Field Notes for Considering Microfinance Services in the Context of AIDS Orphans

Betty Wilkinson

his note responds to a request by USAID Zambia's Health Office to comment on issues regarding the provision of microfinance services to households whose members include HIV/AIDS orphans, and are at risk financially and in other ways. This Note is intended for those who are not microfinance professionals, as an introduction to the topic and to provoke some thinking regarding the best circumstances under which microfinance services can be provided to this vulnerable group. An introduction follows, after which there are short sections on relevant basic microfinance principles, key questions to ask in doing field assessments of communities with HIV/AIDS orphans, and a final note with some observations and three options to consider for trials.

Introduction to Microfinance

Certain institutions worldwide provide microcredit and microsavings services for the purpose of expansion of economic activities and improvement of the standard of living of those under the poverty line, particularly women. The services are provided at or near client's homes, and deal in savings and lending of very small amounts of money. Organizations specifically created to deliver such services are called microfinance institutions, or MFIs.

Savings services may be either forced or voluntary in nature. Forced savings are fixed amounts required from borrowers as a commitment to joint or individual loan security. Voluntary savings are methods for the poor to save small amounts to accumulate funds for significant expenses such as medical costs and school fees, and withdraw them at need. Research has shown that voluntary savings services are critical for the very poor, and are useful and important mechanisms for investment for the poor generally. Unfortunately, legal structures and donor practices often do not allow voluntary savings services to develop fully.

Lending has been the more highly stressed of the two main areas of microfinance services. Though moneylending and methods of rotating savings and credit have existed for millennia, they were more often used to cope with family emergencies or social obligations than for generation of income. Credit unions have also been in existence for a few hundred years, but their expansion in developing countries has been fraught with political interference and subsequent failures. These institutions still exist and are important, but have been complemented by newer forms of microfinance service provision.

Since the 1970s, microcredit services have been developed in innovative forms worldwide, particularly in Bangladesh and Bolivia but also increasingly throughout Latin America, Asia, and then Africa. Microcredit services have taken the form of both individual lending and of loans to both groups and individuals within groups. Clients are generally those under the poverty line, with a special emphasis on women. Loans are made in small amounts, with frequent repayments, for periods of one year or less, for economic activities identified by the borrower and confirmed either by his/her group or by local staff/references. Loan interest rates are high, often 12-50% per annum above the bank prime lending rates. The loans are secured on the individual's reputation or with unorthodox physical security such a goats or chickens. On-time repayment leads to increased credit access, and sometimes to lower interest rates. Late repayments result in reduced credit access, social pressure to repay (in group systems, the group must repay if the individual does not), and sometimes legal action.

The discovery that the poor can and do repay their loans while materially benefiting from the activities which are expanded with borrowed money has led to a good deal of interest in microcredit. The further realization that the poor are willing and able to pay interest rates well in excess of bank rates in order to get services in amounts they need at their doorstep, thus enabling microcredit institutions to become fully financially self-sufficient, has made things even more attractive. Finally, the fact that the poor can be effectively targeted for microfinance services, and that women in particular have been very successful as microcredit clients, has made provision of microfinance services an attractive poverty alleviation tool for donors and governments.

Some Basic Principles of Microfinance

The basic principles of microfinance which may particularly useful for those researching mechanisms to support HIV/AIDS orphans are:

1. Microfinance is not a panacea. It will not save the world, make the poor wealthy, or cure the sick. It is a tool which motivated poor persons can use, along with other tools, to improve their financial condition.

2. Microcredit will not work in locations that do not have sufficient cash-based market activity for a critical mass of clients to be economically active. In environments such as barter economies, isolated areas with low population densities, largely self-sufficient communities with few outside ties, or under conditions of natural disaster, microcredit is counter-productive and will fail.

3. Microfinance institutions must operate with the firm understanding that they function as a business in order to survive and thrive. To work well, microfinance institutions focus their efforts on effective client service, cost recovery and breaking even on a financial basis, and professional management. This has been a problem, because many microfinance programs were set up by non-government organizations that had a social service orientation, and found it difficult to charge high interest rates, press clients to repay, or keep and use accurate financial records for management purposes. There are still debates on whether microfinance should be delivered alone or in combination with other business and social support services. However, there is no question of the importance of professional orientation, and accounting for MFI services independently of any others provided to clients.

   It also means that a microfinance company needs to develop all eligible and interested clients in an area, not just ones who are pre-existing members of a small social organization or have orphans in their families. If the potential client base is too limited, the organizations will not be able to pay the costs of doing business in those areas.

4. In order for microloans to be effectively used, clients must clearly understand and be able to implement the economic activity for which they are borrowing. Knowing what it costs to produce something, and what you must sell it for in order to cover costs, loan interest, and still make a profit, is not as easy as it appears. In many countries, particularly in Asia, cash income diversification has gone on for centuries, and borrowers have clear abilities to use loan funds and pay from diverse sources. In Zambia, where socialism was a powerful force for many years, the level of diversification of cash income sources is still very low. Thus, Zambian microfinance organizations seek clients who have already done some form of cash income generation, even if it is only growing tomatoes and selling them at the roadside. Only experienced borrowers who have done business for some time can afford the risk of expanding into new and untested areas. In cases where there is a severe labor shortage in the family, the fact that the children will work in the business must be squarely faced. Finally, borrowers must have the rigor to keep business money separate, even when there are other pressing needs for cash within the household.

