How to Build More Connected and Inclusive Cities

By Carlos Menendez,

When thinking about the cities of the future, I know that they will be more connected, and I strongly believe that they must be more inclusive. We can’t have the Internet of Everything without the Inclusion of Everyone. Already today, a growing number of cities are using smart technologies to better connect people to places and to each other – and more importantly also connecting people to opportunities for better and safer lives.

Unfortunately, what still causes a significant amount of friction in our cities and prevents inclusive growth is the dominance of cash. In fact, close to 85 percent of all consumer payments in the world are still done with cash or checks. This means that far too many people are trapped by default in an informal economy. They lack the financial services to guard themselves against risk, save for themselves, plan for their children’s futures, and build better lives.

Two years ago, Mastercard set a global goal to bring 500 million people into the financial mainstream by 2020. And we’re well on our way to doing that. In just a few short years, we have helped connect more than 300 million people through partnerships with banks, governments, retailers, and NGOs. We’re also working with our partners to enable and grow 40 million small merchants and micro-entrepreneurs because it’s not just individuals that are too often trapped in a cash economy – stores lose billions of dollars every year to leakage and theft.

Success Factors For Future Interconnected and Inclusive Cities

It’s no secret that the world is becoming more urban. The UN estimates that within the next generation, the number of people living in cities will jump from 50 percent today to almost 70 percent.

Already today, cities are grappling with the challenges that come with their growth. Congestion, pollution, and poverty are features of many of the world’s major cities, and it will take a collaborative effort by the public and private sector to meet these challenges.

We have seen progress, and there are some common themes around how we can leverage technologies and partnerships to move toward more connected, more inclusive cities.

  1. Transforming Public Transportation

The key approach is to tackle those sectors in our cities that have high levels of everyday cash usage, and one of these areas is mass transit. About 65 percent of all urban transportation is still paid in cash, which adds up in significant operational costs to transport providers and puts drivers and passengers at risk of getting robbed.

In over 100 cities around the globe (including London, Singapore, Bogota and New York), Mastercard users are paying their train or bus fare simply by tapping their card or swiping their phone. Only a couple of weeks ago, Sydney became the first city in Australia to introduce contactless payments for public transport – no more queuing in front of tickets booths, topping up cards, or fumbling for cash.

In London, already 40 percent of daily pay-as-you-go journeys on the city’s underground, buses, and commuter rails are paid by contactless cards/phones – which has dropped Transport for London’s cost of selling tickets from 14 to 9 percent of the fare and has saved them over 100 million pounds in cash related costs.

Once payments are digitized, data insights help city governments better understand and connect with their citizens. In Chicago for example, UI LABS, is bringing technology and transportation providers together to find ways to better balance transit supply and demand across a city.

When people use their cards for public transport, this can help form a habit of paying electronically in shops and stores as well which can be a critical factor for enabling broader financial inclusion. For instance, those living in a cash economy face significant risks when it comes to putting away money for savings. This lack of savings then makes it challenging for people to access lower priced weekly or monthly tickets, instead of more expensive daily tickets.

This is why a few weeks ago, the Government of Mexico City announced its plans to launch a debit card that can be used for both transit payments as well as every day purchases, and potentially social disbursements.

  1. Empowering Small and Micro Businesses

Another critical angle to building more inclusive cities is to focus on the role of small businesses and how to connect them to electronic commerce.

In most parts of the world, small businesses account for well over 90 percent of all enterprises. However, small and micro entrepreneurs have historically been underserved when it comes to their ability to accept electronic payments. For a small market vendor, bigger tickets and additional sales from someone using their card instead of cash are important steps on the economic ladder, which are typically followed by better access to credit.

There are various ways to address this. One is by turning a seller’s mobile phone into a payment terminal. Masterpass QR, which is already available in eight countries in Africa and Asia, is a new electronic payment option that lets customers pay for goods and services from their mobile phones by scanning a QR code displayed at a store’s checkout.

In Kenya, Mastercard is partnering with Unilever to simplify the way smaller stores order and pay for their goods with a wholesaler. Today, this is a very cash intensive process. Digitizing this process will give small entrepreneurs better access to funds, facilitate inventory ordering and management, and provide better sales insights about their business.

             3.    Partnering with Governments

Like businesses and individuals, governments make and receive payments. And many governments around the world choose electronic methods for things like procurement, social benefit payments, or tax collection. Electronic payments are not only more efficient and more transparent, they’re also a great way to lead by example.

At Mastercard, we have partnered with over 60 governments globally to deliver more than 1,600 scalable cashless programs in various cities and communities around the world. In the Middle East and Africa, we have joined forces with public institutions on solutions that link a government identity with payments and enable people to become financially included on a massive scale. In Egypt, the government plans to extend financial inclusion to over 54 million citizens through a digital National ID program.

