Lessons From a Microfinance Pilot Project in Rwanda
By Tamsin Wilson
Tamsin Wilson is an independent microfinance consultant. She coordinated Concern Worldwide's qualitative research on microfinance in Angola, Mozambique, Rwanda and Cambodia, and now provides technical support to the Rwandan microfinance programme.
The contribution of Concern Worldwide in producing this article is gratefully acknowledged.
This article describes Concern Worldwide's experiences in developing and managing an innovative microfinance project, Abazamukana1, in Rwanda.
Mugina market place which is transformed into a place of great activity on the weekly market day
One of the legacies of conflict in Rwanda is poorer social cohesion. As a result micro-finance initiatives have not fared well. The type of micro-finance project described below relies more on individual participation than traditional models and has therefore proved to be a valuable tool in addressing post-emergency food insecurity. (Ed)
In 2001, Concern initiated a 3-year action research project on microfinance, funded by the Department for International Development-UK, and involving qualitative research in Angola, Cambodia, Mozambique and Rwanda. Informed by the findings of this fourcountry study2, since 2002 Concern has been supporting the development of an innovative microfinance service, Abazamukana, in Rwanda, which was recently evaluation3.
Microfinance in conflict
Our knowledge of how, and indeed if, microfinance can work in war-affected environments has, until the end of the 1990's, been very limited. In the past, microfinance in war-affected countries has often consisted of short-term, poorly planned, rushed interventions by organisations under pressure to disburse funds quickly, using staff that has no expertise in microfinance. Clients have been provided with relatively large loans for long loan periods, to inject capital into the household economic activities. Unfortunately, these strategies and tactics have generally proved inappropriate, resulting in ineffective lending mechanisms, over-indebtedness of clients, poor repayment rates (significantly less than 98%), and low outreach. This has been partly due to diversion of loans to wealthier or more powerful members of the community, and an over-emphasis on credit at the expense of savings and other services.
History of microfinance in Rwanda
A bicycle repairer in Mugina market who is working with his third loan from Abazamukana
Rwanda today is a relatively peaceful and stable country. Although people are very poor, rural markets are dynamic and organised and attract buyers and sellers from urban as well as rural areas. There has been very little restriction placed on microfinance organisations (MFOs) by the government of Rwanda and overall, this has probably encouraged more non-governmental organisations (NGOs) to get involved in microfinance than if there were exacting regulation. Despite what appears to be a fairly enabling environment, however, only 0.3% of the population have access to NGO microfinance services. With little competition and the highest population density in Africa, why has the entire NGO sector only attracted, on average, 2,900 clients per year since 1994? There are, of course, many causes but there are two particularly important constraints to microfinance. First, skills and education levels are very low, with 91% of the workforce engaged in agriculture, 80% of secondary teachers unqualified and less than one-half of civil servants with secondary education. Without skills, it is difficult to make use of financial services and without skilled microfinance staff, it is difficult to rapidly expand a MFO. Secondly, social capital has been gravely damaged by the genocide. It created many sub-divided groups in Rwandan society and reduced the prevalence of traditional practices like gift giving, exchange, mutual assistance, collective action and protection of the vulnerable. Individuals are less open to joining microfinance groups when social capital remains so seriously damaged.
Project planning
Complementing the findings of the fourcountry research in 2001, the Abazamukana intervention was also developed using market research in Rwanda. As well as identifying a high population density (>300 persons /sq km), this preparatory market research provided a critical insight into the market environment, in particular:
- Clients disliked travelling to, and spending time in, group meetings and were willing to pay more for an individualised service.
- The majority (83%) of potential clients were willing to pay at least 5% interest per month on individual short-term loans (but individual loans were costly and risky to provide).
- Clients appeared to have less respect for NGO managed microfinance initiatives following the post-war emergency relief years, when loans were disbursed but not collected.
- Clients needed to respond immediately to business opportunities and could not wait a long time for loans to be approved.
