaway. Shove, E. (2010). Beyond the ABC: Climate Change Policy and Theories of Social Change. Environment and Planning, 42, 1273–1285. Stirling, A. (2006). Analysis, Participation and Power: Justification and Closure in Participatory Multi-Criteria Analysis. Land Use Policy, 23(1), 95–107. Van Hecken, G., & Bastiaensen, J. (2010). Payments for Ecosystem Services in Nicaragua: Do Market-Based Approaches Work? Development and Change, 13, 421–444.

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Van Hecken, G., Bastiaensen, J., & Huybrechs, F. (2015). What’s in a Name? Epistemic Perspective and Payments for Ecosystem Services Policies in Nicaragua. Geforum, 63, 55–66. Van Hecken, G., Bastiaensen, J., & Windey, C. (2015). Towards a Power-­ Sensitive and Socially-Informed Analysis of Payments for Ecosystem Services (PES): Addressing the Gaps in the Current Debate. Ecological Economics, 120, 117–125. Van Rikxoort, H., & Schroth, G. (2014). Carbon Footprints and Carbon Stocks Reveal Climate Friendly Coffee Production. Agronomy for Sustainable Development, 34(4), 887–897. Wise, R., Fazey, I., Stafford Smith, M., Park, S., Eakin, H., Archer Van Garderen, E., et al. (2014). Reconceptualising Adaptation to Climate Change as Part of Pathways of Change and Response. Global Environmental Change, 28, 325–336.

3 Remittances: Loan Funds for a Rural Economy? Evidence from the Kayes District (Western Mali) Michel Namé and Philippe Lebailly

3.1 Introduction Remittances from migrants represent a considerable financial windfall according to the African Development Bank (AfDB, 2007, p. 61) and the World Bank (2015, pp. 4–5; 2017, pp. 2–3). Most estimates of remitted amounts are based only on remittances through formal channels (money transfer providers, banks and post offices).1 The assessment of flows through informal channels is usually done through banknote swaps (AfDB, 2007, note3, p. 69). However, according to Freund and Spatafora (2005, p. 2), migrant remittances represent between 50% and 250% of the estimated amounts. Today, the concerns of international organizations, states and financial institutions only focus upon the minimization of transfer costs in order to reduce the use of informal channels and the risks associated with them (Bourenane, Bourjij, & Lheriau, 2011, pp. 110–112).

M. Namé (*) • P. Lebailly Faculty of Gembloux Agro-Bio Tech, University of Liège, Liège, Belgium e-mail: [email protected]; [email protected] © The Author(s) 2019 M. O’Connor, J. Silva Afonso (eds.), Emerging Challenges and Innovations in Microfinance and Financial Inclusion, https://doi.org/10.1007/978-3-030-05261-4_3

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Indeed, the reduction of these costs allows better quantification of the flows and an increase in the positive impact of remittances on the standard of living of households according to the AfDB (2007, p. 6). Despite their large volume, remittances may not be a substitute for a sustainable and liberating development effort (Gupta, Patillo, & Wagh, 2007, p. 43), as  it is accepted that a considerable part of the windfall is consumed instantly by beneficiaries including family members and local communities in the form of food, school and emergency health expenditures (AfDB, 2007, p. 23). While long-term economic development, reducing poverty and inequality in rural areas2 also require productive investment (World Bank, 2006, pp. 149–150), Lucas (1985, p. 372) explains that remittances have a negative impact on local agricultural production in the short term. That said, when invested in the long run, they allow increased cereal production and facilitate increased livestock numbers in sub-Saharan African countries. Notwithstanding this fact, Martin, Martin, and Weil (2002) cited by Rocher and Pelletier (2008, p. 31) indicate that less than 10% of remittances are allocated to local investment in the Comoros and Mali. The incentive for productive investment by households is therefore through financial inclusion policies (Rocher & Pelletier, 2008, p. 33) via microfinance institutions (MFIs).3 Gupta et al. (2007, p. 42) have shown a positive and significant impact of remittances on financial development in beneficiary environments. Remittances thus serve as a guarantee of access to microfinance for the improvement of agricultural production equipment, housing, health and education. But the prerequisites for providing this type of service are a stable financial situation and a rigorous organizational structure, indeed what most MFIs in sub-Saharan Africa do not have, according to Sander (2004, pp. 12–13). The usefulness of microfinance lies in its ability to improve family budgets and stabilize small local production companies, but does not claim to fight effectively against poverty (Fouillet, Guérin, Morvant-Roux, Roesch, & Servet, 2007, p. 333). As a result of major climactic shocks, productive investment suffers and microfinance does not, until now, have any effective means of absorbing this type of shock according to the French Agricultural Research Centre for International Development (CIRAD) (2002, p. 4). For Nabeth and Levy (2007, p.  186), guaranteeing a level of economic development would

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inevitably lead to a decrease in vulnerabilities in the rural world. The solution may come from crop insurance.4 A portion of the remittances could be insurance contributions paid to financial institutions, banks and insurance companies, who are responsible for making the transfers.5 Nevertheless, the complexity of crop insurance requires the active participation of governments and the full involvement of private insurers and financial markets (Nabeth & Levy, 2007, p. 187). However, subsidies for a crop insurance policy would be difficult for governments to support because of the very high proportion of farmers in the population, from 30% to 70% depending on the beneficiary country. This is quite apart from private insurers who fear fraud, moral risk and problems of adverse selection. In the same way, rural populations may often be reluctant to pay an insurance premium for an unpredictable future event (ibid.: 190–191).

3.1.1 A Customized Financial Product: Savings For Gubert (2008, p. 53) and Dendir (2017, p. 14), if it is not disputed that remittances from migrants have a resilience function against exogenous shocks, in this case climactic, it should therefore be readily accepted that these transfers differ from other capital sources since they are essentially intended for unsustainable and expenditures that are not  profit-­ oriented. As a result, vulnerable households need savings and insurance services more than traditional financial products (Fouillet et  al., 2007, p. 343). Certain subsidies would be more effective in the fight against poverty if they supported the implementation of savings networks using migrant remittances.6 In relation to this, Gupta et al. (op. cit.) showed that of households benefiting from remittances, the propensity to save is around 40%. But the long-term difficulty is to lead these savings to the financing of productive investments as a large part of remittance flows do not pass through formal channels in sub-Saharan African countries. However, the opposite may be possible in Mali, where the savings of the (banked) migrant invested at a rate of 3.5%7 could be used to finance a locally selected development project in the form of a loan at a borrowing rate of 14% (Gubert, 2008, p. 54). But the risks incurred would not

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be bearable for the borrower in the event of a shock. It is, therefore, the importance of the share of potential savings resulting from remittances, both formal and informal8 after their use that determines the possible economic development of the rural environment (Dendir, 2017, p.  3; Gupta et al., 2007, p. 40). Accordingly, is there really a saving capacity of households regularly receiving remittances from migrants regardless of the methods of use? If so, how is it to be formalized and used for local development? To try to answer these questions, we will focus on the Kayes region, Mali’s largest emigration basin, where remittances are usually received informally (AfDB, 2007, p. 23). There is little research on the possibility of savings from remittances received by recipient households, especially in West Africa. This chapter also attempts to fill this gap. To do this, we carry out an analysis of the composition of the Kayes village savings and self-managed credit banks (CVECAs9). In this way, a review of the history of the microfinance sector as the main instrument of financial inclusion of the poorest populations in the sub-Saharan context seems to be the prerequisite before the investigation of the presence of any kind of savings in CVECAs, considered as the basic microfinance institution model, and finally, its impact on agricultural productive investment.

3.2 Microfinance In the countries of the South, a significant proportion of the population does not have access to the financial services of commercial banks. According to Gentil and Servet (2002, p. 730), this share is estimated to represent 90% or even 100% in rural Africa. Also, in Latin America (Brazil), 85% of the adult population is reported not to have a bank account despite the importance of the geographical coverage of financial services.10 One would immediately want to think that banks are not very fond of this kind of clientele (rural or urban working class). However, this lack of interest on the part of banks in this category of the population is not a priori due to subjective aversion, but clearly responds to a quasi-­ inadequacy of their activities in relation to the banking habits of these

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populations. The constraints of immediate profitability and management rigidity, such as the use of prudential ratios, are characteristic of the way banks operate. These are believed to systematically prevent any deposit or withdrawal activity and the granting of small amounts of loans without substantial guarantees and with precise geographical location. It is the absence of these last two socio-economic aspects added to cultural traditions and solidarity which have shaped the financial practices within these populations who have been traditionally disadvantaged by formal finance. This led to the name informal finance taken up by Lelart (2006). Servet (1990, p. 92) even described it as insubordination from the formal system. According to Lelart (2006, p. 5), informal finance is presented as a set of savings and credit practices that are almost flexible and amorphous since they do not necessarily replicate a preconceived “modus operandi” styled approach. These practices are fundamentally based on relationships of trust and specific to the stakeholders—borrowers and lenders—who are likely to know each other personally and who are likely to decide for themselves how these financial exchanges will work. There are two different types. On the one hand, there are individual practices exercised by the money keeper or custodian as well as by the tontinier, also known as a travelling banker. The money keeper is a person of proven integrity recognized by the community (the village) to whom the savings of the inhabitants are entrusted. This could be a religious leader, a former civil servant or even a successful businesswoman who undertakes to return the amounts paid by savers on request, at any time and without any increase in savings, or any kind of remuneration for the service rendered. The custodian could also make loans in Niger, according to Tinguiri (1990, p. 190). Unlike the custodian, the tontinier in charge of savings moves to potential savers, traders in this case, at the markets to regularly recover identical amounts.11 The refund of the sums paid is made in full and for the period agreed in advance. In addition, the tontinier receives a payment for the security service he offers, withholding the amount of one instalment from the total amount returned to the investor. On the other hand, there are collective practices: tontines12 or credit mutuals such as rotational savings and credit associations (ARECs)

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according to Bouman (1977) cited by Lelart (2006, note 11). They bring together people from the same social background,13 from the same class, in the same geographical environment. Its least complex form—since there are some very sophisticated ones (see Lelart, 2006, pp. 10–11)— consists of bringing together a group of people—12 to make it simple— each month, so 12 times in a row that would each pay the same amount each time. At these meetings, the amount is collected by one of the group members as they go along until the end of the cycle. It is as if the first more advantageous beneficiary receives a loan from the other members and then undertakes to repay it, whereas the last least advantageous to receive the funds raised only recovered their deposit without any interest related to the waiting time. The warm and friendly atmosphere around this practice gives it a social rather than a financial character. The resumption of the cycle, as well as the enlargement of the circle by welcoming the new members, should be unanimously agreed by the group. In addition to this description, loan sharks14 could be added as an individual practice together with self-help associations as a collective practice in the informal sector (Camara, 1991, p. 3). That said, the loans granted or the savings mobilized are not expected to have a real impact on economic development and the fight against poverty. For Haudeville (1990, p. 80), informal savings are thought to finance only informal sector activities. Citing Servet (op. cit.), “the informal is self-financed by the informal” well summarizes the fact. The economic development that is necessary for the poor population requires an accumulation of sufficient and appropriate financial resources to support sustainable productive investment (Soedjede, 1990, p. 129). For Lelart (2006, p.  20), informal finance cannot play this role of accumulation apart from banks. In the informal sector, companies are created, lasting a few years for the most efficient and disappearing to give way to others of the same kind. “The future of the informal sector is to remain informal” Haudeville (1990, p. 81). Thus, microfinance has the potential to break this vicious circle created and fuelled by the informal sector. It can, therefore, be the intermediary sector between informal finance and the traditional banking system, the link or bridge between the working class and commercial financial institutions.

