Microfinance as a tool for empowering conflict-affected communities
Tuesday, 21 January 2014 00:18
By Sarah Hannan
At a recently-held seminar organised by the Pathfinder Foundation in Colombo, a paper and three presentations were publicised under the theme ‘microfinance as a tool for empowering conflict-affected communities’.
The seminar was chaired by Sri Lanka Business Development Centre Managing Director Charitha Ratwatte while University of Peradeniya Department of Economics Senior Lecturer Dr. Ariyaratne Herath, Institute of Policy Studies of Sri Lanka Research Fellow Dr. Ganga Tilakaratna, Batticaloa YMCA General Secretary D. D. David and Ampara Sevalanka Foundation Coordinator Premasiri Basnayaka were the panellists for the evening.
“Poverty is a condition where the people are unable to meet the basic necessities of food, clothing and shelter. In their analysis the group identified that income poverty is very crucial – lack of access to resources, lack of social capital, problem of decision making capabilities and taking responsibility are the main barriers that were identified. Microfinance institutions need to address these issues in such instances. The argument of microfinance is that by providing access to easy and flexible financial services the poor can make use of micro advices which would lead to economic empowerment,” Dr. Herath presenting his paper on the Pathfinder Foundation led study on the effects of microfinance in the conflict-affected communities in Sri Lanka stated.
He further stated that the main objective of the study was to assess the capabilities of microfinance as a tool of reconciliation through economic activity generation and empowerment in the conflict affected communities in northern and eastern regions of Sri Lanka.
Microfinance activities in post conflict environment
Microfinance has been increasingly recognised as useful strategy in the recovering areas of the post conflict environment. It can be an effective method of providing relief and rehabilitation support required in the short term recovery. Post conflict environments are recognised by widespread destruction of physical infrastructure and other support systems such as financial and trade operations that are severely traumatised and dehumanised. The large scale refugee components and social relationships weaken by mistrust and suspicion.
Post conflict environments are in extreme disadvantage compared to other vulnerable societies; weak physical infrastructure, economic and organisational structures of diminished capacity weakens social capital, loss of trust, diminish interactions and weakens networks and increased tension between different communities and groups, declining human capital through death and displacement, loss of self-esteem and trauma are the main issues that needs to be investigated. Post conflict areas are therefore characterised by high operating cost for microfinance institutions. In post conflict environments non-financial services such as training, business development and social intermediation is a must for microfinance to be successful.
The emerging role of microfinance in post-conflict environments
The role of microfinance is reconstruction and recovery in community level and household level. Economy and livelihoods in the conflict affected areas in the north and the east should be taken in to consideration as well.
Out of the entire population in the north and east around 80% of the people are employed in agricultural crop, livestock and fisheries. Approximately 15% - 20% agricultural areas consist of high security zones and cannot be used for cultivation or any other productive activities. Strengthening the small business by supporting the local manufacturer increases produce and improves the market stability and is crucial for economic stability of the productive sectors.
There is an urgent need to increase agricultural productivity in order to improve food security among affected population. The north and east are significant producers of food cash crops, livestock and fish- the major agricultural crops are rice, onion, green chillie, potatoes and tobacco. The region accounts for one-third of the rice production of the country and the north and east has been the largest livestock producer since 1948. The second biggest livelihood is fishing of the economic activities industrial sector is the least developed.
Unfortunately in the past 30 years we had a civil war so industrial development is marginal. Economy and livelihood in conflict affected areas at present have two major programs reconstruction of the war affected areas ‘Nagenahira Navodaya’ and ‘Uthuru Wasanthaya’ are the main Government funded programs. These programs aim rebuilding the infrastructure facilities – mainly the road networks and power supply. In addition livelihood development programs ‘Gama Neguma’, ‘Gemi Diriya’ and ‘Samurdhi’ are the Government’s major poverty elevation programs. Other development attempts in Arugam Bay, Passikudah tourist zones; Trincomalee special economic zone and Kilinochchi 300 acre agro-economic zone are programs executed by the government.
Credit plus approach – credit facilities are provided along with non-financial activities such as training programs, market placement and business development programs which mainly target profit earnings through microfinance services.
Welfare approach – local and international organisations supply credit facilities with minimum interest rates that are targeted at capacity building.
