Moving Beyond Microcredit

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According to statistics from the African Development Bank, less than a third of Ghanaians had a bank account as of 2013, and only six per cent of them had a bank loan outstanding. According to statistics from the African Development Bank, less than a third of Ghanaians had a bank account as of 2013, and only six per cent of them had a bank loan outstanding. Credit Photograph by Tom Cockrem/Getty

The Makola market, in Accra, is a five-way assault on the senses: a frenzied din of bumping carts and shouted exchanges, amid piles of goods ranging from plastic Chinese housewares to local beads and beat-up Nokias. Smells waft in from a food section filled with goat heads, smoked fish, hot peppers, and ground spices packed together under the tropical sun. In the nearby second-hand-clothing section, the pace is slower. Merchants call out for customers, and have time to sit and chat. Outside an end-row stall, Ussher Desbordes, a thirty-five-year-old vender, modelled a fuchsia polo shirt and peach-colored shorts, a representative outfit from the low stacks of casual wear he was selling.

I’d come to the market to talk with merchants about how they fund their operations. Financing is perhaps the biggest problem faced by small businesses in the developing world. Local banks aren’t typically an option, because the fees are too high, and in some cases because people lack the necessary documentation and literacy required to get accounts. Less than a third of Ghanaians had a bank account as of 2013, according to statistics from the African Development Bank, and only six per cent of them had a bank loan outstanding. These numbers help to explain why microcredit—short-term loans, typically paid back within a year—has become one of the most popular forms of development assistance. Nearly everyone at the market has borrowed this way at least once, Desbordes told me, despite high interest rates. In Ghana, these rates average a hundred per cent for consumers, according to the nongovernmental organization MicroFinance Transparency. “If you go for a loan and you don’t know what you are doing, you are going to be burning your money,” Desbordes said.

It has now been nearly forty years since Muhammad Yunus began experimenting with microcredit as a professor in Bangladesh; more than thirty years since he established Grameen Bank to spread the idea; and nine years since he and Grameen shared the Nobel Peace Prize. (Connie Bruck profiled Yunus in 2006.) Approximately a hundred and six million people worldwide have a microcredit loan outstanding, owing an average of about nine hundred dollars, according to the Microfinance Information Exchange, a nonprofit, usually referred to as MIX, that is funded by development organizations and private philanthropies. The loans are authorized and collections managed by thousands of microfinance lenders, who get most of their funding from bigger public and private development-focused groups, including banks.

Yunus was driven by the idea that many of the world’s poor are entrepreneurs who could bootstrap their way out of poverty if only they had access to startup capital. But in practice, loan recipients, including the merchants at Makola, are often already in the middle class, at least relative to local standards. And Yunus did not anticipate the practice becoming a commercial one, which he now blames for higher interest rates.

A rigorous set of studies published in January has helped to more firmly establish microcredit’s limitations. A team of leading microfinance academics from Yale, Dartmouth, and the Massachusetts Institute of Technology compared the gains in living standards among borrowers in Bosnia and Herzegovina, Ethiopia, India, Mexico, Mongolia, and Morocco with those of non-borrowers, measuring household consumption and income. The researchers concluded that, in all six countries, microcredit’s benefits were moderate, at best, and not transformational.

In the months since, the results have sparked debate about how to improve microcredit and what else might be tried. In considering the latter question, researchers keep coming back to the same question: “What do poor people really want?” (This question is so important right now, in fact, that Angus Deaton, who championed the use of household surveys in developing countries, was recently awarded the Nobel Prize in economics.) The merchants in Makalo’s second-hand-clothing section were happy to provide a short answer to it for me, and also a long one.

Of course they wanted microcredit, Alfred Lokko, the operator of a tabletop haberdashery next to Desbordes’s stall, told me—but at much lower rates. Given the current interest levels, he said, “I would try everything else before I go for microcredit.” Almost immediately, a handful of others joined in to echo the sentiment. Merchants here typically begin their careers as assistants, saving up to rent a shop. It generally costs between three thousand and four thousand Ghanaian cedis (between eight hundred and a thousand dollars), depending on the location, for a three-year lease, Desbordes said. They also pay importers for their stock, plus ten cedis per month for membership in the Second-Hand Clothes Dealers Association. Nearly everyone present had taken out a microcredit loan in the past, Lokko told me, but they always tried other avenues first, starting with friends or family.