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Labie (1999) provides the following definition: Microfinance is the provision of financial services (usually credit and/or savings) to people engaged in productive activity, most often handicrafts or trade, who do not have access to commercial financial institutions because of their socio-economic profile. (As taken from Koloma, 2007, pp. 3–4)

This definition seems to state the role, delimit the scope of intervention and define the overall objective of microfinance. However, Poursat (2001) proposes a much more detailed definition: Microfinance is the provision of sustainable financial services to poor clients (including small self-employed workers or micro-entrepreneurs) who do not have access to the formal banking system. These financial services are most often credit and savings, but they may also be other specialized services (insurance, credit, leasing, etc.). (Also taken from Koloma, 2007, p. 3)

The idea should, in fact, be to be able to direct financial resources from the informal sector to the market economy so that they can also contribute to economic development and poverty reduction. As informal finance focuses on savings, microfinance is believed to place greater emphasis on the provision of microcredits, its main activity according to Guérin, 2000, p. 405). Microcredit refers to an amount borrowed from a microfinance institution (MFI) that generally does not exceed 50% of the gross national product (GNP) per capita. According to Lelart (2006, p. 25), the World Bank recommends a 30% cap. As a result, to achieve the objectives of economic development and poverty alleviation, an MFI should be able to deploy rapidly in space and time, to reach poor and highly disadvantaged populations and thus to improve their living conditions more or less significantly (Copestake, 2007, pp. 1723–24; Jégourel, 2008, p. 200). However, for Montalieu (2002, p. 28), microfinance alone is not sufficient to meet all these performance requirements, let alone to achieve the noble objective of poverty alleviation. Already, traditional microcredit appears to be aimed only at vulnerable populations on a recurrent basis, not at the poorest of the poor. It could allow the moderately poor to diversify their sources of

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income by mobilizing capital, but not to directly mitigate the emergence of risks15 (Guérin, 2004, p. 25). Hofmann and Marius-Gnanou (2005) cited by Koloma (2007, p.  2) believe that microcredit is not likely to improve the living conditions of the poorest people since it does not reach them. It may even increase the depth of poverty in the event of over-indebtedness. Furthermore, the less-populated rural environment with the highest number of poor people has actually little or no access to the financial services offered by MFIs (Labie, 2004, p. 21). They prefer richer areas, accentuating inequalities between already well-defined territories and leading to risks of saturation of the supply of services and over-indebtedness of clients (Guérin et  al., 2007, p.  106). However, according to the same authors, in the case of effective targeting of the very poor, microfinance services are not well adapted to demand, which happens to be very heterogeneous and complex. Gentil and Servet (Gentil & Servet, 2002, pp. 730–731) and Granger (2006, pp. 89–90) show that, in the end, there is an insidious junction between the fields of MFIs and commercial banks. Indeed, while some MFIs are working in their development to keep in mind their original credo of providing financial services to those excluded from the banking system, others ultimately now prefer to open up to the formal sector by offering services to the upper class of the urban informal sector. However, this could be an alternative attributed to an operational restructuring due to poor management and out of a concern for greater profitability. In addition, there has also been a descent of some commercial banks into the MFI field, hoping to capture the resources of the informal sector as well (Granger, 2006, p. 90). Notwithstanding these negative aspects of MFIs, however, microfinance is still better adapted to the needs of the poor than the various development projects initiated in rural areas. It allows the value of work to be recognized, especially by women, and the reduction of inequalities within populations (Nowak (2005) cited by Koloma (2007, p.  2)). Microfinance will continue to be the ideal and appropriate instrument for the ambitious formalization of the informal sector. As a result, it ­represents the only option for the banking of the rural and urban working class that has long been ignored by commercial banks (ibid.: 6, 17).

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3.3 A Readiness to Save 3.3.1 The Kayes District The Kayes District is located northwest of Bamako, in western Mali. It includes 29 municipalities, with its capital of the same name. Located in the Sahel zone on both sides of the Senegal River, its low agricultural production due to various climatic uncertainties is not able to meet the cereal needs of the population of about two million,16 most of whom are Soninke (Gorse, 2008, p.  28; Loveluck, 2008, p.  9). According to Loveluck (ibid.), this is probably the same as that used in Delville (1991), being one of the factors explaining the high rate of emigration characteristic of this region of Mali, which was even more marked from the early 1970s according to Gorse (ibid.). In this way, remittances from its nationals constitute the only economic asset of the region, its development being mainly supported by the nearly 400 village migrant associations (VMAs) created in France (Besson, 2008, p. 19) and gathered within the “Coordination des associations pour le développement de la région de Kayes en France” (CaderKaF). Indeed, in terms of its immigration catchment area, Kayes is said to be in the lead amongst other regions of Mali, with 80% of its emigrants living on French territory. As a consequence, in this mythical corridor (France-Mali), Soninke represent a little more than 90% of Malian migrants in the Paris-Montreuil region according to Gubert (2000b) as cited by Loveluck (2008, p. 12). Each year it accounts for two-thirds of the remittances by volume to Mali (AfDB, 2007, pp. 11–12). It was in March 199817 that the CVECAs network of the Kayes-­ Yélimané districts was created under the impetus of three inter-village migrant associations from Diama Djigui, Ordik and Benkadi, all from the region and established in France. According to Loveluck (2008, p.  21), migrant groups in village associations share a twofold concern being to facilitate the integration of new migrants in terms of mutual aid18 and solidarity on French territory and to participate in development actions in their villages of origin (see also Gubert on co-development (2008)). Previously, these activities, which were carried out differently

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according to each association, were limited to the construction of religious buildings (mosques). They then evolved into the establishment of health centres, education support programmes, water and electricity services and agricultural development with an increase in livestock numbers, digging of wells, development of cultivable land,19 to name just a few. In 2016, more than €32 million was injected into the local economy from abroad using only formal channels. One of the particularities of the network is the granting of short-term loans20 with an obligation to provide substantial material guarantees due to the high level of migration in the region (CERISE, 2006, p. 2). It is estimated to have about 50 branches in the Kayes district and about 20  in the Yélimané district (Ponsot & Obegi, op. cit.). According to the authors’ estimates, the village mutuals have approximately 15,000 members,21 including 1100 migrants registered as such and 8000 others living in France. Gorse (2008, p. 28) estimates the network’s financial flows at around €6.1 million per village each year. At the end of 2009, the Kayes network reportedly recorded a net surplus of nearly 1.9 billion CFA francs or around 3 million euros in savings, so it had to find other gainful savings-­related uses (Ponsot & Obegi, op. cit.). For Loveluck (2008, p. 116), the migration context is necessarily the main factor in the network’s self-sufficiency. Relying on Gorse (op. cit.) and the World Bank (2015, p. 12), migrants from France are said to be reluctant to deposit their savings directly into village banks, which they believe are less reliable in terms of providing security guarantees. It is also known that there is a growing consensus on the allocation of remittances: smoothing of food consumption, health, education/training expenditures, family and individual real estate, productive investment and social projects (AfDB, 2007, pp. 43–44; Azam & Gubert, 2005, p. 1332; Generoso, 2012, p. 13; Gubert, 2000a: 27). However, in Kayes there is another item for allocating amounts transferred according to Loveluck (op. cit.) and Ponsot and Obegi (2010, p. 20), being the “savings” of beneficiary families released from the ­remittances—in this way, “migrant savings”22 supply the bulk of the banks in the Kayes network. We then hypothesize that there is an ability in Kayes to save money received from abroad and even that this can be easily assessed, as a marginal propensity to save, by strengthening the organization23 in fundraising and recipient data collection based on Brown’s (1994) studies in Western Samoa

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and Tonga (South Pacific); Richard (2002) in rural Pakistan and Dendir (2017) in Ethiopia and Kenya. However, this is not exactly the same as consent to Keynesian-like saving but a completely different kind of saving, as Lelart (1990, p. 57) describes in these words: In Africa, the act of saving is not in time but in space. The peasant or worker does not seek to secure his future alone by secretly investing his money today to dispose of it tomorrow. He privileges his social relationships, he takes root in a group and he finds the security he needs from others. Saving is not an attitude towards the passing of time, it is an attitude towards those who are close.

Servet (1990, p. 94) adds to this that “the fact of accumulating from an individual point of view goods, assets, in savings accounts not only, very largely does not make sense, but becomes a negative practice in the societies under consideration.” Thus, this ability to save is more like a social act than a quasi-normal economic reflex. Most people in Kayes are reported to live on the margins of poverty according to Ponsot (2007, p. 55). That said, the low level of agricultural production and low incomes from operations are likely to be offset by higher monetary value and high purchasing power in the region (Loveluck, 2008, p. 20). As a result, some public servants are reportedly asking to be reassigned to another part of the country because of the higher prices of everyday consumer goods and services. However, while it is widely accepted that the ability to generate family savings is the first step in any development process (Lelart, 1990, p. 45; Dendir, op. cit.), it should improve the level of production of cultivated food, if only for migrant families.

3.3.2 M  igration and Productive Agricultural Investment 3.3.2.1  My Family, My Community, My Homecoming!24 For De La Brière, De Janvry, Lambert, and Sadoulet (1997, p. 3), migration might be summarized as an implied insurance contract between the migrant and his or her family of origin. Having emigrated, the migrant

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should be responsible for providing for the financial needs of his relatives in terms of food, health, education and so on. In this way, the migrant has no greater concern than taking care of his family and building community structures through his tacit participation in a village association. Any other objective is actually only secondary (Ndione & Lombard, 2004, p.  12). Also, according to Bloy and Dupuy (1990, p.  67): “Membership in associations does not come from a voluntary process, it is imposed on individuals. They are not expected to freely adhere to the group’s objectives, but social pressure forces them to do so.” Does he have a choice? It is only when the migrant is able to ensure the basic needs of his family and participate financially in the community life of the village that an income-generating strategy might then result, aimed at achieving an individual project. In this case, a priority tends to be real estate investment. The fulfilment of a housing project is likely to become the migrant’s second objective according to Ponsot and Obegi (op. cit.). For Servet (op. cit.), this makes sense, since it allows the wealth of the family unit to be shown to others. Welcoming a large household, according to his words, is seen to be a symbol of wealth and prosperity. Also, according to Loveluck (2008, p. 16) and (Fouchard, 2017), the best finished and most impressive buildings in Kayes are said to house exclusively migrant families. The myth about migration and the quality of life it provides must therefore be preserved, no matter what the cost, at the risk of falling into shame and collective disrepute. That which is far away is always better received in Africa, and agriculture, the main element of the rural African existence, is no exception to the rule, especially in Keyes.

Investment in agricultural development projects is also reported to remain a near-individual initiative. It seems more difficult for migrant associations to design and implement large-scale projects with a significant agricultural impact than to provide community facilities. This requires appropriate technical skills and, therefore, partnerships that are often difficult to mobilize. In addition, the means of production, the size of the plots of land and the food requirements are highly specific to each

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family25 in Kayes (Loveluck, 2008, p. 22). Most agricultural projects are likely to be limited to the establishment of cooperative stores aimed at reducing the prices of consumer goods so as to allow access for generally imported foodstuffs for the population. That said, since the majority of migrants in Kayes are rural, agriculture is believed to be the second most important sector for individual productive investment and income-generating activities, far ahead of transport26 and on the heels of trade (Ndione & Lombard, op.  cit.). In addition, households that regularly receive remittances generate savings, which is often accumulated in the form of livestock.27 In this way, livestock farming alone accounts for 49% of productive investment. Basic farm investment, consisting of the purchase of farm equipment— such as drill-seeders, ploughs, accessories, carts, oxen and donkeys—is highly dependent on rainfall variations (Ndione & Lombard, op. cit.), the absence of minimum farm infrastructure and the short-term nature of loans obtained from local branches (Loveluck, 2008, p. 100). As a result, households are more likely to invest their savings in off-­season28 activities that are not directly related to agricultural production. In this way, the mobilization of family savings could ultimately serve to allow the emigration of another family member. This may often be perceived as the best investment of all, as other migrants could find their expenses considerably reduced, while increasing the savings capacity of the beneficiary household in the future (Gubert, 2002, p.  217). Such specific use of savings generated can also be observed in rural China (Zhu, Wu, Peng, & Sheng, 2014, p. 1321).

3.4 Conclusion Although widely used by migrants in Kayes to send remittances to their families of origin, informal channels are said to carry some risk of non-­ receipt in the channelling of these funds. This could be due to misappropriation by a migrant from the same region to whom money is handed over for his relatives, especially when returning on holidays; liquidity problems very often encountered, according to operators in the sector, are typically experienced downstream; no traceability of the funds transferred, not to mention the psychological risk and stress suffered by the

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sender (Ponsot & Obegi, 2010, p. 41). However, for most households, the money is well received when viewed in terms of the accounts opened by them in the CVECAs, the speed of network development and the annual surpluses sometimes achieved. This last point is probably due to remittances, since Kayes is one of the poorest regions in Mali. In this way, there is an ability for recipients to save surplus money. But, it is unlikely to invest much or very little in family farming activities. Citing Loveluck (op. cit.), it may be that in reality productive agricultural investment is not a priority for the villagers of Kayes or that the short-term loans granted do not meet the sustainable financing needs of the population’s agriculture. Nevertheless, the importance of financing a new emigration project is still noticeable within households, especially among the youngest, most influenced by the myth surrounding migration. It is recognized that the PARMEC (Project to support the regulation of mutual savings and loans) law does not authorize remittance transactions to microfinance institutions, as these institutions are sometimes subagents of commercial banks, which may themselves be exclusive partners of money transfer providers. Accordingly, the interest shown by international organizations, states and financial institutions in migrant remittances and the continuous efforts to formalize them may be in response to a concern to combat money laundering and terrorist financing, but it may also be in response to a real quest for profitability that may differ between the parties. Apart from commercial banks and other financial institutions engaged in a constant search for markets, we believe that donors, governments and NGOs have more areas to explore so that the impact of remittances on poverty reduction is no longer a theoretical objective to be achieved in the future.

Notes 1. Money Transfer Companies: Western Union (world leader) barely matched by Money Gram. 2. “Rural poverty still explains 90% of national poverty,” Lachaud (2005, pp. 2–3). 3. According to Rocher and Pelletier (2008, p. 35), the geographical coverage of MFIs and their proximity to poor-rural families is an additional advantage over other operators in the remittance process.