- Many clients disliked the conventional arrangement whereby all members of a group guaranteed the loan of a fellow member, and were required to repay the loan if the borrower could not.
- Clients could not afford the minimum savings balances and collateral requirement of the local Credit Union.
The weekly market was the focal point for thousands of local and city buyers and sellers, and would be a good location for a branch for cash transactions.
What is microfinance?
Microfinance is the provision of banking services such as savings, credit and money transfer to poorer people who cannot access ordinary mainstream banking services. Microfinance can be provided by specialist microfinance organisations (MFOs), by banks that downscale to reach the poor, by moneylenders, Credit Unions and by community-based organisations. Post-conflict microfinance sits on the edge of the mainstream microfinance sphere but it should not be considered a separate discipline.
Project design
The design of Abazamukana and its products responded directly to the results of the market research. The poor image of NGOs in the area, who were well known for giving loans and not collecting repayments effectively, alerted Concern to the need to present Abazamukana differently to its predecessors. One approach would have been to create a wholly community owned and managed MFO, with little outside involvement. However, the approach chosen by Concern was to present Abazamukana as a permanent, professional and commercial banking service provider for poorer people. It rented an office in the market place, with a shop front very like others in the area, and aimed to project a serious, professional image.
Abazamukana's first branch was established in the busy market square, offering innovative and flexible loan and saving products for individuals, rather than groups. Clients could deposit money in their savings account and withdraw money as frequently as they needed, simply by visiting the branch. Loans were made available for short periods of a few weeks or months and repayment was normally weekly.
Meat seller in Mugina market who has taken two loans from Abazamukana.
As there were no group meetings, the organisation depended heavily on the credit agents who made several visits to every client in their own home, to build up a good relationship and mutual understanding before the first loan was disbursed. Because the credit agent and the branch manager approved loans, rather than a committee, clients normally knew in less than a week if their loan application had been successful. Repeat clients with excellent repayment records over the previous three loan cycles simply went to the branch and could immediately obtain a repeat loan of the same size as the last. Instead of group-based collateral, loans were guaranteed by a combination of 20% savings and a personal guarantee from a close family member who became responsible for the loan in case of default.
The credit agents did not carry any cash. Clients called in person at the branch to make all cash transactions, which meant that credit agents were not a target for theft when they travelled in the communities. Credit agents submitted completed loan applications to the branch and a separate cashier disbursed loans to the client.
The more flexible loan product saved time for the client but was more expensive for Abazamukana to provide. Therefore, the loan interest rate (of normally less than four months) was much higher than other MFOs in the area. For the first two loan cycles, 10% interest per month was charged. For subsequent loans, with client credit record established, the interest rate dropped to 5% interest per month. In contrast, the savings product did not create any income for Abazamukana, and therefore did not attract any interest. In the event that Abazamukana becomes a regulated MFO in the future, there is good potential to on-lend funds held, thus allowing savings interest to be paid.
