MICROBANKING BULLETIN - Microfinance Information Exchange

FEATURE ARTICLES Economies of Scope: Credit unions are in agood position to deliver a poverty-focusedproduct sustainably because back office andoverhead costs can be shared with otherfinancial services.To implement Credit with Education, credit unionsagree to finance the loan portfolio with membersavings. In exchange, Freedom from Hungerfinances the technical assistance and start-upcosts. Teams composed of field agents and asupervisor, employed either by the credit unions ora federation, form retail units to deliver Credit withEducation. All services are provided by the samefield agent to joint liability groups of clients in theircommunities. Loan cycles are 16 to 24 weeks withweekly, bi-weekly or monthly installment paymentsof loan principal, interest and savings to a groupsavings account at the credit union.From Freedom from Hunger’s perspective, thisstrategy is beginning to bear fruit. There arecurrently eight individual credit unions and six creditunion federations offering the Credit with Educationproduct. Credit union clients now represent 62percent of Freedom from Hunger’s total outreach,or over 85,000 women, with an average outstandingloan per borrower of US$75.Recent studies demonstrate the achievement ofboth depth of outreach and impact. In a povertyassessment carried out in two credit unionfederations in Mali, wealth ranking showed that 28percent and 57 percent of Credit with Educationclients fell into the bottom two wealth quartilesdescribed as food insecure—persons experiencingeither chronic or seasonal periods of hunger. 9 Thisindicates that, in Mali in 1998, Credit with Educationwas reaching 10,461 very poor credit union clients.Three-year impact studies carried out in Ghana andBolivia provide evidence that the children of Creditwith Education clients enjoyed significantlyimproved nutrition compared with a control groupwhen quality education accompanied financialservices. Improvements in women’s income, healthand nutrition practices, and empowerment werealso demonstrated. 109 Preliminary results of wealth ranking exercise conducted inMarch 2000 by Freedom from Hunger.10 “Impact of Credit With Education on Mothers’ and Their YoungChildren’s Nutrition: Lower Pra Rural Bank Credit with EducationProgram in Ghana,” Barbara MkNelly and Christopher Dunford.Freedom from Hunger Research Paper No. 4, (March 1998); and“Impact of Credit with Education on Mothers and their YoungChildren's Nutrition: CRECER Credit with Education Program inBolivia", Barbara MkNelly and Christopher Dunford. Freedomfrom Hunger Research Paper No. 5, (December 1999).From the perspective of cost effectiveness, it ismuch less expensive to work with credit unionpartners than to create new institutions or work withnascent MFIs. Freedom from Hunger spent US$6.4million in direct grants and technical assistance tocreate a capacity for reaching 30,000 womenthrough two specialized MFIs—or US$211 perborrower. Yet it only cost US$700,000 to create acapacity for reaching 36,000 women with two creditunion federations—or US$20 per borrower. Thecredit unions also reached this level of outreach inhalf the time and with a greater level of financialself-sufficiency than the specialized MFIs.But while the rationale for Freedom from Hunger towork with credit unions is strong, why would creditunion managers adopt a poverty-focused productgiven their need to run profitable organizations?The social reasons certainly play a role in thedecision-making process, but Freedom fromHunger could not make much headway if the socialinclination was not also accompanied by a solidbusiness rationale for going down market.The Poor Are Good BusinessBased on Freedom from Hunger’s earlyexperiences with the credit union/Credit withEducation model, there are numerous businessreasons for credit unions to offer a poverty-focusedloan product.Credit with Education allows credit unions topenetrate new markets. Most credit unionsrequire clients to come to a primary service centerto conduct their transactions, while Credit withEducation is delivered through a mobile bankingsystem. This decentralized model not only offersthe opportunity to provide services to poor clients inisolated communities, but it also helps the creditunion to test if there is sufficient demand to openoffices in those areas. Conversely, in regionswhere a credit union is struggling to sustain primaryservice centers, mobile banking systems can be alow-cost alternative.Risk mitigation and cash flow management havebeen two strong business reasons for adoptingCredit with Education. Rural credit unions, like KafoJiginew in the southern Mali cotton belt, primarilylend for agricultural purposes. Concentration ofportfolio in seasonal lending activities carries a highrisk and results in cash flow shortages. Credit withEducation, which represents 10 percent of KafoJiginew’s portfolio, has helped alleviate theseconstraints. The very poor take short-term workingcapital loans for commercial activities. Short loancycles and timely repayments placed regularly intocredit union accounts promote cash flow smoothing.10 MICROBANKING BULLETIN, SEPTEMBER 2000