The long answer, the men explained to me, was that they could use more and different types of financial services, whether to replace or complement microcredit. Many of them participated in savings groups in which, each month, members contribute to a pot of money and the sum is given to a different person, offering everyone in the group regular access to a relatively large chunk of capital. Most of the men also used a savings scheme called susu, a traditional system with West African origins. A susu office in the market functions like a bank branch for small-scale savings. Customers commit to making a daily deposit, usually of a few cedis per day, then can withdraw their money at the end of a fixed period, typically between a month and two years, with the susu collector keeping the value of one daily deposit per month as a commission. Susu doesn’t increase the amount of capital available to merchants and poor people, but it does offer them a convenient vehicle for saving—one that can complement a microcredit loan, or, if the money accumulates long enough, entirely remove the need for one. At the moment, though, susu offices are still a relatively informal part of the Ghanaian economy. “We used to have two susu collectors here, but one of them ran off with the money a few months ago,” Desbordes said.

I said goodbye to the clothing sellers and went in search of the remaining susu office. I soon encountered a middle-aged woman carrying an empty blue plastic tub. She didn’t speak English, but pointed to herself and said “Hannah.” I managed to convey that I was looking for the susu office, and for ten cedis she led me through Makola’s food section to a two-story structure, the tallest I’d seen in the market. Upstairs, I found the office of Justice Tetteh. He was watching cartoons with his grandson, but offered to give me a quick tour of his operation, Justitet Enterprise.

The shop, one of two branches that Tetteh owns in Accra, consisted of a single room, where two women sat behind a tall desk waiting to serve customers. Tetteh was once a merchant himself, selling used shoes. In 1987, he moved to Liberia, where his father was working, and he soon noticed that the markets in Monrovia didn’t have susu offices. He started one up, before returning to Ghana in 1991 to escape the Liberian civil war. Tetteh described himself as both a customer of and competitor to microcredit. He had used microloans to balance his own accounts when he was short on cash in the past, and was also looking to emulate some of the lenders’ collection techniques, though in his case to encourage deposits rather than loan payments. “They employ a lot of girls to go around the market and collect payments from the customers,” he said. “I need to hire some girls to do that.”

On his walls were newspaper clippings recounting a fire that had destroyed the second-hand-clothing section of Makola in March, 2013. Tetteh is also the secretary of the Second-Hand Clothes Dealers Association, and after the fire, the fourth in that area of the market since 2001, he had arranged a large group loan for his members from the government’s microfinance body. On the back wall was a giant check commemorating the loan.

This history seemed to suggest another answer to the question of what poor people want: a small-scale fire-insurance policy would probably be an easy sell in Makola, but no such thing exists. Some microfinance companies have been experimenting in Ghana and elsewhere with new kinds of insurance. The challenge, with both microfinance and insurance, is to simplify the products enough that they can be sold to people affordably; ideally, they also need to be able to be sold and administered on the cracked and dusty old Nokias that are stashed in pockets and purses across the developing world. In addition to their reach, mobile-phone platforms allow providers to keep their sales and customer-service teams small, and they offer an incentive for companies to keep products like insurance from becoming too complex for first-time users.

For now, though, these ideas are only experimental, and back among the clothing merchants I found that no one had heard about them firsthand. And so, Alfred Lokko told me, “We take susu, and if you can get help from your family you do it. Or you just go for microcredit.”

Walking through their section afterward, I could see the legacy of the fire. The naked wooden beams forming its inner walls were splintered, contrasting with the ones in the market’s undamaged sections, which had been polished smooth by time. The corrugated metal covering the stalls had yet to rust, and many of the stalls were still empty—a reminder that only some of the merchants had raised enough capital to return and start over again.

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