| Strengths | Weaknesses |
| Clients like the individual loan and savings products. In the first nine months, 1,000 people became clients of Abazamukana. | Repayment rates fell sharply when there were delays in getting the motorbikes for credit agents and the organisation continued to disburse loans without any means of following up repayment. |
| Repayment rates improved when the loan guarantee was developed to include 20% of the loan deposited in the savings account prior to loan disbursal, and a personal guarantee from a close family member. | The initial loan guarantee, consisting of character assessment and social pressure applied by local committees, was not a large enough incentive for clients to repay |
| Even though this is a pilot project, Abazamukana was designed as if it were necessary for the organisation to become selfsufficient. This has had a positive influence on the attitude of credit agents and cashiers, and on strategic decisions made by management. | Abazamukana remains closely connected and totally dependent upon Concern. It was unsuccessful in distancing itself from Concern probably because Concern vehicles are used for transport, expatriate staff visit the project and for some time, the Concern logo appeared on the client passbooks. |
| Clients prefer to have credit agents visiting them in their houses rather than them attending group meetings. In a recent satisfaction survey, the majority of clients stated that Abazamukana's loan was the cheapest in the area despite the fact that based on interest rate alone, it is the most expensive. Their analysis of the cost included non-financial costs like travel to meetings, attendance at meetings, and time spent waiting for loan approval. | Clients do not deposit large amounts of savings in their accounts because they are scared that the NGO Concern, like its predecessors, will one day leave and there is a chance that they might not get their savings back. |
| Situating the branch in the busy market square has meant that Abazamukana catches a lot of 'passing trade', especially on market days. | Short-term loans at high interest rates work well until clients delay repayments and the interest due builds up to un-manageable proportions. |
| The loan product is perceived to be for the poorest. | The savings product is perceived to be for richer people as there is a mistaken impression that the poor can't save. In other countries it has been proven that even beggars can save. |
| By hiring an accountant, Abazamukana has been able to develop transparent accounting systems. | Some people, including a few community leaders, have taken loans without any intention of repaying. Furthermore, they have actively encouraged others not to repay the so-called 'American money.' |
| Motorbikes, rather than 4x4 vehicles, are the most appropriate means of transport for the MFO as they keep costs low and suggest that this isn't a 'normal' NGO project. | By not actively targeting women, the microfinance service was used more by men. Of the few people that hadn't made a single on-time loan repayment, 70% were men, whereas of those with a 95% repayment rate, or better, 70% were women. |
Strengths and weaknesses
In general, where Abazamukana strayed from the basic principles that underpin microfinance it has experienced problems, and where it has adhered to them it has been successful. The greatest challenge has been creating the conditions for clients to wish to repay their individual loan, in the absence of the tried and tested group guarantee mechanism. A combination of factors have been employed, including the alternative guarantee mechanism (20% compulsory savings and a personal guarantee), good education and close follow-up by staff, easy access to future loans if the last ones have been repaid, and the organisation projecting the image of a serious and permanent microfinance provider.
Lessons learned
Poor people will pay market rates of interest for a service that they value, and the cost of the savings or credit product is less important than its accessibility and convenience. Time is a precious commodity to poor people and they will pay more for a product that saves them time. Charging market rates of interest helps to create a microfinance service that can grow over time to help more people.
Individual loans can work, especially in areas where social capital has been eroded, but they are more risky than group-based loans. They require a combination of supporting factors, including close follow-up of late payers the day after their repayment falls due, an effective alternative guarantee, support of community leaders and the incentive of future loans to encourage repayment.
Good personnel are the single most important factor influencing the success of an MFO. Although staff are difficult to recruit in waraffected areas, an MFO like Abazamukana should have a professional microfinance manager and a professional accountant. Without this, the chances of success are significantly diminished.
Sustainability should be planned from the beginning. Whereas it is normally expected that MFOs will achieve self-sufficiency in 5-7 years, it may take a few years longer in harsh post-conflict environments. In the interest of sustainability, some necessary decisions may be unpopular with clients - it is impossible to meet all demands.
In-depth market research should be conducted before the MFO is designed, since waraffected situations are quite different to places where microfinance is normally found. However, while microfinance products must be adapted to their environment, they should always adhere to basic microfinance principles.
Poorer people need encouragement and incentives to believe that they should be putting away a few coins a week as savings. They also need to believe that their money is safe. If NGOs do not have a background and technical expertise in microfinance and a commitment to remaining in emergency relief countries in the medium to long term to support the microfinance services that they have established, they should not become involved in microfinance operations.
For further information, contact Tamsin Wilson on email: Tamsinwilson@btopenworld.com
1'Abazamukana' is Kinyarwandan for 'Slowly, slowly, we progress together'
2Wilson, T. (2002) Microfinance during and after armed conflict: Lessons from Angola, Cambodia, Mozambique and Rwanda. http://www.postconflictmicrofinance.org
3Wilson, T. and Kidney, I. (2003) Concern Worldwide Rwanda: Abazamukana Mid-term Review Report. Internal document.
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