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4. Cover options for crop failure, price volatility and livestock mortality. 5. Inspired by the idea of insurance products designed by the AfDB (2007, pp. 53–54) for the formalization of remittance channels. 6. “Safe saving is often a more important service than credit,” Fouillet et al. (2007, p. 346). 7. Subsidies from the French Development Agency (AFD), shareholder of the National Bank for Agricultural Development. 8. Remittances, whether formal or informal, are in all cases well received by AfDB households (2007, pp. 35–37). 9. Data provided by the literature due to lack of up-to-date information. 10. Of the 5658 municipalities in the country, only 4% do not offer formal banking services (Gentil & Servet, op. cit.). 11. It leaves the investor with a kind of “tracking card” with personal information and checkboxes for each payment. The number and period of payments are known in advance and correspond to the number of boxes checked (Lelart, 2006, p. 6). 12. From the Neapolitan banker Lorenzo TONTI, he was at one time Louis XV’s financial advisor and is said to have put forward the idea of the first public tontines (Lelart, 2006, p. 9). 13. In this respect, tontines were not only the preserve of populations excluded from the traditional banking system but also a cultural and social practice. Indeed, according to Lelart (2006, p. 16), even among African officials at the World Bank, tontines are practised. 14. Also known as street bankers, often solicited for short-term loans at excessive interest rates (between 100% and 125%). 15. For example, risks of low harvests due to climate change. 16. Antony Fouchard (23 May 2017) for the newspaper “Le Monde Afrique”. Available at: http://www.lemonde.fr/afrique/article/2017/05/23/dans-laregion-de-kayes-au-mali-les-habitants-comptent-sur-la-diaspora-pas-surl-etat_5132637_3212.html (Accessed June 2017). 17. The main financing body is the Agence Française de Développement (AFD) and the technical support structure in charge of training network agents, called the Centre d’Appui à la Microfinance et au Développement (CAMIDE). 18. Living conditions during the first year are often very difficult for the new newcomer. 19. Onions, tomatoes, bananas, Arabic gum (the purest in the Sahel) for export (Fouchard, 2017).

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20. Credits mainly granted for trade (67%), in fact without major climate risk; agriculture covering only 4% of loans (agricultural equipment, seeds, inputs, plant protection products) in 2006. 21. 10,069 savers in 2011. Available at: www.mixmarket.org (Accessed February 2015). 22. Dedicated to family and community (Ndione & Lombard, 2004, p. 11). 23. More information provided by the applicant client than before. 24. Based on a migration slogan inspired by Ponsot and Obegi (2010, p. 18). 25. Number of dependent individuals per family because in Kayes, subsistence agriculture (food crops) is reported to predominate (Loveluck, 2008, p. 18). 26. Lack of road infrastructure leading to considerable maintenance costs. 27. Very common among the Haalpularan (Peule and Toucouleur population). 28. Three to four months of the rainy season and eight to nine months of the dry season. The growing season is the rainy season (Ndione & Lombard, 2004, p. 17).

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Haudeville, B. (1990). Epargne et financement de l’entreprise productive. In G.  Henault & R.  M’Rabet (dir), L’entrepreneuriat en Afrique francophone: Culture, Financement et Développement, Aupelf-Uref (éd.), (n°6, pp. 77–85). Paris: John Libbey Eurotext. Hofmann, E., & Marius-Gnanou, K. (2005).  Empowerment des femmes et microfinance en Inde: Entre relativisme culturel et instrumentalisation. In: I. Guérin, K. Marius-Gnanou, J. M. Servet, & T. Pairault (Dir.), Microfinance en Asie: entre traditions et innovations.  Karthala, IRD, Institut Français de Pondichéry.  Jégourel, Y. (2008). La microfinance: entre performance sociale et performance financière. Regards croisés sur l’économie, n°1, pp. 197–205. Koloma, Y. (2007). Microfinance et réduction de la pauvreté en Afrique Subsaharienne: quels résultats au Mali? Document de travail n°138, Lare-Efi, GED, Université Montesquieu, Bordeaux IV, 38p. Labie, M. (1999). La microfinance en questions. Limites et choix organisationnels (116p). Bruxelles: Luc Pire. Labie, M. (2004). Microfinance: un état des lieux. Mondes en développement, 2(126), 9–23. Lachaud, J.-P. (2005). Transferts privés de Côte d’Ivoire, et pauvreté durable et transitoire au Burkina Faso. Document de travail 93/2004, Centre d’Economie du Développement, Université Montesquieu-Bordeaux IV, 14p. Lelart, M. (1990). Les circuits parallèles de financement: Etat de la question. In G.  Henault & R.  M’Rabet (dir), L’entrepreneuriat en Afrique francophone: Culture, Financement et Développement, Aupelf-Uref (éd.), (n°6, pp. 45–63). Paris: John Libbey Eurotext. Lelart, M. (2006). De la finance informelle à la microfinance. AUF et Editions des Archives Contemporaines, 62p. Retrieved February 2015, from https:// halshs.archives-ouvertes.fr/halshs-00009833/document Loveluck, W. (2008). Potentialités de financement de l’économie agricole et rurale dans une zone de migration: Les caisses autogérés de Kayes au Mali. Mémoire, Montpellier SupAgro, 174p. Lucas, R.  E. B. (1985). Migration Amongst Botswana. Economic Journal, 95(378), 358–382. Martin, P., Martin, S., & Weil, P. (2002). Best Practice Options: Mali. International Migration, 40(3), 87–102. Montalieu, T. (2002). Les institutions de microcrédit: entre promesses et doutes: Quelles pratiques bancaires pour quels effets? Mondes en Développement, Tome, 30(119), 21–32.

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Nabeth, M., & Levy, U. (2007). Les dérivés climatiques, un paroxysme de la mxicro-assurance? Autrepart, 4(44), 185–198. Ndione, B., & Lombard, J. (2004). Diagnostic des projets de réinsertion économique des migrants de retour: Etude de cas au Mali (Bamako, Kayes). Revue Européenne des Migrations Internationales, 20(1), 169–195. Nowak, M. (2005). On ne prête (pas) qu’aux riches, la révolution du microcrédit. Paris: JC Lattès, 270p. Ponsot, F. (2007). Le rôle des institutions de microfinance dans l’offre de produits spécifiques aux migrants dans leur pays d’origine. Réseau français de la Microfinance sous-commission n°1, 63p. Retrieved February 2015, from https://www.microfinancegateway.org/sites/default/files/mfg-fr-publications-diverses-imf-et-produits-specifiques-aux-migrants-12-2007.pdf Ponsot, F., & Obegi, B. (2010). Etude de capitalisation des initiatives et mécanismes en matière de transferts de fonds au Mali, 108p. Retrieved February 2015, from http://www.arabic.microfinancegateway.org/sites/default/files/mfg-fretudes-de-cas-initiatives-transferts-de-fonds-au-mali-03-2010.pdf Poursat, C. (2001). Les concepts clés de la microfinance. Publication Agridoc-GRET. Richard, H. A., Jr. (2002). Precautionary Saving from Different Sources of Income: Evidence from Rural Pakistan. Policy Research Working Paper 2761, 36p. Rocher, E., & Pelletier, A. (2008). Les transferts de revenus des migrants: quel impact sur le développement économique et financier des pays de l’Afrique Sub-saharienne ? Bulletin de la Banque de France, (173), 27–38. Sander, C. (2004). Capturing a Market Share? Migrant Remittances and Money Remittancesas a Micro-Finance Service in Sub-Saharan Africa. Small Enterprise Development, 15(1), 20p. Servet, J.-M. (1990). Représentations de la monnaie et des supports d’épargne et limites de la mobilisation de l’épargne informelle: Hypothèses de travail pour une enquête au Sénégal. In G.  Henault & R.  M’Rabet (dir), L’entrepreneuriat en Afrique francophone: Culture, Financement et Développement, Aupelf-Uref (éd.), (n°7, pp.  87–96). Paris: John Libbey Eurotext. Soedjede, D. (1990). Politique de financement de l’entrepreneuriat au Togo. In G.  Henault & R.  M’Rabet (dir), L’entrepreneuriat en Afrique francophone: Culture, Financement et Développement, Aupelf-Uref (éd.), (n°11, pp. 129–144). Paris: John Libbey Eurotext. Tinguiri, K. L. (1990). Epargne et crédit informels en milieu rural au Niger: L’activité des tontines et des gardes-monnaies villageois. In M. Lelart (dir), La tontine, AUPELF-UREF (éd.), (n°8, pp.  177–208). Paris: John Libbey Eurotext.

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World Bank. (2006). Global Economic Prospects 2006: Economic Implications of Remittances and Migrations. n°34320, 182p. World Bank. (2015). Migration and Remittances, Recent Developments and Outlook, Special Topic: Financing for Development. Migration and Development Brief 24, 27p. World Bank. (2017). Migration and Remittances, Recent Developments and Outlook, Special Topic: Global Compact on Migration. Migration and Development Brief 27, 44p. Zhu, Y., Wu, Z., Peng, L., & Sheng, L. (2014). Where Did All the Remittances Go? Understanding the Impact of Remittances on Consumption Patterns in Rural China. Applied Economics, 46(12), 1312–1322.

4 Islamic Microfinance: Exploring the Experience of Akhuwat in Promoting Qard Hasan in Pakistan Joana Silva Afonso and Ajaz Ahmed Khan

4.1 Introduction1 Islamic microfinance has received increasing recognition in recent years as the number of institutions providing Shari’ah compliant microfinance has grown. Some Islamic microfinance institutions (IMFIs) have gained greater visibility and attracted the interest of practitioners, investors and academics. It was not surprising, therefore, that the programme of the fifth European Research Conference on Microfinance included a plenary session on the topic.2 It gathered highly experienced and prominent figures within the sector, including Professor Malcolm Harper from Cranfield Management School, Professor Habib Ahmed from the University of Durham and Dr Mohammed Kroessin from Islamic Relief Worldwide. J. Silva Afonso (*) Portsmouth Business School, University of Portsmouth, Portsmouth, UK e-mail: [email protected] A. A. Khan CARE International, London, UK e-mail: [email protected] © The Author(s) 2019 M. O’Connor, J. Silva Afonso (eds.), Emerging Challenges and Innovations in Microfinance and Financial Inclusion, https://doi.org/10.1007/978-3-030-05261-4_4

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Also present was Dr Amjad Saqib, Founder and Executive Director of Akhuwat Islamic Microfinance (AIM), an IMFI from Pakistan that has grown remarkably over the last decade and is now one of the largest IMFIs in the world, with more than 940,000 active clients. AIM focuses exclusively on providing qard hasan or ‘benevolent’ loans to low-­income borrowers. In 2017, it became the largest microfinance provider in Pakistan in terms of number of active clients. The invitation to the conference derived not only from this recent performance but also from the recognition of the institution’s distinctive features, and its ambitious plans to expand the model to other non-Muslim-majority countries. This chapter aims to explore the advantages and challenges associated with the interest-free microcredit model promoted by AIM, as well as to provide a better understanding of Islamic microfinance. Qard hasan is defined by Obaidullah (2011) as an indigenous Islamic microfinance model. This type of microcredit methodology attracts attention based on the expectation that it can increase and improve access to formal financial services for Muslim populations who can seem to refrain from participating in traditional interest-based microfinance programmes (Harper, 2017, p. 189). The most recent data from the Global Findex Survey on Financial Inclusion shows that many Muslim-majority countries have relatively lower rates of financial inclusion, challenging the accepted positive association between financial and economic development (Beck, Demirgüç-­ Kunt, & Levine, 2007). This is the case in Pakistan: the share of the adult population who owned a formal bank account in 2017 (18%) or had borrowed from a formal financial institution in the previous year (2.6%), was far below the same indicators for the average of the lower middle-­ income countries, which were 56.1% and 9.8%, respectively (World Bank, 2018).3 During the conference session, the speakers emphasised the ethical essence associated with a qard hasan microcredit model. Dr Amjad Saqib explained that AIM has an explicit social mission and considers the provision of benevolent loans as a means to an end—alleviating poverty through promoting financial inclusion. The panellists raised a number of key questions to the development of Islamic microfinance. These related to the demand, the sustainability, the replicability and the impact of the qard hasan model. This chapter will explore these questions further, using

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AIM as an example. The information shared by Dr Amjad Saqib and other speakers at the conference is complemented with literature on AIM and Islamic microfinance more generally, and the results of an on-going evaluation led by Lendwithcare, a microfinance crowdfunding platform established by CARE International UK, which has been funding AIM since 2013.4 The chapter starts with a brief introduction to Islamic microfinance. Section 4.3 describes the development of AIM and the qard hasan model. In Sect. 4.4, key questions are contextualised using the experience of AIM. The chapter ends with the main conclusions and their implications for the sector.