But what’s most important for many people, is that this may be the first time they see their name printed on a financial instrument. This gives them a financial identity, and it may give them the first chance to move out of the cash economy into the formal economy.

Technology as the Great Enabler

Simplifying access to public transport, empowering small and micro businesses, promoting cashless programs – what these three areas have in common is that technology works as a great enabler. While the know-how exists to solve many of the world’s most pressing problems, no one can meet these challenges on their own. It takes partnerships across businesses, governments, NGOs and academia to advance more connected and more inclusive cities – and to build healthier, safer and more prosperous communities.

Carlos J. Menendez is president, Enterprise Partnerships, for Mastercard. In this role, Mr. Menendez is responsible for expanding the company’s operations globally with partnerships in the Smart Cities, Retail, Travel and Banking space.


Microfinance as a Credit Card?

By Jonathan Morduch

Muhammad Yunus won the Nobel Peace Prize in 2006, the most prestigious of a string of awards celebrating his role in creating banks for the poor. If there was a Nobel for marketing, he could have won that, too. That’s not meant as a jab but as recognition of Yunus’s rhetorical flair. Yunus not only founded a financial institution that serves the poor in Bangladesh (Grameen Bank, the 2006 Nobel co-winner), he also crafted a global vision for funding entrepreneurs and tirelessly promoted it for three decades.

Muhammad Yunus at the unveiling of his official portrait as Chancellor of Glasgow Caledonian University. June 29, 2016. Photo by Author.

But today Yunus’s vision — and the assumptions it rests on — is coming apart. Microfinance has proved fairly robust as a banking idea but not as an anti-poverty intervention.

Yunus’s pitch for microfinance was designed to please donors and socially-driven entrepreneurs who might follow his lead. His pitch is simple, promises much, and asks little of donors and aid agencies. The focus is on loans that are funded mainly by borrowers’ interest payments. The microfinance loans, Yunus argues, fund small, under-capitalized businesses and thereby transform their ability to generate income. That accomplishment, he claims, can reduce poverty dramatically. In contrast to the targets of previous attempts to fix credit markets in low-income areas, the borrowers are mostly poor women, the loans are small (starting around $100), and repayments are made in manageable weekly installments over a year.

Microfinance is an unusual kind of “device.” Most important, it’s a set of financial services, not a tangible product. But the microfinance narrative is very much bound up with its “device-like” qualities: microfinance is tailored to meet a narrow, specific purpose; its presentation and delivery are standardized and easily replicable; it is sold in standard units without much customer support; and it is brought into communities without substantial adaptation to the local context. Ideally, context should matter more, but customization is costly. The device-like nature of microfinance permits lenders to expand quickly and slash costs.

Microfinance is device-like in another way. Many microfinance providers seek to earn profit and pay for their work through a fee-for-service business model. Microfinance institutions thus aim to operate independently of the state’s purse and outside its purview. Unlike public social insurance programs that redistribute income, microfinance leaves poor people to find — and fund — their own ways out of poverty. Grameen Bank’s success in Bangladesh — it now serves over 8 million customers — has been a model for similar entrepreneurial, market-friendly approaches to social problems, including private health clinics and ambulance services for the poor, private schools in slums, and a range of other interventions that graft do-good aspirations onto market models.

The pitch for microfinance hasn’t been embraced by everyone. Some argue that poor adults need quality jobs, offering employee benefits and possibilities for promotion, not self-employment in tiny, self-managed businesses (Bateman and Chang 2012). The anthropologist James Ferguson argues that the rise of publicly-provided cash transfers holds far more interest than “paradigmatically neoliberal” interventions like microfinance (Ferguson 2015: 1). Empirically-minded academics (who may have started with high hopes for microfinance) also point to evidence from independent research that fails to find clear causal impacts of microfinance on business growth or poverty reduction for most customers. Aid agencies and foundations have been left feeling confused, disappointed, and perhaps betrayed — and have started moving on (Mossman 2015).

But too quickly dismissing microfinance as a “sort of neoliberal predation” (Ferguson 2015: 2) or as a poor substitute for social insurance or alternative income-generating interventions fails to get at the root of microfinance as practiced. So does outright rejection based on econometric studies of hard-to-find causal impacts on business outcomes. The arguments against microfinance may be correct on the surface, but they fail to get at what microfinance actually is and how it really works.