Findings and recommendations and a model for microfinance in post-conflict areas
Microfinance initiatives in the region are making an impact on the livelihood improvement activities. There are some positive impacts from microfinance interventions and they benefit certain areas and certain groups in varying degrees and not disbursed equally across the region. Groups with successful microfinance ventures display high levels of supports and are male-headed families.
There is a concentration of success in the on-going microfinance institutions in the areas that were relatively free of conflict such as main towns and the rural areas before the final phase of war that remained under government control for a long period. Microfinance activities have both encouraged and created other intangible benefits too – not only the financial but also the non-financial sectors as well.
However the poor and the vulnerable are the most affected in their conflict experiences; damage to property and levels of trauma is far greater than those belonging to well to do social groups. There are war widows, displaced people and ex-combatants who have very different conflict related experiences. It is therefore difficult to make microfinance engagement activities in post-conflict areas without considering these complexities and a uniform approach is impractical.
According to the identification of various groups such as refugees, resettled people, rehabilitated ex-combatants, war widows and other vulnerable households not affected but in the conflict areas and their extent of trauma; skills, capacities and opportunities are taken in to account to establish a model for the study. Identifying and assisting these groups are crucial to execute micro financial programs in these regions.
Credit plus services mainly in the services that would assist the entrepreneurs and self-employed individuals who are developing their businesses are provisioning financial services. Credit is an important component identified in the microfinance sector as it is linked with the viability and the sustainability of the enterprise.
The viability and sustainability of the enterprise will ensure the financial viability and the sustainability of the relevant micro financial institution. There is an emphasis on the credit plus services in war affected areas. Different strategies can be used to cater to the identified groups considering their social status.
Limited studies in the north and east
Dr. Tilakaratna presenting her observations stated that much research has been done in the area of microfinance in Sri Lanka but very limited studies have been carried out in the north and east on the impact of microfinance and hardly any studies carried out on microfinance in the post conflict environment. In that sense Dr. Herath’s studies are still at the draft stage but will be an important contribution towards microfinance studies.
When it comes to microfinance in conflict affected communities or disaster stricken communities we often question what microfinance is and what is not. There is no agreed definition on microfinance but it is broadly provisioned with the sort of financial services such as deposits, loans, money transfers and insurance services for low income households and their micro enterprises. In addition to the financial services and micro financial institutions provide non-financial services as well; including training, marketing assistance as well as capacity building. These services alone cannot be considered as microfinance and is very important to understand that microfinance is not grants. Whether it is business grants or consumption grants, no matter what the context is it does not support all kinds of charity.
Looking at the conflict affected communities we often argue that microfinance can play an important role in assisting the conflict affected communities by supporting their income generation activities, reducing their vulnerabilities and assist in building their assets.
How can microfinance work in conflict affected communities and how do we say that the initiatives have worked successfully? We can be subjective, for instance if one microfinance institution decides to work in the worst affected communities. They decide to provide financial as well as various capacity building and non-financial services for a community of 50 or 100 people but after a year or so due to lack of funding they could not continue their operations; can this be considered as success on microfinance? Has it worked even though it has made an impact on the lives of these people? On the other hand there may be other programs where they have operated in a number of different villages but not necessarily targeting the poor but who have helped them to setup income generation activities and micro enterprises by providing them the financial facilities; is this considered as success?
The international recognised consensus is that no matter what is the environment there are number of parameters that we need to take in to account when we talks about the success of microfinance. Depths of outreach – how poor are the people that we are reaching?
Breadth of outreach is the scale of operations, how many people are we going to cover? Sustainability or length of outreach, sometimes we forget about the sustainability aspect especially when we are talking about the conflict affected communities; the length of outreach determines how long the microfinance institution can continue to serve the community? It is equally important as reaching the poor and reaching a large number of people.
The impact – What kind of change can you bring to the people you are targeting? Has the microfinance institute been able to help them to arrange their income, empower them or start income generation activities?
When it comes to conflict affected environments or the post conflict environment microfinance activities can be very challenging in such an environment and people may be very por. But in a way we still have to stick to the principles of microfinance.