4.2 An Introduction to Islamic Microfinance This section provides a brief introduction to the principles that govern Islamic microfinance and some of the main financing methodologies employed by IMFIs. Islamic microfinance differs from interest-based microfinance because of the need to conform to certain religious principles. These are contained in the Qur’an and the Sunnah, or word and living tradition of the Prophet Muhammad. While Islamic teachings do sometimes provide quite specific guidance—for example, the longest verse in the Qur’an deals with financial transactions and contracts—the religious principles derive from the objective of promoting honesty, transparency and, above all, fairness in economic activities and behaviour between all parties, regardless of their relative power and status (Khan, Kustin, & Khan, 2017). There are four main Islamic finance principles that are of particular importance. Firstly, riba, most commonly translated as interest or usury, is forbidden. Lenders cannot expect to receive a predetermined, fixed sum, regardless of the outcome of the enterprise in which the funds are invested. A return on capital is allowed providing the lender participates in the productive process and is exposed to risk. Secondly, gharar, which describes any transaction that involves excessive uncertainty and risk, deceit or fraud, is prohibited. Gharar refers to any transaction of items whose existence or description is uncertain due to lack of information or knowledge

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of the ultimate outcome. For example, it is not permitted to sell something that one does not own, in the hope that it can be bought cheaper at a later date—‘short-selling’ is therefore forbidden. Thirdly, Islam considers certain activities as morally or socially harmful and prohibits investment in these areas. The prohibited or haram areas include the production and sale of alcohol, gambling and illegal drugs. Finally, financial transactions should directly or indirectly be linked to a real, tangible, economic activity or asset, as opposed to financial speculation or debt. In addition to these general principles, Islamic teachings emphasise the importance of honouring contracts and agreements. These should be clear, by mutual agreement, and the responsibilities and benefits of all concerned parties should be clearly detailed and for a known period and price. Furthermore, there should be at least two witnesses present when a contract is signed. To ensure ‘authenticity’ it is essential to seek approval from qualified Islamic scholars as to whether the manner in which operations are structured and implemented are Shari’ah compliant and also to conduct regular Shari’ah audits. In practice, this involves IMFIs requesting local religious authorities to provide confirmation that their operations conform to Shari’ah. Although the Qur’an prohibits the use of interest and encourages legitimate commerce, trade and wealth creation, it does not promote any specific type of contract. A number of Islamic financing techniques have developed in accordance with Shari’ah and these have been adopted by IMFIs. Broadly speaking, it is possible to distinguish between techniques that promote partnerships, such as mudaraba and musharaka, and arrangements that are essentially sales contracts, such as murabaha, ijarah and bai salam. Islamic finance only permits one type of loan, namely qard hasan. Under mudaraba, an IMFI provides the capital required to fund a project, while a micro-entrepreneur uses his or her skill to manage the project. Profits are shared according to a predetermined ratio, usually determined as a percentage of the profit. In the case of a loss, providing it was not due to mismanagement or misconduct, the IMFI loses its capital while the micro-entrepreneur loses the time and effort that he or she has expended in the activity. Musharaka involves two or more parties contributing towards financing a venture and sometimes managing the project as well,

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and profits and losses are shared in accordance with each partners’ equity participation. Partnership finance, which relies heavily on trust and confidence, is largely absent from Islamic microfinance because most IMFIs lack the time and capacity for robust monitoring and evaluation of clients’ activities, and in any case the small scale of such activities is likely to make transactions uneconomic. At the same time, most micro-­entrepreneurs are, for a variety of reasons, unable to keep accurate accounts. As a result, it is difficult to calculate the exact level of profits or losses. Murabaha is the most widely used instrument in Islamic microfinance, largely because it is relatively straightforward to structure, understand and implement for all parties. In a murabaha contract, an IMFI will purchase and deliver an asset or other items requested by the micro-­ entrepreneur. It adds a ‘mark-up’ or profit margin to the sale price and the micro-entrepreneur pays instalments to the IMFI over an agreed period of time for this service. There is some scepticism towards this particular method of financing, as the fixed mark-up appears similar to interest. However, the mark-up is not compensation for time, rather it relates to the efforts and expense of the IMFI in seeking out, negotiating, purchasing and delivering the asset requested, at the best possible price. Ijarah is similar to leasing and involves an IMFI purchasing an asset that it then rents out at a price that enables it to recover its investment plus a profit. More often than not, the micro-entrepreneur makes regular payments and becomes the owner of the asset once all instalments have been made. Bai salam is a contract whereby the full price for an asset or commodity is agreed and paid up front in cash by the IMFI at the time the agreement is made. The item is delivered at a specific time in the future. The essential purpose is to ease cash liquidity shortages, most commonly for smallholder farmers, by enabling them to receive advance payment. Qard hasan is a cash loan that is repaid without interest, mark-up or share in the venture for which the loan is used. Qard hasan has a particular resonance for Muslims, as such loans are encouraged by Islamic ­teachings as an effective way of helping poor people. Indeed, they are preferred to the provision of outright charity. Qard hasan is considered a ‘benevolent loan’ and this is generally interpreted to mean that a borrower cannot be forced to make a repayment—in the event that a borrower is unable to repay, the lender must accept the transaction as a charitable act. Sometimes

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a small administrative charge is permitted for qard hasan loans. Importantly though, this charge cannot be made proportional to the amount or term of the loan. This distinction is what differentiates it from riba. Qard hasan is generally more appropriate and appealing in most cases, as many poor people prefer to receive cash to use at their own discretion, rather than being tied to a particular commodity, as is the case with murabaha. However, IMFIs that rely exclusively on this methodology will not be able to cover their operational costs without other sources of income, typically from charitable sources such as zakat, sadaqah and waqf.5 The prohibition on riba and gharar also impacts on savings and insurance products. Since riba forbids offering a predetermined rate of return, the relatively small proportion of IMFIs that do offer savings accounts reward savers a share of the institution’s profits. Some IMFIs also offer takaful which is a Shari’ah compliant alternative to conventional insurance. In takaful, which translates as ‘guaranteeing each other’, all participants contribute to a mutual fund and this pool of contributions creates a takaful account. The IMFI will manage this account and charge an agreed fee to cover the operating costs. Any claims are paid out from the account and any unused funds are returned to the participants at the end of the agreed period. Although partnership finance and qard hasan represent the traditional forms of Shari’ah compliant finance, most IMFIs concentrate on sales contracts, offering mainly murabaha and to a lesser extent ijarah. In a recent book (Harper & Khan, 2017) that examined 15 different Islamic microfinance programmes in 11 countries in Asia, Africa and the Middle East, AIM was the only institution which exclusively employed qard hasan methodology.

4.3 AIM and the Qard Hasan Model 4.3.1 The Institution Akhuwat was founded in 2001 by a group of philanthropists with the mission of alleviating poverty. Its operating philosophy is guided by five principles. Firstly, and in line with Islamic teachings as outlined in the previous section, it provides interest-free loans to the ‘economically active

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poor’, mostly to help establish and develop their businesses. The organisation views interest as a barrier to ‘widespread proliferation of capital, and a violation of all moral and ethical codes’. It believes that ‘burdening the poor with exorbitant interest rates’ undermines efforts towards poverty alleviation. Secondly, it holds its meeting and loan disbursements in  local religious places—mostly mosques, but sometimes temples and churches. The organisation believes that using the existing indigenous infrastructure for operations allows it to minimise costs and also promote greater transparency and accountability, as well as create a sense of goodwill amongst the local community. Thirdly, it encourages clients to become donors through the ‘Member Donor Program’. It decided to instigate this initiative when clients asked how they could contribute to the organisation’s development. The donations are entirely voluntary and, it is hoped, helps instil the value of helping others in need. Fourthly, it promotes a spirit of volunteerism. It considers that there should be a social contract between the privileged and the underprivileged, a sense of duty between those who have resources towards those who do not. AIM trains and employs volunteers on a regular basis. Finally, it is a ­non-­discriminatory organisation and works with all, regardless of ‘their caste, colour, creed, gender, politics or faith’. In its first decade of operations, the institution gradually increased its scale and outreach, as many other IMFIs have done (Khan, Ishaq, Afonso, & Akram, 2017). However, AIM has expanded operations markedly during the past five years (Table 4.1). Impressive recent growth is partially a result of increasing financial support from regional governments in Pakistan that have sought to promote financial inclusion and entrepreneurship Table 4.1  AIM main activity indicators Gross loan portfolio (USD)

Active borrowers

Annual variation (%) (No.)

2014 24,849,495 60.3 2015 46,887,198 88.7 2016 76,632,330 63.4 2017 123,903,151 61.7 2018 129,371,850 4.41

235,517 405,939 567,761 855,232 941,782

PAR30

Annual variation (%) (%) 44.2 72.4 39.9 50.6 10.1

0.48 0.29 0.33 0.26 0.24

Source: Adapted from Khan, Ishaq, Afonso, and Akram (2017), Haider (2017) and personal communication with Project Manager, Akhuwat, on 1 July 2018. Data as of 30 June each year

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among low-income populations. The partnership with provincial authorities has provided AIM with significant funding for both loans and operational costs, complementing other national and international donations gathered by the institution (Khan, Ishaq, Afonso, & Akram, 2017). The growth of the credit portfolio has been accompanied by an equally remarkable geographical expansion. As of the end of June 2018, AIM operated through 794 local branches throughout the country, even including the remote regions of Gilgit-Baltistan in the north of the country and the Federally Administered Tribal Areas (FATA) that border Afghanistan. These are areas where many microfinance institutions are reluctant to operate because of poor infrastructure and insecurity. AIM branches are small and simple in order to minimise operational costs (Khan, Ishaq, Afonso, & Akram, 2017), but the institution’s human resources are significant: as of mid-2018 the microfinance institution employed around 4200 staff.6 In the last two years, AIM has become the largest Pakistani microfinance institution by far, in terms of number of active borrowers. However, the MFI ranks below Pakistani interest-based microfinance banks such as the Khushhali Microfinance Bank, Tameer Microfinance Bank and the National Rural Support Programme Bank, in terms of the market share as measured by the gross loan portfolio (Haider, 2017). This reflects a much lower average loan size than other microfinance providers and strongly signals that AIM is targeting relatively poorer and more vulnerable segments of the population. Until 2017, the institution worked as a non-governmental organisation (NGO) which, beyond the provision of interest-free loans to low-­ income entrepreneurs, offered other types of credit, including housing, education, emergencies and debt payment. It also offered non-financial services linked to education, health, and a clothes recycling programme that exclusively hired employees from the transgender community, one of the most marginalised groups in the country. Regulatory changes in the microfinance sector in 2016 led to a separation of the institution’s microcredit operation, which is now implemented by Akhuwat Islamic Microfinance, a non-bank financial institution regulated by the Securities and Exchange Commission of Pakistan. The non-­ financial activities remain under the sphere of Akhuwat, which is a registered non-governmental institution.

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4.3.2 The Qard Hasan Microcredit Model During the conference session, the AIM manager put forward three main reasons to explain adopting benevolent interest-free loans as their microcredit model. Dr Amjad Saqib stated that the two main motivations behind the creation of Akhuwat were the implementation of a Shari’ah-­ compliant microcredit methodology; and the rectification of a feature of most conventional microfinance programmes that was deemed unfair— namely charging higher interest rates to poorer clients compared to relatively better-off borrowers. Professor Malcolm Harper added a third reason, arguing that other Islamic financial instruments, including the partnership and sales contracts described in Sect. 4.2, are not suited to the financial needs of relatively poorer people who often require cash for working capital or for making a series of relatively small purchases. It is important to stress here the ambiguity associated with the concepts of poverty and poor, which are often interpreted differently by microfinance actors. Robinson (2001) talks about the economically active poor, and this was an expression employed by Dr Amjad Saqib in his intervention. Qard hasan loans are offered to low-income entrepreneurs, but engagement in a self-employed activity is a pre-requisite to access the loan. Thus, it should be expected that, like most other productive credit programmes, AIM’s microcredit programme does not reach some of the poorest segments of the population. AIM’s microcredit model is based on the traditional group lending methodology. Borrowers form solidarity groups of three to six members living in the same neighbourhood and undertaking their own independent businesses. The applications of all the members of the group are assessed simultaneously, although the applications regard individual loans (Khan, Ishaq, Afonso, & Akram, 2017). The microcredit product is called a Family Enterprise Loan, which discloses one of its distinctive features—the process expects the involvement of the household by supporting both the loan application and the business. In practice, this translates into the inclusion of another member of the household (often the spouse) as co-signatory of the loan contract (Khan, Ishaq, Afonso, & Akram, 2017). AIM demands that loan candidates should not have any other active loans at the point of application. Once they finish repaying their first microcredit loan, they may apply for a second larger loan. The initial

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application process takes, on average, three to four weeks and includes visits by the loan officer to the homes or businesses of each of the group members. The final step in the application process is a compulsory group meeting, usually held in a mosque or branch office, in which the branch manager verifies that all conditions have been met and all members are made aware of their responsibilities regarding the loan. After approval, the disbursement of loans is scheduled for the following public session, which again usually takes place at the local mosque—on a small number of occasions when the majority of the borrowers are Christians or Hindus then churches or temples are also used. At this event, borrowers and their guarantors must be present to sign the loan contract (Khan, Ishaq, Afonso, & Akram, 2017). During this public ceremony, which several hundred people typically attend, AIM’s branch managers or other senior staff emphasise the fact that qard hasan loans are promoted in accordance with Islamic teachings and they discourage all present from engaging in interest-based transactions and encourage prompt repayment so that others might be able to benefit from the same funds in the future. In this way, the moral obligation to repay the loan is reinforced both by the public nature of the event (the presence of witnesses being one of the requisites of Shari’ah), and by the attachment of ‘religious sanctity to the oath of returning it on time’ (Obaidullah, 2011, p. 420). From this, it can be concluded that the uniqueness of the AIM model is not limited to not charging interest on loans or penalties for late repayments. It is also rooted in its family approach and in the use of religious sites and language to strengthen the moral commitment of borrowers to honour the loan contract and, at the same time, reduce the operational costs of the institution.