Although microfinance has failed relative to its boldest claims, it has not failed unconditionally. In fact, microfinance has been a wild, improbable, impressive success in important ways. Microfinance grew fast in Bangladesh, serving women whose families live on incomes that are low, if not among the country’s very poorest, and the broader movement inspired by Yunus and his fellow pioneers now serves more than 200 million people globally. Each week, microfinance institutions bring reliable financial services to citizens who otherwise would be ignored and excluded by traditional banks.

We are then left with a puzzle. Why do so many millions of people want microfinance if it fails to deliver on its promises?

The problem is not with its device-ness but with its portrayal. The practice of microfinance is distinct from the narrative that Yunus created to promote it. Microfinance customers have re-imagined what the financial services can do and why they need them. Customers divert microfinance loans from businesses and instead use them to spend on other priorities. By doing that, borrowers provide an alternative view of their real needs (and an alternative view of microfinance’s possibilities). Researchers have tested Yunus’s narrative of entrepreneurial transformation and found it wanting, but the tests are too narrow because Yunus’s narrative is too narrow.

Washington, D.C. 1986

To unspool Yunus’s vision and explore alternatives, it is helpful to go back to the 1980s when the modern incarnation of microfinance first emerged on the global scene. Transcripts from congressional hearings about foreign assistance provide a useful record of early public conversations in the United States. In February 1986, for example, Rep. Stan Lundine of New York convened a joint meeting of the House Select Committee on Hunger together with a subcommittee of the Committee on Banking, Finance and Urban Affairs. The hearing took place in a high-ceilinged, wood-paneled chamber within the maze of the Rayburn House Office Building, the block-sized office complex flanking the U.S. Capitol. The topic was “Microenterprise credit” — not yet shortened to “microcredit” — and Yunus was the featured guest. At the time, he was a little-known Bangladeshi economist who, three years before, had received a special license to create Grameen Bank. The Ford Foundation, an early backer, paid to bring Yunus to Washington.

When international development was on the agenda, the usual focus was on government-to-government foreign assistance, but Doug Bereuter, a moderate Republican from Nebraska, started the meeting by noting that this was an unusual event. “Some may find it strange,” Bereuter began, “that two congressional committees are meeting to discuss such things as news-vendor cooperatives in the Dominican Republic … or a sandal maker in Dacca [sic]. But perhaps it may not sound so esoteric when one realizes that one-half to three-quarters of the developing world’s population consists of underemployed people working in the so-called informal sector.” It was this population — systematically excluded from the banking sector and limited in their access to working capital — that Yunus sought to serve. He explained to representatives that banks “refuse to open their doors to the poor people who cannot provide collateral” and that “giving money to the poor is not their cup of tea” (U.S. House of Representatives: 4)

Yunus relayed his own story to the assembled legislators, starting with the “frustrations after frustrations” that befell Bangladesh after independence in 1971. Yunus was an economics professor at Chittagong University on Bangladesh’s southern coast when in 1974 the country experienced a deep famine. Yunus set out to create an informal economic study, taking his students to a nearby village to learn about the villagers’ lives and needs. Yunus concluded that the villagers’ business problems were fundamentally credit problems:

One of the things which struck me, was that it is very hard for people to make a living, because the circumstances and environment do not support their income-generating endeavors.

One woman I met in that village near Chittagong University was working all day to make bamboo stools. At the end of the day she made only 2 pennies. My trained mind in economics could not accept the propopsition that one could work all day to build bamboo stools and make only 2 pennies.

On closer scrutiny, I found that it is because she did not have the small amount of money to buy the bamboo to make the bamboo stool, so she borrowed the money from the trader who will buy the final product, the bamboo stool, from her. As a result, the trader dictated the price, which barely equaled the cost of the raw materials.

So, it came to my mind that I should make a list of such persons in that particular village who were borrowing from the trader just to make things and make a living for themselves and how much money they are borrowing from the trader.

I had a student of mine with me and we prepared a list of 42 such persons. The total amount they borrowed from the traders, different traders, totaled 856 taka, which is barely a total amount of $26. I felt extremely ashamed of myself being part of a society which could not provide $26 to 42 able, skilled human beings who were trying to make a living. (U.S. House of Representatives: 4)

Yunus’s impulse was humanitarian and focused on the villagers’ immediate burdens. These early observations suggested to Yunus the possibility of a kind of emancipation. The stool-maker would gain freedom from the middleman’s usurious loans. The rickshaw puller could buy his own rickshaw and avoid handing over the bulk of his earnings as rent for the vehicle.