5. The client selection process must be carefully tied into both the microfinance institution's business approach and its financial products. Experience has shown that selecting too poor a client base will make growth and self-sufficiency very slow and problematic. Selecting too wealthy of a client base creates repayment problems (they don't pay!) and sometimes creates social difficulties in the area. Blending groups of more poor and less poor also results in repayment and social strife. Finding the right identifiers (which are often the communities themselves) and ensuring the client base in a given area is relatively financially homogeneous is important.

6. There is virtually no room for provision of grants or free goods to the same group who are receiving microfinance services. If food aid, cash, or other free goods are being provided to a group of poor persons, any efforts to provide microfinance services to this group will inevitably result in loan repayment failure. This experience has been repeated too often worldwide to refute. In some few communities, where local, private sector organizations have had a history of microfinance service provision, they were able to maintain repayments under temporary conditions where grant food or goods were provided to clients after a natural disaster. In all other situations, people simply become confused about what is a gift and what is not.

7. Group borrowing for group businesses must be approached with a great deal of caution. Group businesses tend to fracture due to the different strengths and weaknesses of their business arrangements and the concerned individuals. Unless there is a great deal of social cohesion and trust, as well as clarity and transparency about the business costs, operations, cash management, and use of income, loans to groups for activities undertaken jointly tend to default on payments.

8. Loans for longer-term crops are exceptionally risky, and most microfinance institutions avoid them. Crop lending is risky due to the possibility of insufficient rain, problems with insects and disease, natural disasters, and the fact that families eat the product, often as their staple food. The loan funds are not being focused on a cash-generating activity, and there are long periods where there are no payments. In addition, most countries have long histories of subsidized agricultural credit that is subsequently forgiven. Borrowers naturally assume that they will not have to pay these loans. Therefore, programs established for this purpose have a high potential for failure.

Key Issues in Field Assessments

There are several key issues to look for in field assessments of orphan families, considering the potential for microfinance service provision

There are a number of questions that field people in Zambia can ask when reviewing the conditions of communities that are accommodating large numbers of HIV/AIDS orphans. The following questions will help researchers and others understand whether a community is ready and able to effectively utilize microcredit services to improve the standard of living of its poor households.

The Physical Locale
1. Is the area's cash economy sufficiently active that client income-generating activities will result in cash that can repay microfinance loans, on time, with interest?
2. Is the area sufficiently secure from war or natural disaster or other substantive risks that clients will be able to repay over time without unanticipated failures of their businesses?
3. Does the area have sufficient physical resources (land, water, labor) and access (a road, a weekly market there or within ½ day travel) to support growth?
4. Are all of the inputs needed for client businesses readily available locally, or able to be procured reasonably quickly and easily from nearby?

   The Population

5. Are there at least 600 potential microfinance clients within a one day walk, given whatever mechanism you use to define "potential client"?
6. Are the people in the area supportive of poor persons, particularly women, doing business of any kind?
7. Are potential clients mobile enough to trade outside the area if this becomes necessary for their income generation activity?
8. Can a microfinance staff person reside there or nearby and get out to a banking facility within two hours by motorcycle, year-round?
9. Will someone from outside that area be accepted as a staffperson of a microfinance institution?
10. Can a male staffperson work with women clients on a regular basis without social problems ensuing?
11. Are there existing groups of poor persons already, organized for social or other purposes?
12. Is there an existing program of social welfare for the target group, or are there plans to implement one?
13. Are the local chief and other powerful persons willing for microfinance services to be placed in their area, and will they help enforce repayment requirements using moral suasion and, if needed, village courts?
14. Are the resources of the community sufficient that they can help vulnerable families cope with loan repayment in case of an emergency within that household?

    Issues Generally Important, But Especially Important To AIDS Orphan Families

15. Do vulnerable families have enough resources to grow food to eat? (If not, they will use loan funds for this purpose, rather than for other cash income activities.)
16. Is there sufficient labor within the family to ensure the economic activity can be properly undertaken, even if there are sudden, unexpected changes in the household composition?
17. Is there sufficient understanding of how to run the economic activity that, if the main loanee is incapacitated, others can take over and run the business and repay the loan?
18. Is there sufficient control over the cash, and understanding of the difference between cash inflow and profits, so the activity will be able to repay the loan on time plus interest?
19. What are the family options in case of emergency/medical/other costs, so they won't tap into the loan capital?
20. Can the family clearly distinguish between any other gifts and their loans?
21. If they have access to voluntary savings services, will they be able to use it to protect their money so they can pay major costs?
22. If the loanee dies, can the family still take over responsibility for the loan?
23. If the family has a disaster (i.e. their loan-funded chickens die) will they still be able to cope with loan repayment?

A Final Note

Microfinance services are only one of a great number of services that can be provided in order to empower vulnerable households economically. The central focus should be on whether the service can materially improve their standard of living, whether it is possible and acceptable within the community, and whether it is financially sustainable for a microfinance institution to provide it. When microfinance services are provided, they should be a service which families undertake willingly and responsibly, and which are not and cannot become an undue burden. On the same token, microfinance institutions should not be forced or induced to provide services to these families and communities if such services are not financially sustainable.

A few areas where testing of pilot programs might be considered include:

• provision of loan guarantees against death or debilitation of a loanee in a vulnerable family, which allows MFIs to protect their investment while not exposing such families to unacceptable risks
• matchmaking, where social organizations dealing with these households introduce them to MFIs working in the area as potential clients
• provision of basic business training services, possibly by a program such as USAID's HRDP, before microloans are considered by these families.

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Hari Srinivas - hsrinivas@gdrc.org
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