4.4 A  Working Hypothesis and Four Essential Questions on Qard Hasan and Islamic Microfinance The main argument raised throughout the conference session referred to the ethical nature of qard hasan loans, and their potential role in fulfilling the social mission of microfinance institutions. This vision of the model

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has several implications on the identified critical questions relating to demand, sustainability, replicability and impact for the development and growth of Islamic microfinance. It particularly influences the notions of sustainability and replicability of microfinance programmes, leading different actors in the sector to think ‘outside the box’ of conventional microfinance. This chapter will now explore the critical questions in each of these four areas in turn.

4.4.1 Demand Data on the microfinance sector published by the Pakistan Microfinance Network (PMN) highlights the impressive performance of AIM in terms of outreach. As mentioned previously, AIM’s growth over recent years has been outstanding both in terms of number of active clients and geographical coverage. The overall penetration rate of the microfinance sector in the country has increased significantly from 11.8% in September 2014 to 25.4% in September 2017, even though Islamic microfinance only comprises a relatively small proportion (16% by September 2017) of the sector as a whole and is due in large part to the operations of AIM.7 Despite this positive evolution, estimates of the financially unserved population in Pakistan, especially in rural areas, are relatively high. This seems to be in line with the conclusions of the 2014 MIMOSA report, which analyses microcredit markets worldwide in terms of market saturation. Pakistan was classified as an under-served market, ranking 1 on a scale of 1 to 5 (Javoy & Rozas, 2015). This is not surprising, considering Pakistan’s financial inclusion figures mentioned earlier, and it can be perceived as a mismatch between the current offer and the needs and constraints (including religious) of low-income Pakistanis. In this analysis, an important and often neglected issue is the role of informal finance. Although the Global Findex figures on borrowing from informal sources seem to show a more modest use of informal loans in Pakistan compared to its neighbours India and Bangladesh (World Bank, 2018), this might not reflect the whole story. Pakistanis are usually suspicious and careful in revealing personal information, especially on such a sensitive topic (Lieven, 2011). Thus, it should be expected that the

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declared figures for informal finance are underestimated. Given that informal finance can include both exploitative moneylenders and informal savings and credit groups (locally referred to as ‘committees’), it would be useful to have a better understanding of the existing mechanisms and their comparative relevance. The unmet demand for qard hasan loans, and Islamic microfinance in general, does not seem to be confined to Pakistan, as illustrated by the case studies from 11 different countries included in Harper and Khan (2017). In the conference session, Professor Malcolm Harper shared his perception that the situation is geographically heterogeneous, giving the example of the relatively more conservative Somalia where the preference for Shari’ah compliant loans seems comparatively more significant than in Bangladesh. The preference for Islamic financial products when similar conventional products are available was also found in a randomised control trial implemented in Jordan. The Shari’ah-compliant product introduced by the MFI was a murabaha loan, which was compared to a conventional consumption loan destined to buy household assets (El-Zoghbi, Karlan, Osman, & Shammout, 2016, p. 1).

4.4.2 Sustainability Adopting a qard hasan microcredit model implies looking at the sustainability of the institutions from a different perspective and challenging traditional concepts that stipulate that costs should be covered by loan charges and profits. Different speakers at the conference asserted that if AIM still exists and continues to grow after continuously operating and implementing the same basic model for the past 17 years, it ought to be considered sustainable, regardless of its funding sources. Although this perception does not fit with the traditional accounting definition of sustainability, which is commonly used in the evaluation of the performance of microfinance institutions, the question raised by the panel was, to what extent does it have to fit? Considering the mixed results on social impact obtained by conventional microcredit programmes, the pursuit of different and innovative models should be encouraged, and its mismatches with conventional programmes accommodated to properly evaluate these models, both its advantages and weaknesses.

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Khan, Ishaq, Afonso, & Akram (2017) offer insight into the funding of AIM’s microcredit programme. In the fiscal year ending in June 2016, the main funding sources of the institution were national and international donations (including sadaqah or zakat), institutional funding from regional governments (in particular the Government of Punjab) and application fees (AIM charges a fixed and non-refundable fee of 200 Pakistani Rupees (just under US$2) for all loans). Some two years later, the composition of the funding sources had not changed significantly.8 Although three additional international funders now support AIM (British Asian Trust, United Nations Development Program and Louis Berger), the amounts granted are relatively small and less than the main international funder, Lendwithcare, which provided approximately US$750,000 in 2017. In addition to these funds, during 2015–2016 Akhuwat generated more income from voluntary donations from its own active clients than from the application fees charged during the same period (US$1.45 m compared to US$1.13 m). In this year, as in the previous one, the income raised, even not including the borrowers’ contributions, exceeded the total operational expenses (cost coverage ratios of 109% and 131%). This was achieved due to increased income and a strategy of low costs. Besides the maintenance of a simple and low-cost logistical infrastructure (in terms of physical space and equipment), average salaries for comparable positions are lower than those in other microfinance institutions. They are, however, compensated by career development opportunities, since AIM has a policy of promoting from within; and the ‘faith’ factor, with many staff being committed Muslims who value working for the organisation as it acts on Islamic teachings of helping the poor while simultaneously not engaging in interestbased transactions. Both factors seem to be key to achieving low rates of staff turnover. The authors, thus, conclude that the provision of qard hasan loans can be compatible with achieving sustainability. Voluntary donations from clients are a distinctive feature of AIM’s microcredit model, which Dr Amjad Saqib highlights. These donations are encouraged by AIM from the beginning of the relationship with the client. AIM believes that if an individual is able to take a loan without interest, which it is hoped will help to improve his/her economic situation, when this person manages to get out of poverty at some future time,

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he/she will have the moral obligation to assist others to do the same, although there is no formal obligation to do so. Dr Amjad Saqib referred to this as ‘Akhuwat’s social contract with its clients’ and more widely a ‘pact between the privileged and the underprivileged, a duty of those who have resources towards those who do not’. From this perspective, AIM should be seen not only as a microcredit programme, but also as a partnership with the community, in which the principles of solidarity and sharing are central. AIM managers believe that if clients understand these principles, they are inspired to contribute, even if their monetary contrition is relatively small. Interestingly, in order to convey the message that such donations are not a charge for its service but to promote solidarity with other ‘deserving’ people, AIM has decided not to use the voluntary donations from clients to cover operational costs, but rather as extra loan capital.

4.4.3 Replicability It might be assumed that the success of a qard hasan model is strongly dependent on its religious component and can therefore only work when implemented within Muslim-majority countries or communities. Dr Amjad Saqib disagrees with this idea, remarking that the practice of interest-­ free loans has long been present in many societies, most often among family and friends.9 The results of the Global Findex Survey seem to corroborate this argument showing that, in 2017, borrowing from family and friends was the main source of credit in low- and middle-­income countries (World Bank, 2018). Dr Amjad Saqib argued that interest-free loans should be perceived essentially as an ethical practice. Despite the fact that AIM considers itself a faith-based institution, it does not consider itself as a proselytising organisation. It works equally with Hindus and Christians, even using their temples and churches to gather borrowers and disburse loans on occasions (Khan, Ishaq, Afonso, & Akram, 2017). Clearly, the ability of AIM to attract zakat and sadaqah donations from economically better-off Muslims as well sadaqah donations from its own clients has been key to generating the necessary funds for its microcredit programme, particularly prior to attracting institutional support. Furthermore,

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the concept of qard hasan loans has a particular resonance for Muslims,10 whether they are private individuals or representing institutional donors, such as the various provincial governments in Pakistan. Considering interestfree loans as a purely ethical, rather than a faith-­based, practice opens the door to a more positive and open view on the possibilities of replicating the model in other, particularly non-Muslim, contexts. However, there is doubt as to whether the interest-free model would be able to attract the same level of financial or moral support in a non-Muslim environment. Khan, Ishaq, Afonso, and Akram (2017) briefly mention the implementation in Pakistan of 16 independent local replications of the AIM model. However, these institutions have struggled to attract donations and increase their scale and outreach. In fact, there are few successful examples of IMFIs that rely exclusively on qard hasan. Analysing the experience of START, a microfinance institution created in 2002  in Kosovo by Islamic Relief, Khan and Zeqiri (2017) observe how, unable to attract donations in an environment where Islamic religious practice is not strong, the organisation gradually moved away from solely using qard hasan to mostly employing murabaha (with relatively higher charges for clients), reserving qard hasan only for the poorest clients. It is clear that Akhuwat’s success is only partly due to the qard hasan model striking a chord with donors and clients. Equally, if not of more importance, there has been the personal charisma and leadership qualities of Dr Amjad Saqib, and the ability to recruit very able staff and instigate strong operational policies and procedures. During the session, Dr Amjad Saqib referred to AIM’s plans to implement replications of the model in other (non-Muslim majority) countries during 2018 and beyond.

4.4.4 Impact The considerations and arguments put forward while developing the three previous questions build up to the final question relating to the impact of Islamic microfinance. What evidence exists regarding the impact of qard hasan models and Islamic microfinance overall? How does this research compare with impact studies of conventional interest-based microfinance? Is there enough evidence on AIM to justify the ethical perspective associated with the model and its implications?

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The common perception of the conference speakers is that there is certainly much to do in this regard. In fact, there is relatively little research on the impact of Islamic microfinance programmes, and the studies undertaken so far suffer from the same deficiencies that conventional microfinance has long been accused of, namely that the studies have used weak methodologies and data. There is no conclusive impact study using randomised control trials, and rigorous quasi-experimental studies are scarce. Regarding the impact of AIM microfinance programme, which is the most well-known example of the qard hasan model, until recently, the most rigorous of the studies was the social performance investigation carried out for the European Union: ‘Pakistan Financial Services Sector Reform Programme in 2005–2006’. The research aimed to ‘quantify and demonstrate some of the outcomes of microfinance institutions’ and included six Pakistani MFIs, with different missions and programmes. The quasi-experimental methodology implemented was based on a difference-­ in-difference approach, comparing the differences in the incomes of clients and non-clients of the institutions in the locations where the programme was implemented with control locations (Zaidi, Jamal, Javeed, & Zaka, 2007, pp. ii–iii). The researchers surveyed a sample of 220 active Akhuwat borrowers and 120 non-borrowers. In the quantitative analysis, they did not find, for most of the economic and social outcomes included, significant differences between the clients and non-clients. They associated these non-­ results mainly with the short period of participation in the programme. Interestingly, they also found that only 15% of the sample clients were considered to be poor according to the official poverty line, which was a common result with the other participating MFIs in the study. To complement the information collected through the quantitative survey, the study also included two focus group discussions with a smaller sample of clients in different loan cycles, which overall provided a very positive perception of the borrowers regarding the impact of the microcredit loan received from Akhuwat (Zaidi et al., 2007). It should be noted that this study was implemented in 2005 when Akhuwat had 13 branches located in the Punjab province and only 7150 active borrowers, a very different reality compared with the present situa-

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tion. Moreover, the research was based on cross-sectional data, therefore being more sensitive to selection bias and less suitable to measure changes in the lives of the clients over time. The first longitudinal study conducted on the impact of AIM microcredit programme was implemented within a broader evaluation project led by Lendwithcare. The project, in which the University of Portsmouth participates as academic consultant, started towards the end of 2014 and included the implementation of two waves of a household survey in 2015 and 2017. Although also based on a quasi-experimental methodology using a difference-in-difference model, data was available for two periods in time, which allowed for a comparison between the changes in the selected outcomes for the sample of clients and non-clients before and after the participation in the programme. The main findings of the study, which are included in the final project report, are presented next (Afonso, 2018).11 The household survey was applied to a sample of 500 new AIM clients from four branches in the city of Lahore supported by Lendwithcare and 100 non-clients from the same neighbourhoods. The survey included a purpose-designed questionnaire and the application of the Poverty Probability Index (PPI).12 A first result from the application of the baseline survey in 2015 was the (expected) relevance of the ‘faith’ factor in the reasons for applying for a business loan at AIM. Of the new clients interviewed, 62% stated ‘compliance with Islamic teachings’ as their main motivation to choose AIM, with only 29% choosing the cheaper cost of the loans in comparison with other financial providers. In the second wave of the survey, there is also evidence to corroborate the identification of AIM clients with the principles of the institution, specifically the solidarity and sense of responsibility towards others in worse conditions. Of the clients interviewed in both surveys, 93% had made either regular or occasional voluntary donations to the institution during the previous year when they were repaying their first microcredit loan. The study results were, overall, positive at both business and household levels, with quantitative and qualitative indicators showing that, on average, business sales, profits, net income and poverty scores, among other indicators, had improved for AIM new clients in comparison with the