The story holds power — but only under strong assumptions. Stripped to its essence, the story constructs a narrow view of the poor as fundamentally entrepreneurs (or would-be entrepreneurs) with pent-up productive power, held back only by the lack of capital. What is left unsaid and unexamined is the possibility that some villagers instead see themselves as would-be employees rather than would-be entrepreneurs — and they might then benefit most from the introduction of a large employer with the capacity to offer steady employment. Nor is there recognition of a failure in the goods market that might instead be met by increasing competition for monopolist middlemen. Nor is there recognition here that financial tools are necessary to facilitate spending, not just fund investment.[1]

The view of microfinance underlying Yunus’s depiction often is defended using a version of the idea (if not the language) of diminishing marginal returns to capital, an Economics 101 mainstay. The idea as applied to microfinance has the pleasure of being simultaneously intuitive and counterintuitive. The main idea (see fig. 1) is that the first increments of capital obtained by a business will generate the largest gains in profit. These are the loans that support an entrepreneur’s best, most-underfunded ideas. As a business acquires more capital, entrepreneurs move to their next-best ideas, then their next-next-best ideas, and so on. This part proceeds as

Figure 1. The Return to Capital (Case 1: Diminishing marginal returns to capital). Entrepreneurs who start with little capital generate far more additional profit than those who start with more capital.

Figure 1. The Return to Capital (Case 1: Diminishing marginal returns to capital). Entrepreneurs who start with little capital generate far more additional profit than those who start with more capital.

The counter-intuitive part springs from the next step: the simplified story results in starved-for-capital micro-enterprises served by Grameen Bank generating far higher profit (r1) from a given investment (an increase from A to B in fig. 1) than by the larger, established businesses served by traditional banks. The gain in profit for entrepreneurs that are already well-funded is just r2 when their capital increases by the same amount (i.e., an increase from C to D).

Rep. Lundine captured this notion in remarks at the hearing, as he described the dynamism of the “microentrepreneurs” served by Grameen Bank:

Microentrepreneurs very much represent the private sector in developing countries. In fact, it is this segment of the private economy in these countries which is the most dynamic and which represents the greatest potential for economic growth. Economic growth from the bottom up benefits precisely those who have the greatest need and therefore the most to gain, the poorest of the poor. (U.S. House of Representatives: 1-2).

The assumption that poor microentrepreneurs have the “greatest potential for economic growth” also means, according to the logic, that the poor can pay high interest rates and still come out ahead. In fact, they can pay far higher interest rates than larger businesses (since r1 >> r2). Assumptions are thus inverted: The poor can pay more because they are poor and excluded. The poor can profit more because they are poor.

In short, Yunus’s story implies that if you can find a way to reach the poor, their gains (and the bank’s gains) can be high. Yunus reported to the legislators that Grameen Bank had grown steadily, earned profit for the past two years, and recovered loans at a rate “near 99 percent.”[2] Yunus’s contribution was to find a way to reach the poor cheaply enough that revenue from interest could cover the costs. Grameen Bank did that by serving villagers at group meetings and having the villagers themselves play a role in monitoring each other and determining creditworthiness (Cull et al. 2018).

The cost-cutting part of Yunus’s depiction increasingly was relevant to its success. By the time of Yunus’s visit to Congress in 1986, the IMF and World Bank were preoccupied by the fiscal imbalances in developing economies, which ultimately pushed the IMF and World Bank to force high-debt countries to cut budgets in order to service foreign debt, often by slashing social spending. In that light, it was unsurprising that Representative Bereuter highlighted that support of microcredit was inexpensive for donors (especially relative to building bridges and railways). In almost poetic terms — “given today’s budgetary reticence” — Bereuter had noted that “the large drop in new investments in the developing world” made “small credits to viable microbusinesses seem to be an optimal way to generate new income and jobs” (U.S. House of Representatives 1986). Microcredit thus also had the advantage of seeming like a cheap way to do something for the poor. The donors only were called upon to provide startup funding and basic infrastructure.

Another poetic contrivance created an additional reason for turning to microfinance: the rathole. This metaphor was invoked most famously in the 1990s by Sen. Jesse Helms, a Republican from North Carolina and chairman of the Senate Foreign Relations Committee, to depict what he saw as a transfer of taxpayer funds overseas with seemingly little accountability and no clear metrics of impact. To Helms, foreign assistance mainly disappeared down “foreign ratholes” never to be seen again. But with microfinance the market promised to provide accountability. Surely customers wouldn’t pay Grameen Bank for loans — with 16 percent interest at the start — if the services were not making a difference. Plus, surely the loans would not be repaid “nearly 99 percent” of the time if the money was being wasted. The market, hallowed in Reagan’s 1980s, thus was positioned as both a delivery mechanism and an accountability guarantee. Evidence of sustained demand for microcredit and high repayment rates became the prime indicators of success. Other interventions, like public schools and hospitals or road projects, could not claim such easy metrics.