Another misconception that needs to be highlighted is that microfinance is credit for micro enterprises. We see many microfinance institution are also focused on micro enterprises development. What we need to understand is that not all poor people and not all vulnerable people are micro entrepreneurs and not all of them want to be micro entrepreneurs. Sometimes they prefer to work under somebody who is in the small and medium enterprise or engage in casual labour. But that does not mean that they do not need access to financial services. Their needs are accustomed to their lifestyles and some of the people who have fixed salaries but their incomes are low or unstable.
Micro entrepreneurs, in addition to microfinance, need other financial credit services to fulfil their other needs. In the absence of other financial services they use the micro credit loans for other purposes. In a way it is better to provide them a range of financial services for them.
Even in a conflict-affected community they need access to different types of loans and not only income generation loans but also consumption loans, emergency loans, housing loans. Money transfer facilities are not provided by microfinance institutes but it is a service that they may need. Money transfers to receive their remittances and also savings. Given that they are exposed to higher level of risk and the conflict affected people lack assets to rely on the social networks in the post conflict environment.
In addition to financial service they are in need of business development services to start-up a new income generation activities. If it is a new enterprise it is important to provide them financial literacy as they may not have had access to a financial institutions and it is very important along with credit financial facilities they are provided with vocational training or skills development.
The point that needs to be highlighted that all people in the conflict affected areas may not need access to all these different financial services. The conflict affected communities are very heterogeneous. We need to understand the heterogeneity of the people and their different needs. What we need is not a super institution which can provide all these different services and cater to all these needs of different groups. One organisation cannot do that we need a set of different institutions operating in these areas that would provide various services catering to the needs of the community.
The type of services that a microfinance institution can provide depends on the needs of these communities base on their missions and objectives. But they have various regulatory constrains at the moment NGOs, NFIs are legally not allowed to mobilise services even though they want to provide these services. On the other hand microfinance institutions also have to be selective of the services they want to provide and they cannot cater to all these different needs. They have to be selective and they have to think of the sustainability of their organisations.
Not always the correct tool
In some cases microfinance may not be the correct tool for some groups who are not ready to make use of loans or savings facilities. May be it is not the right tool for them and they might be in needs of grants or other kind of support which is beyond the scope of a microfinance institution. There are separate institutions which have a development arm or there are institutions that provide welfare services. But specialised microfinance institutions cannot provide these kinds of services and it is important the microfinance institutions do not mix-up grants and loans like what happened in the post-tsunami era.
Many organisations in the south due to the nature of donor conditions they started giving loans along with grants which created confusion among the clients where they treated even a loan as a grant. This had adverse implications not only towards the institutions but also towards microfinance as a whole. It is important that when microfinance institutes provide grants and loans they clearly separate these services from other financial services especially loans.
As presented by Dr. Herath, there in a diversity of financial institutions operating in the north and east. Obviously it is different, in all the divisions and all the areas and would be interesting if Dr. Herath could cover in his future researches to what extent this variation is within a district or intra-district disparities. Based on my interviews what I have gathered in the north and east part of the country in the post conflict era is that in some parts of the north and east there is a multiplicity of institutions, whereas in some areas there is a lack of institutions. But when you take in to account whether it is a minimalist approach or a welfares approach even the banks when it comes to access to financial services we cannot neglect the role of the state banks or any other regulated development banks as they play an important role; taking in to consideration that some of the microfinance institutions cannot provide savings facilities or remittance facilities and those are also services that are required by the conflict affected communities and we need to take in to account their role as well.
There has been a concern over the multiplicity of institutions and when people have access to multiple institutions in many districts multiple borrowing is increasing. It is necessarily not a bad thing, microfinance institutions would like to think that this is my client so they are not going to borrow from other institutions but it is not the case in reality. We need to think as to why this is taking place? There are many reasons for multiple borrowings: When they cannot build up a lump-sum they tend to borrow from different sources. Sometimes when they take a loan from one institution they cannot apply for another loan until the previous loan is settled. Even if they are getting a loan for a micro enterprise and once the enterprise is established you cannot assumes that until they pay that loan they do not need access to other financial services. If they need to maintain a continuous flow of funds they have to borrow from another institution. Because of the diversity of the institutions and the diversity of their needs they will need to approach different institutions to access different products. There is a need to access to pawning facilities from state and other development banks.