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baseline survey. The observed variations of these indicators were stronger than those verified for the group of non-clients. These results reflected in the majority (68%) of the clients considering their quality of life to be better in 2017, and in the significant decrease of clients identifying access to capital as the main constraint for their businesses (only 20% in 2017 compared with 76.5% at baseline). It is, however, important to note that the research also highlighted the heterogeneity among the clients. There were significant differences, namely in the indicators related to income, consumption and poverty, between female and male clients, with female borrowers earning lower personal incomes and registering lower PPI scores, on average, relative to male clients in the two waves of the survey. These differences are not surprising considering other studies conducted in the sector in Pakistan (Asim, 2009; Safavian & Haq, 2013; Zulfiqar, 2017). It should be noted that the gender differences in income and expenditure were not significant at the household level. Statistically significant differences were also identified between the clients from the four branches involved in the study: the clients living in the two central urban areas were more likely to earn higher incomes and be less poor. The differences were also verified in the composition of the branch samples in regard to gender and literacy levels, with a stronger presence of female and illiterate clients in the poorer areas. Interestingly, the comparison between the different client segments showed that the variation of the PPI scores was stronger for these two sub-groups (female compared with male clients and illiterate compared with clients with formal education), which indicates a potential reduction of the respective poverty gaps, although this needs to be corroborated with further analysis. In comparison to non-clients, the research found that the access to loans had a positive impact for those respondents who experienced stronger improvements in their poverty scores, but had no significant impact for respondents who experienced a deterioration or no variation of the individual PPI scores.13 Not forgetting that the quasi-experimental methodology employed presents some limitations, it should be noted that these limitations are not sufficient to overlook a consistent finding of the study, the heterogeneity among AIM clients and its consequences on the effects of the qard hasan loans provided by the institution. This acknowledgement is

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important in the assessment of the AIM model and should also be taken in consideration when analysing the existing, and at this stage, not very successful replications of the model within Pakistan as well as the potential future replications of the qard hasan model in other contexts.

4.5 Conclusion The preceding discussion points towards an under-served demand for Shari’ah-compliant finance in Pakistan. In the context of relatively high rates of financial exclusion, we can assume that this demand will likely be shared by other countries with significant Muslim populations. AIM’s experience also demonstrates that there is a strong desire among Muslim donors to support qard hasan programmes as a preferred means of helping low-income borrowers. This willingness is based, in part, on Islamic teachings and extends to borrowers themselves who support the organisation’s philosophy of solidarity with ‘others in need’ and make voluntary donations to support the programme. Although it does not adhere to the same evaluation criteria as employed in conventional interest-based microfinance, the Akhuwat qard hasan model has been ‘financially sustainable’ so far. How likely is it that this model can be replicated elsewhere? The discussion during the conference and in this chapter shows that AIM’s experience appears to be unique, particularly regarding the capacity of the institution to attract donations. Microcredit models based on qard hasan have either struggled to increase scale and outreach, as has been the case with the many local replications in Pakistan, or have shifted their emphasis from providing benevolent loans to a greater focus on other Islamic microfinance products that generate greater income for the institution, as was the case with START in Kosovo. While acknowledging AIM’s innovative approach to cover its operating costs, it is also important to take into consideration the various strategies adopted by the institution to maintain low operational costs and high loan repayment rates, and promote a strong sense of commitment and loyalty from its staff. Some of these strategies, such as the use of mosques and references to Islamic teachings, incorporate a faith element. However, others, such as careful client selection and rigorous loan

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appraisal, are simply examples of good microfinance practice. Furthermore, AIM has benefited from the leadership qualities of Dr Amjad Saqib, his personal charisma and the professional connections he has developed throughout his career, particularly with the various regional governments in Pakistan. Exploring the relative importance of faith and other factors in the success of AIM and other Islamic microfinance methodologies, requires further research including the application of qualitative methodologies. Indeed, compared to interest-based microfinance, Islamic microfinance is a vastly under-researched area. The longitudinal investigation led by Lendwithcare represents a step in the right direction, especially considering the intention of the project partners to continue the research and implement a third wave of the household survey in 2019. This will provide an opportunity to further investigate the differences encountered in the outcomes of the microcredit programme for distinct segments of AIM clients. Analysing client heterogeneity can contribute to better understanding the change mechanisms associated with benevolent loans, and consequently, identify critical factors to the successful replication of the model. More generally, promoting further research and programme evaluations that focus on the qard hasan model will enhance transparency and accountability of IMFIs, and contribute to overcoming the prevailing scepticism towards the financial sustainability of this type of model and Islamic microfinance. At the same time, it will contribute to the development of evaluative thinking and related skills within the institutions.

Notes 1. The authors acknowledge the speakers at the conference plenary for their contributions to the discussion, Muhammad Shakeel Ishaq and Shahzad Akram from Akhuwat Islamic Microfinance, for providing information on  the  organisation’s operations, and  Elise Aston for  her comments and suggestions. 2. The fifth European Research Conference on Microfinance took place in Portsmouth, UK, from 12 to 14 June 2017. The conference was hosted by the University of Portsmouth, who co-organised the event with the

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European Microfinance Platform (Luxembourg) and the Research Centre for Microfinance (Belgium), known by its acronym CERMi. 3. It should be noted that despite this comparative worse performance, the figures show a clear improvement regarding the data from the previous waves of the survey in 2014 and 2010. Data from the Global Findex Survey on Financial Inclusion is available at https://globalfindex.worldbank.org/ 4. The University of Portsmouth is one of the partners participating in the Lendwithcare evaluation project. For more information about Lendwithcare, please see https://www.lendwithcare.org 5. Zakat is an obligatory almsgiving for all Muslims who meet the necessary criteria of wealth. While zakat funds can be used to cover the operational costs of organisations that assist the poor, they cannot be used to fund loans. Sadaqah is a voluntary charitable donation and can be used for both loan capital and to cover operational costs. Waqf is an endowment (usually a building or plot of land) or a trust set up for charitable purposes. It involves tying up a property or fund in perpetuity so that it cannot be sold, donated or inherited by anyone. An IMFI can, for example, use the rent from letting a property to finance its operations. 6. According to personal communication with Project Manager, Akhuwat, 22 June 2018. Altogether, Akhuwat employs approximately 7500 staff. 7. The information is available online in the quarterly editions of MicroWatch (No. 33 and 45), a publication of the Pakistan Microfinance Network (http://www.pmn.org.pk/publications/category/MicroWatch). 8. Personal communication with Project Manager, Akhuwat, 24 May 2018. 9. Khan, Kustin, and Khan (2017) also observe that interest-free loans are not exclusively Islamic either. For example, gemach or ‘acts of kindness’ is a Jewish interest-free loan fund with easy repayment terms and similar to qard hasan. 10. There are several verses in the Qur’an that encourage Muslims to provide qard hasan loans to ‘those who need them’. For example, ‘Establish regular prayer and give regular charity and give Allah qard al hasan’ (Surah 73, Verse 20). Indeed, qard hasan loans are considered as if they were made to Allah, rather than the borrowers, to encourage lenders to part with their wealth. 11. The final report of the project is available at http://www.careevaluations. org/wp-content/uploads/Impact-Assessment-Report-Pakistan-JoanaAfonso.pdf

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12. The Poverty Probability Index (PPI) is a poverty assessment tool initially developed by Mark Schreiner for the Grameen Foundation, and currently managed by the Innovation for Poverty Action (IPA). PPI is based on a country-specific questionnaire with 10 multiple-choice questions on household characteristics and assets ownership. More information available at https://www.povertyindex.org/ 13. The analysis was based on the application of quantile regression methods to assess the impact of different factors, including the access to the microcredit loan, in the variation of the PPI scores. The access to the microcredit loan was statistically significant (at 1% significance level) for the group of respondents in quartile 3, meaning those who have experienced stronger improvements in the PPI scores.

References Afonso, J.  S. (2018). Lendwithcare Assessment Project: Akhuwat Islamic Microfinance Report. Project Report. Portsmouth: University of Portsmouth. Asim, S. (2009). Evaluating the Impact of Microcredit on Women’s Empowerment in Pakistan (CREB Working Paper 03-09). Lahore: CREB, Lahore School of Economics. Beck, T., Demirgüç-Kunt, A., & Levine, R. (2007). Finance, Inequality and the Poor. Journal of Economic Growth, 12, 27–49. El-Zoghbi, M., Karlan, D., Osman, A., & Shammout, N. (2016). Understanding Demand for Sharia-Compliant Loans: Results from a Randomised Experiment in Jordan. Washington, DC: CGAP. Haider, M. (2017). MicroWatch (Issue 45). Islamabad: Pakistan Microfinance Network. Harper, M. (2017). What Do the Cases Tell Us? In M. Harper & A. A. Khan (Eds.), Islamic Microfinance: Shari’ah Compliant and Sustainable? (pp. 185–201). Rugby, UK: Practical Action Publishing. Harper, M., & Khan, A.  A. (2017). Islamic Microfinance: Shari’ah Compliant and Sustainable? Rugby, UK: Practical Action Publishing. Javoy, E., & Rozas, D. (2015). MIMOSA 2.0: Mapping the (Micro)Credit Cycle. Retrieved from MIMOSA Project: http://mimosaindex.org/wp-content/ uploads/2015/11/MIMOSA-White-Paper.pdf

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Khan, A. A., & Zeqiri, V. (2017). Pioneering Islamic Microfinance in Kosovo: The Experience of START.  In M.  Harper & A.  A. Khan (Eds.), Islamic Microfinance: Shari’ah Compliant and Sustainable? Rugby, UK: Practical Action Publishing. Khan, A. A., Kustin, B., & Khan, K. (2017). Islamic Financing Principles and Their Application to Microfinance. In M.  Harper & A.  A. Khan (Eds.), Islamic Microfinance: Shari’ah Compliant and Sustainable? (pp. 1–16). Rugby, UK: Practical Action Publishing. Khan, A. A., Ishaq, M. S., Afonso, J. S., & Akram, S. (2017). Is It Possible to Provide Qard Hasan and Achieve Financial Self-Sustainability? The Experience of Akhuwat in Pakistan. In M.  Harper & A.  A. Khan (Eds.), Islamic Microfinance: Shari’ah Compliant and Sustainable? (pp. 17–31). Rugby, UK: Practical Action Publishing. Lieven, A. (2011). Pakistan – A Hard Country. London: Penguin Books. Obaidullah, M. (2011). Islamic Microfinance: The Way Forward. In K. Hassan & M.  Mahlknecht (Eds.), Islamic Capital Markets: Products and Strategies (pp. 415–427). New Jersey: Wiley. Robinson, M. (2001). The Microfinance Revolution. Washington, DC: The World Bank. Safavian, M., & Haq, A. (2013). Are Pakistan’s Women Entrepreneurs Being Served by the Microfinance Sector. Washington, DC: The World Bank. World Bank. (2018). The Little Data Book on Financial Inclusion 2018. Washington, DC: The World Bank. Zaidi, S. A., Jamal, H., Javeed, S. & Zaka, S. (2007, April). Social Impact Assessment of Microfinance Programmes. Draft Report. Retrieved from https://www.researchgate.net/profile/Sarah_Javeed/publication/266874152_Social_Impact_ Assessment_of_Microfinance_Programmes/links/56275aea08aed3d3f13a3a91/ Social-Impact-Assessment-of-Microfinance-Programmes.pdf Zulfiqar, G. (2017). Does Microfinance Enhance Gender Equity in Access to Finance? Evidence from Pakistan. Feminist Economics, 23(1), 160–185.

5 Relationship Lending in Microfinance: Do Women Benefit As Much As Men? Mathilde Bauwin

5.1 Introduction1 The term “financial inclusion” has been gaining importance since the early 2000s, especially following a speech given on 29 December 2003 by the former General Secretary of the United Nations, Kofi Annan, who said: “the stark reality is that most poor people in the world still lack access to sustainable financial services, whether it is savings, credit or insurance. The great challenge before us is to address the constraints that exclude people from full participation in the financial sector”. Since then, media have been highlighting the number of people excluded of financial services, and financial inclusion has gradually become one of the primary objectives of international institutions such as the World Bank or the various agencies of the United Nations.