All else is not equal

The world, though, doesn’t necessarily look like figure 1. There are tradeoffs and complexities in practice and, like so much else in economics, the relationship captured by the simple textbook case requires that we assume ceteris paribus — “all else is held equal.” The assumption is not trivial here. People who start with vastly different amounts of capital also are likely to be different in other ways. Poor entrepreneurs are less likely to have relevant skills and connections. The bamboo-stool maker probably is hindered by more than the lack of financial access. She also may lack the trade connections or marketing skills to sustain a scale of business necessary to reap large returns. The story changes dramatically (see fig. 2) when the analysis is expanded to take into account how economies of scale can matter. Here, the poorest entrepreneurs (i.e., those in the left-most section increasing capital from A to B) generate little extra profit with a given increment of extra capital (for lack of scale and perhaps lack of other inputs beyond capital), while better-off entrepreneurs are positioned to reap the rewards of their size (as they increase capital from C to D). Here, r1 << r2. The poorer entrepreneurs in this second case are unable to profit much, unable to pay high interest rates, and need a lot more than capital if they are to materially move forward.

Figure 2. The Return to Capital (Case 2: Returns to Scale in Capital Investment). Entrepreneurs who start with little capital generate less additional profit than those who start with more capital.

Figure 2. The Return to Capital (Case 2: Returns to Scale in Capital Investment). Entrepreneurs who start with little capital generate less additional profit than those who start with more capital.

The assertion that village economies look more like figure 1 than figure 2 — i.e., that diminishing marginal returns is a more powerful effect than increasing returns to scale — set too high a bar for the expectations of microfinance impacts. A stack of statistical studies now shows that village economies are a mix and plenty of residents are in the figure 2 world, ill-prepared to gain much from petty business. For them, the notion of microcredit as a simple device, always capable of delivering impact on its own, falls away. Gone is Yunus’s case that anyone can succeed in business once given access to a bit of capital.

Microfinance as a credit card?

What then is the role for microfinance? Why do poor people stick with it? Why does it continue to grow by the year? To answer these questions, it’s helpful to start with an anomaly: In practice, microfinance activity more closely resembles the provision of consumption loans than business loans, revealing a different picture of the financial needs — and financial lives — of poor households. The rhetoric around microfinance obscures the reality that borrowers are consumers, too, and what many often seek is simply better ways to spend, not just to invest in business.

Like typical consumer loans — and like credit cards — microfinance loans allow borrowers to make big purchases and repay over time (with interest). Grameen-style microfinance loans require that loans are repaid steadily through weekly installments, a structure that looks more like a typical consumer loan than a business loan. (In contrast, a typical business loan would allow borrowers to invest the funds and only much later, once profit has been generated, repay the loan with the accumulated revenues.)

Recent village studies, especially those using the close observations of financial diaries methods, show that loans are desired and used for many purposes beyond business. Incomes are seldom steady and predictable; needs vary as well: families need to pay for schools, medicines, and food during slow periods. They might need to buy bus tickets to get to the city for a job, upgrade their homes, or simply pay down a more expensive loan. Borrowers repay the loans in small bits using whatever household income is available. Stuart Rutherford’s financial diaries from Bangladesh, included in the book Portfolios of the Poor, reveal many such examples (Collins et al. 2009). Rutherford spent time with a small group of Grameen Bank customers and found that only half of “business” loans were used for business purposes (and under half when weighted by the size of loans). I found the same in a national survey in Indonesia (Johnston and Morduch 2008), and others reveal similar patterns in India, Peru, and elsewhere.

Evidence that microfinance loans are used to fund non-business needs (even if for education or health) is sometimes used to criticize microfinance, but that misses the point. As Collins et al. (2009) argue, microfinance in practice can add critical sources of finance that can be added to other funds used to manage day-to-day cash flows, accumulate large sums for lumpy expenses (including investment), and cope with risk. In a wide variety of situations, microfinance loans can be relied on to help liquidity-constrained households put together the money they need at the moment they need it. The result may be to improve the families’ situations, even if their businesses don’t grow and incomes do not rise (even if they don’t actually have a business!). The notion that business finance is the single, main need for finance for poor households does not square with the evidence. Rather, poor families, like richer families, need broad financial tools. In fact, the poor may need them more urgently.

If we drop the illusion that microfinance loans are necessarily business loans (and the assumption is dropped that everyone is a budding entrepreneur), it is easier to see how microfinance works. It becomes easier to see how microfinance addresses the challenges posed by the illiquidity of borrowers. And it becomes easier to anticipate (and more directly address) problems such as over-indebtedness and the lack of adequate consumer protections in the sector (see Guérin et al. 2015 and Karim 2011). It also is easier to see that microfinance is a complement to — not a substitute for — social insurance and other interventions that bring public resources into poor communities.

