How Does Microfinance Work?

This blog post was written by our Engagement & Finance Officer, Sasha Watterson. 

Microfinance today is a broad term used to describe financial services (such as loans and savings) which are offered to entrepreneurs, small businesses and individuals who lack access to traditional banking services. Dr Mohammad Yunus is considered a pioneer of modern microfinance. In the 1970s and 80s, he experimented with making small loans (which he funded himself) to women in Bangladesh who had relied on loans with unfair terms in the past. 

Since then microfinance has expanded and evolved to include many different structures of microfinance - microcredit, savings-led microfinance, The Grameen Model, savings groups etc. The movement has impacted millions of families over the years, and even today the microfinance landscape continues to develop. For more than a decade Five Talents has been developing a model of savings-led microfinance which allows our clients to build a sustainable income and forge a route out of poverty.

As a microfinance charity, we provide services to more than 35,000 people living in East Africa. Our aim is to give our clients the means to save together (in groups we call Trust Groups) and take small business loans to invest in their micro-enterprises. All Trust Groups are unique and progress at different speeds but most follow a basic model:

1. Mobilisation: Members form Trust Groups of 75-100 people, subdivided into groups of 3-5 people, who know each other well and are prepared to co-guarantee one another’s loans.

2. Formation: Members begin saving and are trained in financial literacy and business skills. A Board is elected from amongst the members who are then trained in good governance and oversee all Group meetings and transactions. Groups write their own Constitution and hold elections each year.

3. Launch of loan scheme: After around 6 months, members start lending to each other and the fund grows through the charging of interest (which is shared out as dividends at the end of the year). Experience shows that groups make very strong credit decisions since each of the members are invested in the loan fund. Throughout this period members continue to receive training in basic business skills.

4. Trust Group matures: After around 18 months our involvement will begin to decrease as groups mature and are able to operate independently. Groups continue saving and lending together,  giving them an ongoing safety net through their savings and the means to keep growing their businesses.

Each microfinance programme is based on a model that is designed and operated by our local partners. They know their communities best and, because the model builds sustainable groups, it allows us to move on and start programmes, supporting more communities. Since 2016, as a result of the generosity of our supporters, we have been accelerating the number of programmes we are starting. Visit our website to find out more about our current programmes, including a brand new programme in DR Congo.

Does Microfinance Reduce Poverty?

This blog post was written by our Engagement & Finance Officer, Sasha Watterson.

Over the past decade we have seen hundreds of cases which show the impact of microfinance on poverty. Over a three-year period, our monitoring shows that the clients in our savings-led programmes will have increased their savings fivefold.

Whilst the savings provide a place to turn during tough times, loans help businesses grow. The members pull their savings together to form loans. At first, these loans are small, generally no more than £150. But as the businesses grow, members save more and the loan fund grows.

There are many ways to reduce poverty, but in the rural areas in which we work, microfinance and development go hand-in-hand. And what’s more, poverty alleviation through microfinance is highly efficient. Over the past decade, every pound donated to our Kenyan programmes has unlocked £12 of economic activity, either in the form of savings or loans.

Over the past ten years, Five Talents supporters have transformed the lives of our clients in a range of ways. The most important effect we see is an increase in dignity; rather than being given a handout each entrepreneur is provided with the tools to lift themselves out of poverty. The benefits of our savings-led microfinance model include:

• Growing a safety net of savings: Microfinance effectiveness can be measured in financial terms. A central benefit of microfinance is that those who joined the programmes three years ago have grown their savings more than fivefold and each has an average of £133 in their savings account today. It’s important to think about these financial figures in a human context. Our group members typically have no savings when they join and live on less than $2.50 a day so this is a truly significant change. The practical result of this is that events such as drought or illness no longer push households into absolute poverty.

• Building and expanding business and incomes: The main microfinance benefits are the investments made by members from loans which enable them to establish and grow their small businesses. And this is a long-term impact. Repayment rates in our Embu programme in Kenya, for example, are always above 98%, which shows that members are able to run successful businesses after receiving our training.

• Being able to meet basic household needs: Children indirectly benefit as members have the income to invest in their children’s schooling, diets, and improve the quality of the family’s healthcare. As a typical family has 4 dependents, by impacting 22,000 households our donors are supporting around 80,000 children. When we visit our clients, the biggest change mentioned by the majority of members is: ‘Now my children can go to school.’

• Female empowerment: For Five Talents, the importance of microfinance is also linked to the impact it has on gender relations. Women are empowered to make decisions about how to save and invest their incomes and earn money for themselves, which increases their decision-making power in their households and communities more widely.