M. Bauwin (*) Université Paris-Dauphine, PSL Research University, IRD, LEDa, [UMR 225], DIAL, Paris, France Institut National d’Etudes Démographiques, Paris, France © The Author(s) 2019 M. O’Connor, J. Silva Afonso (eds.), Emerging Challenges and Innovations in Microfinance and Financial Inclusion, https://doi.org/10.1007/978-3-030-05261-4_5

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As a consequence, attention has been focused for about a decade on the number of people holding a bank account, or more recently a mobile account thanks to technological progress, with microfinance becoming only a tool to help increase this number. However, these striking numbers, showing the progress made towards financial inclusion, not only demonstrate the increasing reach of microfinance worldwide, with even more new clients or “banked” people every year, they also exhibit another concomitant phenomenon, which is the retention of older clients. Once people get access to microfinance, they remain “financially included”, meaning that they keep returning to these products and services. So far, client retention in the microfinance sector has not appeared as a major issue of interest. Instead, being inherent to microfinance’s modus operandi, it is included in impact assessment studies as a way to control for the duration of inclusion in a microfinance programme. However, client retention is at the core of some recent scandals about the “mission drift” of microfinance. Indeed, over-indebtedness, in particular, is more likely to occur after a client has received several loans than after they have received the first loan—all the more so as loan amounts usually increase over credit cycles, which is called “progressive lending”. Thus, this chapter aims at more deeply analysing the conditions of loan renewals. Additionally, it has been shown by Agier and Szafarz (2013) in relation to Brazil as well as in one of our previous work on Tunisia that women are not necessarily favoured in the microcredit allocation process, particularly in terms of amounts granted. This chapter therefore focuses on the conditions of loan renewals from a gender perspective. In particular, the objective is to analyse the policy of progressive lending by the main Tunisian microfinance institution (MFI) Enda inter-arabe to check if the initial gap observed between amounts granted to new male and female clients that we observed in our previous work is persistent or not over credit cycles. Indeed, this initial gap seems to be accounted for by great information asymmetry between new applicants and credit officers, which is usual in any lender–borrower relationship; because of such an asymmetry, officers tend to refer to stereotypes about women and their projects, most probably leading to statistical discrimination. In the same way, the main hypothesis in this chapter is that the same kind of stereotypes may have

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an effect on the application of a progressive lending policy. Since gender division of labour within the household remains significant in Tunisia (MAFFEPA, 2005),2 female clients may still be considered to have less time to dedicate to their projects whatever the credit cycle. As a consequence, we assume that loan officers are likely to conclude that if women invest less time on average in their activity, their project is likely to evolve less quickly, and women should also need less money at any credit cycle. Such general consideration would lead to statistical discrimination taking the form of a slower progressive lending policy for women that cannot be justified by project characteristics, or by different risky behaviours between men and women as clients. The alternative hypothesis is that credit officers gain information on clients as clients renew their loans, which should reduce the moral hazard issue. To that extent, the relationship between credit officers and microfinance clients would be similar to any lending relationship between financial intermediaries and firms, and several theoretical papers show that such lending relationships enable creditors to produce information about borrowers and to use it in their next credit decisions (Campbell & Kracaw, 1980; Diamond, 1991; Leland & Pyle, 1977). As a consequence, MFIs’ credit officers could also learn from their relationships with their clients that female clients are eventually as able as men to manage their projects and even less risky in terms of repayment. In such a case, the progressive lending policy should be at least fairly applied between men and women. To check our hypotheses, we use longitudinal client data from Enda and analyse Enda’s progressive lending policy by examining amounts granted over credit cycles on the one hand and the growth rate of these amounts granted on the other hand, while correcting the selection bias and taking former repayment behaviour into account. The main result is that although female clients are less risky in terms of repayment behaviour, loan amounts granted to women grow more slowly from one credit cycle to another than those granted to men, all things being equal. Section 5.2 reports how progressive lending is applied in practice and considered in the literature, Sect. 5.3 describes the data, Sect. 5.4 details the empirical method, states the results and discusses them, and Sect. 5.5 concludes.

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5.2 P  rogressive Lending in Practice and in the Literature 5.2.1 Progressive Lending in Microfinance Few questions are generally raised, other than about the issue of impact, concerning what happens after clients have received their first microcredit. Yet, what happens is very specific to the microfinance sector. As Armendáriz and Morduch (2010) explain, microfinance institutions aim at serving vulnerable people, and hence offer very low loan amounts, leading them to face higher transaction costs than traditional banks. As a strategy to reduce these costs, MFIs implement “progressive lending” (Armendáriz & Morduch, 2010, p. 143): they progressively increase the loan amounts over credit cycles, provided that the client has demonstrated good repayment behaviour. This enables MFIs to remain profitable as their transaction costs progressively decrease relative to loan amounts. In a broader perspective, one of the strategies implemented by MFIs is to encourage client retention by creating “good dynamic incentives […] through attractive long-term relationships with clients” (Armendáriz & Morduch, 2010, p. 161). Progressive lending is one of these good dynamic incentives designed to encourage clients to keep resorting to the MFI.  Finally, progressive lending is also what enables MFIs to avoid potentially large losses as, in practice, loan officers can test borrowers’ repayment behaviour with small loans at first before allowing them to climb up the loan scale. As a result, client retention and progressive lending are part and parcel of the microfinance system. Client retention has recently been the subject of higher attention: it is today considered as an indicator of social performance in the Universal Standards for Social Performance Management, which has led to its integration in practical tools of social performance assessment such as SPI4. However, no additional recommendation is provided in these standards and tools about how progressive lending is supposed to be implemented. More generally speaking, the conditions of what would be a responsible policy of client retention and progressive lending are not detailed.

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5.2.2 Progressive Lending in the Literature With regard to academic literature, progressive lending is usually not analysed in itself; instead, the time component of client retention is sometimes considered, and appears mostly in impact studies as a way of distinguishing between treatment and control groups to assess the effects of benefiting from microfinance services. For instance, Banerjee, Duflo, Glennerster, and Kinnan (2009) analyse the impact of microfinance on several economic and social indicators with a randomized experiment in India, in which the average loan amount enables to control for how long clients have been benefiting from a microfinance programme, as loan amounts are supposed to increase gradually with credit cycles. In a more recent version of their study (Banerjee, Duflo, Glennerster, & Kinnan, 2015), the authors expect to assess the impact of microfinance by comparing the treatment group consisting of people benefiting from microfinance services for a longer time (three years), and the control group consisting of new clients. Client retention is thus used to estimate the potential impact of microfinance after a certain time. It is considered as a phenomenon logically resulting from the first step, which is accessing microfinance services. Once again, the issue of access remains the main focus, and no question is raised about what happened during the threeyear period in terms of number of loans, amount increase, or variation in credit cost (interest rates may differ according to loan amounts, low amounts usually being more expensive than higher amounts). In the same way, Weber and Ahmad (2014) compare women in higher loan cycles of a Pakistani microfinance institution with those in the first loan cycle to assess the possible impact of microfinance on women’s empowerment. The treatment group consists only of women having taken part in the microfinance programme for five years, and if the number of loans they got is provided in descriptive statistics as additional information, it is not included in the analysis itself. Once again, the treatment and control groups are distinguished only by time, and the impact of microfinance is supposed to appear only over time, whatever the number of loans or the growth rate of loan amount. In the study by OECD (Organisation for Economic Co-operation and Development) on the effects of microfinance on poor rural households and the status of women (OECD, 2007), several “treatment variables” are used

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to estimate the impact of microfinance services, these variables being “availed program loan” (yes or no), the number of months the loan programme has been available, the cumulative total amount of loans (which blurs the possible evolution in loan amounts over cycles), and finally the number of loans. However, the last two treatment variables were eventually not used in final discussions as they did not appear statistically significant. This non-significance could have raised some new questions for further research, but classical treatment variables were used for the impact study instead. The meta-analysis achieved by Chliova, Brinckmann, and Rosenbusch (2015) is very meaningful in this respect. They gathered the maximum possible number of quantitative studies about the impact of microfinance since 1980, ending up with 91 studies. In most of these studies, the independent variable of interest is dichotomous and represents the participation, or not, in a microfinance programme, that is receiving at least one loan. Chliova et al. (2015) also used some other studies (representing a minority) in which participation is captured by a continuous variable and measured by time since the reception of the first loan. Nothing other than time is used to consider client retention in impact analyses, and the other features of progressive lending are not examined. Some recent studies focus on client retention from the MFI’s point of view, such as Epstein and Yuthas (2013), who show that client retention is higher in rural parts in Malawi than in urban regions, or Pearlman (2014), who focuses on the determinants of dropouts, but again the other aspects of progressive lending such as growth rate of loan amounts or decrease in credit cost are ignored. Thus, to the best of our knowledge the conditions of loan renewal have not been analysed yet.

5.3 Data 5.3.1 Data Preparation and Management Enda provided a complete panel dataset containing information about all new clients from June 2012 to December 2013 and about all the loans they received from June 2012 to March 2016. It was decided to limit the

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dataset to new clients up to the end of December 2013 as the situation in the country changed in 2014, with the entry of new actors in the microfinance sector leading to the possibility that new clients in 2014 may have been selected in a different way. The whole dataset consists of 69,301 clients (63.5% of whom are women) who received a total of 183,109 loans. One client can hold two loans concurrently but not two project loans. The loans dedicated to personal projects or market opportunity (a tiny minority though, as they represent only 2636 loans, that is 1.42% of all the loans granted over the period) were removed from the dataset. However, as holding two credits at the same time could influence the evolution of projects and/or clients’ financial situation, a dummy variable was created to take this information into account.

5.3.2 Descriptive Statistics 5.3.2.1  Evolution of Clients’ Projects As already mentioned, all the loans considered in our dataset were disbursed to finance a project, which may be a low-scale income-generating activity (IGA) or a micro or very small enterprise. In order to analyse the progressive lending policy applied by an MFI, it is necessary to consider how clients’ projects evolve, as the way loan amounts grow is likely to depend at least partly on the evolution of clients’ projects. The average age of projects when clients receive their first loan is 5.8 years, without statistical difference between projects led by men or women. The main activity sector is agriculture among both male and female clients, followed by trade. However, women are more likely to lead projects in the production sector (i.e. mainly textile production, food production, or handicrafts) whereas men are more likely to work in services (especially transport or mechanics). As often observed in microfinance, female clients tend to lead smaller projects than men. Here, the classification concerns the type of financial products which are intended to be tailored to each type of project. When clients receive their first loan, women are relatively more likely to receive a product designed for income-generating activities, or “micro projects”,

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whereas men are relatively more likely to receive credit for very small enterprises, especially in the non-agricultural sector. In addition, a specific financial product is designed for young people only (under 35 years of age) to enable them to start an activity, and men are more represented in this category than women. The financial products differ, in particular, in terms of maximum amounts and interest rates. Although they are supposed to be tailored to the size and type of clients’ projects, the choice of financial product is at the discretion of loan officers. For instance, if a loan officer estimates that a high amount (above 3000 TND) should be granted considering the project characteristics, he or she has no other choice than granting a financial product for very small enterprises. We therefore cannot conclude with certainty that a client’s project exactly corresponds to the category the product is supposed to be designed for— this classification only reflects the assessment of loans officers. A striking gender difference concerns the evolution of financial products over credit cycles. If we estimate that the financial product granted actually corresponds to the project’s size and type, a micro project may turn into a very small enterprise whether in the agricultural sector or not, or a project may regress and a small enterprise may decline into a micro project. In the same way, the creation of an activity by a young client may then turn into a micro project or a very small enterprise. In any case, the evolution of financial products from one credit cycle to another reflect at least the way officers see the evolutions of clients’ projects, if not actual evolutions. Men who receive a first credit for a micro project are more likely to receive subsequent credits for small enterprises than women, who are more likely to keep receiving credits for micro projects. By contrast, women receiving first credits for small enterprises seem more likely to regress in terms of financial product as compared to men, that is to say to receive next credits for micro-projects. This could reflect the fact that women’s projects develop less quickly than men’s, possibly because of the gender division of labour in the household, differences in priorities and preferences, inequalities in access to resources and mobility, or starting inequalities in education, training and skills, and so on. The second possibility is that this evolution reflects the evolution of loan officers’ assessments, especially of their clients’ financial needs, as financial products are distinguished not only by activity sector but also by their maximum amount. This is why we turn to other more

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objective indicators to take the size and type of projects into account in the econometric analyses, such as fixed assets, current assets, or monthly profit. The dataset has three more indicators for non-agricultural loans only, which are being part of the formal sector or not (which means the activity is officially registered), the location of the project (at home or in independent premises), and monthly profit. It has two other indicators for agricultural loans, which are the useful area for the activity and three categories of project size assessed by the value of fixed assets. About non-agricultural loans, when clients receive their first loans, only 19.4% of their projects are officially registered on average, but this is even less the case for women, as 11.9% of them work in the formal sector against 33.7% of men. Additionally, gender differences exist in transitions as well: men working in the informal sector are respectively more likely to evolve towards the formal sector than women, as 18.6% of them make the transition against only 6.3% of women, and less likely to be back into the informal sector when being officially registered (25.1% lost the registration against 41.7% of women). Concerning agricultural loans, the useful area for men’s projects is 3.83 ha on average against 2.99 ha for women’s projects. The MFI also classifies the projects according to the value of fixed assets and considers that the project is an income-generating activity (IGA) if fixed assets worth less than 8000 TND, a micro enterprise if they worth between 8000 and 100,000 TND, and a very small enterprise above 100,000 TND. Again, men are more represented in very small enterprises (2.58% against 0.56% of women’s projects), whereas women are more likely to run income generating activities (82.1% against 59.3% of men’s projects), for both culture and breeding, even though breeding tend to be smaller projects for both men and women. In the same way, 89.7% of women’s projects did not have any employee against 83.9% of men’s projects, since 10.5% of men’s projects resorted to regular employees, 2.4% to seasonal workers, and 3.3% to both, against respectively 6.4%, 1.3%, and 2.7% of women’s projects. These indicators tend to show that women’s projects would start from further behind and then develop less quickly. However, as project development also depends on financial investment, the role of the progressive lending policy in these evolutions remains unknown at this point.