Ultimately, Yunus’s talking points were, if anything, too easily appealing in their moment. Microfinance is instead best thought of as a device like a credit card: it can be very helpful, sometimes harmful, and seldom truly transformative. Microfinance loans differs from credit cards in important ways too; they are fixed loans, not lines of credit, and they have clear rules and structures that make it more difficult — but not impossible — to get into real trouble with debt. Only with a sharper understanding of how microfinance is actually used can providers develop better options and safeguards. This vision of microfinance may not sell as well to donors, but it may describe the device that families most need and value.

Jonathan Morduch teaches at New York University. He’s the author of The Financial Diaries: How American Families Cope in a World of Uncertainty with Rachel Schneider.

Why Rwanda’s Development Model wouldn’t Work Elsewhere in Africa

By Prof Nic Cheeseman 

Rwanda is often touted as an example of what African states could achieve if only they were better governed. Out of the ashes of a horrific genocide, President Paul Kagame has resuscitated the economy, curtailed corruption and maintained political stability.

This is a record that many other leaders can only dream of, and has led to Rwanda being cited as an economic success story that the rest of the continent would do well to follow. In countries like Kenya and Zimbabwe some have argued that their leaders should operate more like Kagame. In other words, that job creation and poverty alleviation are more important than free and fair elections.

In response, critics have sought to puncture Kagame’s image by pointing to human rights violations committed under his leadership. This is an important concern. But the notion that the Rwandan model should be exported also suffers from a more fundamental flaw: it would not work almost anywhere else because the necessary conditions – political dominance and tight centralised control of patronage networks – do not apply.

The Rwandan model

Many of the achievements of Kagame and his governing Rwandan Patriotic Front party are impressive. He took over a deeply divided nation in desperate need of economic and political reconstruction in 1994. Since then, Kagame has established firm personal control over Rwandan politics, generating the political stability needed for economic renewal.

Instead of sitting back and waiting for foreign investors and the “market” to inspire growth, the new administration intervened directly in a process of state directed development. Most notably, his government kick started economic activity in areas that had previously been stagnating by investing heavily in key sectors. It has done so through party-owned holding companies such as Tri-Star Investments.

Combined with the careful management of agriculture, these policies generated economic growth of around 8% between 2001 and 2013. Partly as a result, the percentage of people living below the poverty line fell from 57% in 2005 to 45% in 2010. Other indicators of human development, such as life expectancy and literacy, have also improved.

An example for Africa?

Despite the impressive headline figures, a number of criticisms have been levelled at the Rwandan model.

Most obviously, it sacrifices basic human rights – such as freedom of expression and freedom of association – to sustain the ruling party’s political hegemony. The Rwandan system therefore involves compromising democracy for the sake of development. That decision may be an easy one to make for those who enjoy political power, but is often rejected by the opposition.

Less obviously, the use of party-owned enterprises to kick start business activity places the ruling party at the heart of the economy. It also means that when the economy does well, the already dominant Rwandan Patriotic Front is strengthened. This empowers Kagame to determine who is allowed to accumulate economic power, which in turn undermines the ability of opposition leaders and critics to raise funds. These arguments have been around for some time. But they have done little to dampen the allure of the Rwandan model for some commentators and leaders. Given this, the strongest argument against exporting the Rwandan model is not that it is undemocratic and gives the ruling party tremendous economic power. It’s that it won’t actually work.

Can’t Work Everywhere

One of the most rigorous efforts to understand the political conditions that made the Rwandan model possible has emerged from the African Power and Politics research project led by David Booth, Tim Kelsall and others. They argue that Kagame’s government is an example of “developmental patrimonialism”. In this system, the potentially damaging aspects of patrimonial politics are held in check by a leader who enjoys tight control over patronage networks. These include jobs for the boys, waste and inefficiency.

This authority needs to be established both internally and externally. External political control is required because the threat of electoral defeat by a strong opposition party may force the government to prioritise short-term survival over long-term investments. Internal control is required because the absence of checks and balances on the ruling party is likely to exacerbate corruption.

When these conditions hold, elements of patrimonialism may be economically productive by generating resources that are channelled back into the system. In the Rwandan case, the Rwandan Patriotic Front’s economic and political dominance has not undermined development because the funds generated through party-owned enterprises have often been reinvested in the economy.

Unintended consequences

The problem is that these conditions don’t hold in most African states. With a few exceptions such as Chad and Angola, the ruling party cannot aspire to the level of dominance witnessed in Rwanda because the opposition is too strong for this degree of political control to be sustained. In Kenya and Zimbabwe, for example, the opposition has consistently won a large share of the legislative and presidential vote.