Considering the conflict affected areas if multiple borrowings occur we have to be cautious about it as they lack financial literacy and are unaware of their payment capacity. If the institution is new to them they will not be committed to settle the loans as well. Due to multiple borrowings rather than empowering the people in the conflict affected areas they will be pushed in to further debt and will end up in a further financial crisis affecting the sustainability of the financial institution as well.
Microfinance can play an important role in the conflict affected communities if designed according to the heterogeneity of the people, their different needs, and the market conditions and is operated in a sustainable manner. But we have to understand that microfinance is not a panacea and microfinance institutions due their limitations cannot cater to all the financial needs. At that juncture the government and non-governmental organisations particularly involved in the development activities can fill that gap and can play an important role together with the financial institutions.
Economic activities in Batticaloa
David in his speech focused on the economic activities in Batticaloa prior to the 1978 cyclone and at present: How are the people surviving in the conflict affected areas now and before the conflict how did they survive? In Batticaloa and the north and east provinces 80% of the people live in the eastern zone and 20% of the paddy cultivation or agro based activities are carried out on this zone, so the backbone of the economy depended on the western zone was hampered during the conflict as militants occupied this zone. All the economic activities came to a standstill, prior to that the 1978 cyclone damaged the whole economy of Batticaloa and the eastern province. People depended on a hand to mouth living and were living in makeshift households.
In 1998 the micro credit program was implemented in an environment where we could not have a meeting in the village or collect savings or any contributions and micro credit was used as a development tool to eradicate malnutrition we saw that people did not have money to invest on any enterprise. Staring of with the vulnerable families we now have over 2500 clients with a Rs. 76 billion portfolio.
Micro credit is not a tool but is a mechanism that depends on the practices of different communities and cultures. A mechanism that has evolved daily depending on the needs of the people and we found our own system, forming groups and giving loans individually that has worked up to now. The objective of eradicating malnutrition has been reached to a great extent and the families that enrolled in this program are funded to meet their day to day expenses and are provided with the basic necessities for their families. Some families have even built homes and have managed to cement their floors and furnish them as well.
Micro credit is not about aiming the poor to build a palace; if we can change the present situation from 5% to 50% their lifestyles would be empowered. Due to the situation after the conflict people needed funds to restart their livelihoods as they were severely affected by the conflict. Mobility is important and was restricted by two means by the military and the community. During that period in a small scale micro credit was introduced along with training programs to start household businesses in food processing.
In the post-conflict period the situation has differed most of the institutions are not looking at the welfare of the people in the grass-root level, their personal development, literacy towards finance. These institutions provide funds to these families going to their doorsteps and do not monitor how these funds are used or whether they have the capability to pay back these loans. Some of these institutions tend to give bigger loans or money which is not needed to these families and these families end up in more debt and find it difficult to pay back.
Micro credit is one of the best mechanisms that can uplift the people’s social status. Prior to 1978 the people in Batticaloa were financially liberal but now they are tight-fisted with their finances after the cyclone and the conflict situation. After the interventions of some of the financial institutions this situations has been changed and the people are more prompt on paying back their loan instalments. The most suitable microfinance model for the people living in a certain area should be defined.
Government’s involvement in micro financial activities
Basnayaka in a brief presentation brought the audience’s attention towards the government’s involvement in micro financial activities: In 1994 through Janasaviya microfinance activities were implemented in conflict affected areas and were carried out through the involvement of many groups and institutions. During the initial stages we noticed a rapid development in these areas but the state involvement in these activities was limited during the conflict period and the non-governmental institutions immensely supported these programs.
Comparing the way these programs were carried out during the conflict and now are different from each other as the financial status of these communities was different during the conflict and now. The accessibility for finances and the financial institutions were limited and in the post-conflict era the development of infrastructure and road networks have improved the mobility of these communities. This in return has given them access to technology and many people have started to use mobile phones in these areas. Microfinance has provided them a new way of life and the group model that we used during the initial stage needs to modified ad needs to be thought-through.
Three models are used when implementing microfinance; the group model, organisational model and individual model and at present executives from financial institutions have started to visit these areas with proper financial regulations and frameworks. At present the microfinance institutes have gained more experience in the field and we have to move forward with these observations and experiences. The lifestyle of the people in the east is now turning in to a metropolitan model due to the infrastructure developments that have taken place. However economic stability still has to be established in these areas and micro financial institutions have an important role to play in this process.
Pix by Upul Abayasekara