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5.3.2.2  Evolution of Clients’ Financial Situations When receiving a loan, clients should provide a guarantee, which can take several forms as is usual in microfinance, since MFIs are supposed to be more flexible with people excluded from the traditional banking system. Once again, the types of collateral offered by clients vary according to gender. First, the share of unique guarantors (a loyal client acting as a guarantor, parental engagement or the client’s own credit background) is similar among men and women. However, women tend to resort more to reciprocal guarantee: this includes joint surety, which involves several current clients, and mutual guarantee, which involves only one other client. Conversely, men have more recourse to financial or physical guarantees (salary or pledging of equipment). This could reflect the existing gender inequalities in terms of access and control over resources. In particular, most female clients are married and have another member of their household who is active, these proportions being higher among women than men. We can therefore expect women to be at least as likely as men to offer salary as collateral, but salary is the most common collateral offered by men and not by women, which would imply that women cannot use their household’s resources as collateral or prefer not to. With regard to specific financial indicators, if the household’s financial situation does not differ much between men and women, the project’s financial indicators are higher for men than women when all credit cycles are taken together. Households’ median expenses and revenues are c­ omparable, whereas median fixed assets, current assets, and monthly profits (applicable to non-agricultural projects only) are higher for men’s projects than for women’s. To take a first look at the evolution of these indicators over credit cycles, we consider only clients who got four credit cycles (15,572 clients from our dataset) to avoid selection bias and compare comparable clients (Fig. 5.1). The evolutions in terms of value and of ratio (with the baseline being the value of the indicator when the client took his or her first loan) show that all financial indicators evolve positively for both male and female clients, but some gender differences may be observed: fixed assets of men’s projects increase more quickly than those of women, which widens the initial gap. Concerning current assets, the gap in value between

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Fig. 5.1  Evolution of financial indicators, in value and ratio (medians)

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Fig. 5.1  (continued)

men’s and women’s projects persists, but current assets of women’s projects still increase more quickly. In the same way, the existing gap between men’s and women’s monthly profits (for clients getting non-agricultural loans) slightly widens, but women’s profits grow more quickly. This questions the assumption that women’s projects grow more slowly: the initial gaps are sizeable between men’s and women’s projects, but then men and women seem to manage their projects differently and to make different choices in terms of investments: men seem in particular more likely to invest in fixed assets. With regard to households’ financial indicators, both revenues and expenses increase slightly more quickly for women than for men, which could also indicate different choices in terms of allocation of resources. Given these contrasted figures, both values and evolutions in ratios of financial indicators will be taken into account in the analysis of loan renewals.

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5.3.2.3  Loan Amounts over Credit Cycles As it is the case for most microfinance institutions, Enda applies a policy of progressive lending: amounts granted go from an average of 678 TND for the first loan up to 2364 TND for the fifth loan (Table 5.1). Not surprisingly, the amounts are higher for male clients, which could be explained by the differences between men’s and women’s projects in terms of size, type, or financial indicators. The econometric analysis will attempt to check if these differences totally explain the gaps observed in amounts granted or not. It also seems that amounts granted increase more quickly over credit cycles for men than for women, as the gaps between amounts granted to men and women become increasingly higher over cycles (Fig. 5.2). To consider the evolution of these loan amounts in greater detail, we again consider ratios; this time, as loan amounts are limited (the ceiling being 5000  TND), we do not expect extreme values and use average ratios. The evolution of loan amounts over credit cycles is defined as the growth rate of loan amounts from one credit to the next one. First, it should be noticed that if loan amounts increase from a credit cycle to another in 95% of the cases, they still may decrease: thus, the minimum ratio from a cycle to the next one is 0.10 while the maximum is 12.5. The evolution of growth rate is represented in Fig.  5.3. Unsurprisingly, if the growth rate is substantial from the first credit to the second, it tends to be lower afterwards. Indeed, the leeway for increasing the amount is high after the first loan and then decreases. The evolution of the growth rate is similar for men and women. Nonetheless, knowing that the amounts at the first credit cycle are much lower for women, such similar growth rates can result in increasing gaps in terms of loan amounts, as seen in Fig. 5.2. Moreover, as financial indicators evolve differently for men and women, we cannot know at this stage if these similar growth rates represent a fair progressive lending policy which takes the evolution of projects into account. Table 5.1  Average loan amount by credit cycle and by gender Cycle

1

2

3

4

5

Men Women Total

882 560 678

1401 924 1093

1899 1274 1494

2329 1577 1838

3058 1912 2364

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Fig. 5.2  Average amounts granted over credit cycles by gender

Fig. 5.3  Evolution of loan amounts from one credit cycle to another by gender (in ratios over the previous amount)

5.4 Methods and Results The aim of the chapter is to analyse the conditions of loan renewals and, in particular, to check if the loans are renewed in a fair manner between men and women, given the evolution of their respective projects and situations. However, the first emerging issue is the fact that not all clients

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renew their loans. There is a significant amount of natural attrition in our dataset,3 which corresponds to the clients who left the MFI. As dropouts may have different characteristics, whether they left the MFI after defaulting or not, we suspect that the selection (whether it is self-selection by clients themselves or exclusion by the MFI) is not random. Therefore, the analysis includes a correction for selection bias on panel data. The variable of interest is first the amount granted when a loan is renewed, and second the growth rate of loan amounts. Whatever the variable of interest considered, the selection bias should be corrected. In order to do that, we follow Wooldridge’s procedure (Semykina & Wooldridge, 2010; Wooldridge, 1995) to correct selection bias in panel data models. Indeed, unobservable variable(s) could have an effect on both the probability of renewing a loan and the loan amount granted, in level or growth rate. These characteristics could be tenacity or perseverance which could push the client to renew their loan to keep their activity running, as well as insisting that the loan officer should increase loan amounts more significantly; they could also be better entrepreneurial skills in general. These unobservable variable(s) could also be correlated to the client’s or project’s observable characteristics, particularly the project’s financial indicators such as fixed assets, current assets, or profits for non-agricultural projects. This possible correlation is an allowed hypothesis in Wooldridge’s procedure. The procedure is composed of three steps. The first equation may be written in latent form as follows:



S* = Z δ +ε it +1 it +1 t +1 it +1 s =1 if Zit δ + ε >0  it +1 +1t t +1 it +1 And  s = 0 otherwise  it +1 The selection equation being: sit = Zitδi + εit > 0 With

(5.1)



• sit  =  1 if the client renews a loan at the end of the credit cycle t, with 1 ≤ t ≤5 • Zit representing the client’s characteristics (some being time-varying, i.e. changing from one credit cycle to another, and others being time-­invariant) as well as the characteristics of the project and the loan (being time-varying)

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• δ a vector of parameters • εit following a normal distribution • Corr(εit, εit + 1) = ρtt + 1 After estimating Eq. (5.1) with T standard probit models, the second step consists in computing T inverse Mills ratios for sit  =  1, and these ratios are included in the subsequent equation to correct the selection bias. The exclusion variable is the fact that the last repayment of the previous loan was made during the last week of the month, since, in this case, the probability of a loan being renewed is much lower. Indeed, this week is supposed to be dedicated to collecting late repayments, and officers are even not supposed to proceed to any renewal during the period. If a closing date falls during this period, officers are expected to anticipate and launch the renewal procedure before. If they do not, there is higher risk that there is no renewal at all. Consequently, the probability of a loan being renewed is negatively correlated with the previous loan’s closing date falling during this period. By contrast, if a loan is renewed, the fact that the last instalment was paid during the last week of the month is not expected to have any effect on the next amount granted.

5.4.1 T  he Amounts Granted After the First Credit Cycle We first focus on the amounts granted in level, in order to check if the gap observed between amounts granted to men and women at first cycle persists or not for the next cycles. There are two main differences between the granting procedure of the first amount and of the next ones: first, officers better know their clients from the second cycle, and do not resort to a moral enquiry any longer, since clients’ repayment behaviour during the first cycle is a sufficient indicator to anticipate moral hazard; second, there is no official amount requested by clients after the first cycle. Indeed, at the time of our study, the renewal procedure consisted in officers discussing with clients before the end of the previous cycle, and determining a loan amount together given clients’ financial conditions and needs. Consequently, there is no official amount requested by clients which can be taken into account in the estimation of amounts granted from cycle 2.

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Following Wooldridge’s procedure, loan amounts from cycle 2 are estimated using Eq. (5.2) and a pooled ordinary least squares estimator with bootstrapped standard errors: yit = ψ xi + β X it + γ Request + ϕYear + δ Nbdelay + ρλit + εit i1 it −1 1

(5.2)

With • yit the loan amount granted for each individual i at a time t, t being a credit cycle >1 • x̄i the vector of average values of Xit by individual • Xit the matrix of time-varying independent variables • Requesti1 the amount requested at cycle 1 • Year1 a dummy variable indicating the year (2012 or 2013) when the first credit cycle was granted, as amounts tend to grow from a year to another • Nbdelayit-1 the number of days of delay of the previous credit cycle (in log) • λit the inverse Mills ratios • εit the idiosyncratic error term The matrix of independent variables consists of constant socio-­ demographic characteristics (age, marital status, household size, education), and the loan’s time-varying characteristics (credit cycle, time interval between two loans, collateral), the project’s time-varying characteristics (activity sector, age, employees), financial time-varying characteristics (household expenses, fixed assets, current assets), and organizational timevarying features (new officer compared to the previous loan or not, officer’s gender, branch fixed effect, branch’s age and branch’s rate of rural areas). The model is run on all loans first (Table  5.2), and then on non-­ agricultural and agricultural loans separately (Table  5.3), in order to introduce the additional information available for each type of financial product. The coefficients of average values of Xit by individual have been dropped from the table for more clarity. Concerning all loans first, a first model is run including a linear effect for credit cycles (Model 1), a second one introduces dummy variables for

Loan Previous number of days overdue (log) Number of days between two cycles Requested amount at cycle 1 (100 TND) First amount received in 2013 (vs. 2012) Parallel personal or opportunity loan Collateral (vs. unique guarantor)  Reciprocal guarantee  Physical guarantee Credit use (vs. working capital)  Investment  Creation  Other

Female Credit cycle (linear effect) Credit cycle (vs. 2)  3rd cycle  4th cycle  5th cycle Female # credit cycle  Female # 3rd cycle  Female # 4th cycle  Female # 5th cycle (3.099) (0.0400) (0.282) (4.808) (35.39) (8.905) (10.83) (166.6) (64.02) (152.6)

−5.913 −30.00*** 354.4** −175.6*** −114.2

353.9** −176.0*** −114.5

−7.539 −30.48***

−144.0*** −0.236*** 26.6*** 34.47*** 120.9***

(168.9) (67.07) (165.7)

(8.317) (10.88)

(3.039) (0.0332) (0.299) (4.210) (36.53)

(3.890) (7.159) (18.38)

387.7*** 712.0*** 1116***

−144.6*** −0.224*** 26.6*** 35.11*** 124.7***

(4.289)

Model (2) −113.7***

(4.353) (2.586)

Model (1) −113.9*** 365.4***

Table 5.2  Estimation of amounts granted from cycle 2 (all loans) Model (3)

347.3** −177.1** −130.7

−6.479 −19.88**

(159.9) (70.55) (154.2)

(7.983) (9.934)

(2.907) (0.0370) (0.264) (4.442) (35.05)

(8.534) (13.31) (34.37)

−143.2*** −260.0*** −400.5*** −146.0*** −0.223*** 26.5*** 33.35*** 108.9***

(8.067) (12.69) (30.86)

(5.214)

481.4*** 882.1*** 1367***

−12.18**

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Socio-demographic profile Young (