In addition, even some states that feature more dominant ruling parties have consistently failed to impose economic discipline on their governments. Instead, entrenched clientelism and internal factionalism have typically undermined anti-corruption efforts. This is true for both Angola and Chad, hurting efforts to reduce poverty and boost economic growth.

Shorn of the internal and external political control required to make it work, the application of the Rwandan model elsewhere would generate very different results. Extending the control of the ruling party over the economy is more likely to increase graft and waste than to spur economic activity. And efforts to neutralise opposition parties are likely to be strongly resisted, leading to political instability and economic uncertainty.

What this means is that if other countries on the continent try to implement the Rwandan model, the chances are that they will experience all of its costs while realising few of its benefits.

Prof Nic Cheeseman is a Professor of Democracy, University of Birmingham


Does Microfinance Really Alleviate Poverty? The 34-Billion-Dollar Question!

Give a man the means to borrow, so the argument goes, and he can work himself out of poverty. But do microfinances’ claims stand up?

Despite around US$34 billion in funding and numerous microfinance initiatives to help entrepreneurs in the world’s poorest countries, informal moneylenders and predatory loan sharks continue to thrive. Designed to help alleviate poverty in some of the world’s poorest countries, microfinance initiatives provide loans to entrepreneurs and small businesses, hoping this will help the poor to work themselves out of desperate poverty.

But if formal, government-supported microfinance initiatives are widely available, why haven’t loan sharks and predatory lenders been wiped out? If microfinance cannot compete with informal lenders, can we be confident that it really works?

These questions really matter. Philanthropic donors and policy-makers are enthusiastic about microfinance initiatives and, understandably, those working in microfinance often have a vested interest in showing that their work is effective. Research into how microfinance initiatives really are performing should therefore take into account the often highly politicised context in which poverty alleviation schemes operate. But that isn’t always easy – or even possible.

In Thailand, for example, the controversy surrounding rice subsidies for poor farmers forced the former prime minister, Yingluck Shinawatra, to flee the country. She was tried and convicted in absentia. At around the same time, it was reported that, relative to their peers in South-East Asia, Thailand’s poor are getting poorer. In such politicised contexts, it is difficult to find researchers willing to ask awkward questions about why this might be so.

This means that the enthusiasm of microfinance funders is still not grounded in rigorous studies. Research on microfinance sits somewhat uncomfortably across disciplines – finance, economics, management and development studies, among others – and many research projects studying the effectiveness of microfinance schemes are driven by academics’ need to publish in high-ranking academic journals. This can lead to research that applies highly complex and discipline-specific quantitative methods to large samples of microfinance borrowers without focusing on more fundamental questions such as why predatory lenders still thrive.

Fortunately, some researchers and governments are starting to realise that we know less about these schemes’ effectiveness than we might think. That’s why my team started our research by asking a fundamental question: Why is it that moneylenders still thrive when formal microfinance is widely available?

The Sceptical Approach

Attempting to evaluate microfinance initiatives in isolation, many studies ignore the competition from informal lenders. In contrast, we set out to listen to people and gather information from three different sources. We conducted in-depth interviews with poor micro-entrepreneurs, many of which had borrowed from both formal and informal lenders. This latter type of borrower, in particular, drew interesting comparisons. We also interviewed representatives of formal microfinance initiatives and informal lenders, including loan sharks.

Tagging along to visit loan shark clients, ethnography-style, provided the level of insight often absent from purely quantitative studies. Interviewing both lenders and borrowers allowed us to uncover distinct informal borrowing schemes used by microbusinesses, and revealed a mismatch between incentives and strategic objectives in formal microfinance schemes.

Our recent paper aggregates findings from two studies in Indonesia – an ideal research setting because, along with Bangladesh, it hosts some of the world’s most widely available microfinance schemes.

Among our findings is that microfinance initiatives can produce unintended consequences. When poorly managed, they provide entrepreneurship opportunities for “middle men”, where borrowers who more easily qualify for loans from microfinance initiatives then lend to poorer borrowers. Consequently the poorest of the poor micro-entrepreneurs benefit less than the comparatively less poor, and this reinforces existing socio-economic hierarchies in these countries.

Getting it Right (and Wrong)

This informal intermediation is just one of the problems making formal microfinance initiatives less effective than they might be. In fact, the formal sector can learn a lot from the informal sector.

Poor staff management in formal organisations permits – and even fosters – informal intermediation, reducing microfinance effectiveness. We found that loan officers at formal microfinance organisations have an incentive to focus on quantitative outcomes such as the number of loans provided and rollovers of “safe” loans, rather than on funding the poorest borrowers. Loan officers know that some borrowers use their loans to lend to others; they provide loans to these informal intermediaries because they know that they will reliably pay back their loans.