Microfinance success is always achieved when the model is designed with the client in mind. Each of these benefits is a result of a long-term focus on the dignity of the people we work with. We've seen this pro-community, long-term view work again and again throughout all of our programmes.

What did our evaluation tell us about our impact for women in East Africa? Part 2

This blog post was written by our Programmes and Systems Manager, Hannah Wichmann.
Five Talents recently conducted an independent evaluation of our work in Kenya to learn more about the impact of our work there.

As we mentioned in last month’s post, women are at the heart of our programmes, in fact over two-thirds of Five Talents’ beneficiaries are female. So during our evaluation finding out as much about how our programmes impact women was critical. We know that in Kenya, just 34% of women have a bank account compared to 50% of men.

During the evaluation, we visited groups where we asked members to raise their hands if they owned a business. There was a clear trend. Significantly more men raised their hands than women. We then asked the women who didn’t have their hands raised, what their businesses were.

Margaret, one of the members in Nakuru in Kenya told us that whilst she doesn’t have a business, she did borrow a loan to buy chickens and sells their eggs to pay for the school fees of her two grandchildren who she cares for. She then added that she doesn’t think of it as a business because she didn’t think it was big enough. In fact, this was true for many of the women we met - they didn’t recognise themselves as the entrepreneurs and small business owners that they are.

Using the evaluation, we’re going to help women benefit even more from our work. One of our aims is to improve the training our female members receive. We know that small changes such as adapting the language used can make a big difference. By avoiding words such as ‘business’ and instead use terms such as ‘income generating activity’, we will see an even greater impact for the women we support.  

This will help women, in particular, to continue building on what they already have - small businesses, relationships with each other, a small amount of savings. And we know from over a decade of experience that with this training, these resources can accumulate to a lot. Over £16M in small loans to be exact!

As women have invested these loans, they’ve begun to earn more and in turn, this gives them greater decision making power in the home. Over eighty percent of women told us that relationships in their households had improved since they joined the programme. By helping women to save and grow their businesses, we expect this to grow even further.

If you want to find out about what else we found during the evaluation click here

This evaluation was made possible through the generous support of the London Chamber of Commerce and Industry's Commercial Education Trust. We are extremely grateful to the Trust for their support of this project.

Financial exclusion of women is a global issue but how will our microfinance programmes help? Part 1

This blog post was written by our Engagement & Finance Officer, Sasha Watterson.

Empowering women through microfinance is at the heart of what we do. 70% of the worlds poor are female. What’s more, studies have found that internationally, women are more ‘financially excluded’ than men. This isn’t just a developing world issue; studies in the US and Europe have shown women are more likely to be financially excluded (less able to take a loan for example) than men [FinMark Trust, 2016].

In 2012 the State of Microcredit Summit Campaign Report found that of microfinances’ reach, 82% of the very poorest were women. Too many women struggle to access financial services - even the most basic, like a safe place to save.

We know that financial exclusion is a major issue for women worldwide; women and girls comprise half of the world’s population but own only 1% of the wealth. [Advocates For Youth].  We see the result of this inequality in the lives of our clients. Before joining our microfinance programmes, many of our female clients were forced to rely on their husbands, fathers, or brothers when they needed money. They had no control over their finances, meaning they had no control over their futures. For women in poverty, microfinance offers an opportunity they have never had before.

But is all this empowerment having an effect? It’s easy to say the work we do is empowering but how empowering? Could we be doing better? All of these questions (and many more!) led to the decision we needed to independently evaluate our programmes - so that’s exactly what we did (and in next month’s post we will tell you what we found!).

Women’s empowerment through sustainable microfinance is important, not only because it offers a route out of poverty, but also because it addresses problems of inequality. Research has found that women farmers are responsible for 60-80% of food production in low-income countries, but, globally, own less than 20% of agricultural land - and less than 5% of the world’s titled land [Advocates for Youth]. Giving women the chance to build and scale their own businesses is an effective way to deal with this inequality.

Research has also shown that women are more reliable when it comes to repayments, which is important when our clients are borrowing from a communal savings pot!

Providing access to financial services when accompanied by business training, increases women's’ decision-making power in the household and improves their socio-economic status in the community. In essence, for our female clients, it’s all about respect and self-empowerment. In our opinion, women and microfinance are a great combination!

And what’s more, the benefits aren’t limited to the women themselves. Studies have shown that women are more likely to invest extra income on the children’s education. Research has shown that when the mother controls the household’s budget, a child’s chances of survival increases by 20%.  [Journal of Health Communication]. Whenever we ask our clients what difference the programme has made, the answer is normally simple: “now my children can go to school.”