We even found collusion between intermediaries and loan officers, as well as former microfinance loan officers becoming informal lenders themselves. “It is easy to do”, they said, easier than to “sell noodles or operate a small grocery stall”, and borrowers “do not care whether we have licenses or not”. During preliminary fieldwork in Thailand in August 2017, we found that informal intermediation and relending of loans between borrowers occurs there, too.

To stop predatory lenders from taking advantage of poorer borrowers, the microfinance industry needs to develop ways to identify and prevent management failures. It is also important to understand that informal lending doesn’t just involve predatory loan sharks. There is a whole spectrum of informal intermediation, for example, ranging from the benign and casual to the systematic and downright criminal.

Therefore, research on poverty alleviation must take a sceptic approach, and listen to borrowers and all lenders carefully. Without learning from the different lending schemes of informal lenders, microfinance initiatives cannot be efficient and competitive – and that is why they haven’t displaced the informal lending on which many borrowers still depend.

Ghana’s micro-insurance offering benefits from collaborative efforts

The rollout of new micro-insurance products in partnership with mobile operators is allowing Ghana to deepen penetration rates, something that has historically proven tricky due to its large informal sector and a lack of consumer awareness.

Wider offerings

In mid-May telecoms firm MTN Ghana announced it had teamed up with insurance provider aYo – part of US-based Metropolitan Life Insurance – to introduce a micro-insurance service for mobile money transfers.

The service charges users 5% on every transaction and in turn grants them life insurance for 120 days. Potential claims payouts are calculated by tripling the sum of all transactions over the previous four months.
The new product aims to simplify insurance coverage and facilitate faster processing by offering the ability to manage claims directly from a mobile phone.

The product follows on the footsteps of another micro-insurance product – this one focused on income protection insurance – launched in November by local mobile network operator Tigo.

Created in partnership with insurers BIMA Ghana and US-based Prudential Life, the product allows customers to insure themselves from their phones by paying GHS0.30 ($0.07) per day for 24 days. In the event of an accident or illness that prevents the insured party from working, claimants receive a lump sum of up to GHS4000 ($907), and they can receive up to GHS1800 ($408) per year for hospitalisation.

Room for future growth

Such forays suggest there is scope for similar offerings in the future, given the country’s low insurance penetration and high prevalence of mobile phones.

“Currently, the micro-insurance penetration in Ghana stands at about 28%, and we believe that with the SIM penetration in Ghana well over 100%, there is room for micro-insurance to grow,” Tara Squire, mobile director at Tigo, told local press at the firm’s November product launch.

Ghana’s high mobile phone penetration rate stood at 139% as of February, up nine percentage points on a year earlier, according to the National Communication Authority. Mobile data subscriptions have also helped pave the way for micro-insurance uptake, rising from 39.5% in December 2013 to 69.9% in February.

With its customer base expanding, the segment looks set to continue on a strong growth trajectory: a recent study by the National Insurance Commission showed the number of people and properties covered by micro-insurance schemes had risen from 1.8m in 2012 to 7.5m in 2014.

The grey economy

Ghana’s overall insurance penetration rate – at below 2% of GDP, compared to above 3% in peers such as Kenya or Nigeria, according to the African Insurance Organisation – is likely to rise as the government pushes to reduce informality in the economy. According to the Ghana Statistical Service, some 62% of businesses in the country are not registered.

Mobile initiatives, by making it easier to reach out to the informal sector, should spur individuals and businesses to buy insurance, according to Solomon Lartey, CEO of Ghana-based Activa International Insurance.

“The way forward for the insurance sector in Ghana is via micro-insurance, because most of the population works in the informal sector,” he told OBG. “We want to see more formality in the sector.”

Another potential catalyst is new legislation updating the regulatory framework, which, if passed, should bring new clarity to the sector.

A draft insurance bill currently being reviewed by industry stakeholders is intended to strengthen the sector by tightening regulations and improving enforcement, thereby boosting stability and consumer confidence.

One of its key elements will be to further codify the micro-insurance segment, by supporting product development for critical sectors and prioritising licensing for specialised insurers.

The law builds on an initial framework for micro-insurance released in 2013, in which the National Insurance Commission authorised the sale of such products, but did not include the segment in its regulations for the broader insurance industry. The new draft will address this by laying out best practices for operations in the segment.

One continued drawback, however, is a limited awareness about the value of insurance coverage, which constrains insurance expansion among lower-income brackets and rural Ghanaians, according to Joseph Kusi-Tieku, CEO of local firm GN Reinsurance.

“A lack of knowledge about insurance products among the population is what is hampering growth,” he told OBG. “Education is key to insurance development and penetration growth.”