MICROCAPITAL STORY: The Importance Of Financial And Other Education For Microfinance Clients – Lessons From Freedom From Hunger And TechnoServe

A recent report by Kate Murphy in the New York Times highlighted the importance of financial and business education alongside the provision of microcredit. The report notes that interest in training programmes targeting microfinance clients has grown in recent years. The reason for this appears to stem from results of studies which suggest that start-up micro-businesses are more likely to survive if the owners have basic operational skills. Mr. Bobbi L. Gray of the non-profit international development organisation, Freedom From Hunger, was quoted as saying that loan recipients are more likely to succeed if they receive business education. Freedom From Hunger was established in 1946 and currently provides financial education in developing countries under its Credit With Education programme.

According to information on the Freedom From Hunger website, previous studies are said to have demonstrated the positive impacts of education on microfinance clients. Education can be provided in various spheres of knowledge including financial, business and health education. In Ghana, 90 percent of Credit with Education participants reported increased incomes since joining the programme. Seventy-eight percent said they are “very confident” they know how to prevent their children from getting diarrhoea and other diseases, as compared to 31 percent of non-participants. In Bolivia, Credit with Education participants were observed to be more likely than non-participants to get involved in local politics and to hold office. The studies further suggested that education combined with credit has a positive effect on the nutritional status of children and the food-security status of the families involved in the programme.

The New York Times report also referred to a paper by the New Haven-based Innovations For Poverty Action, a non-profit organization that evaluates approaches to development problems and disseminates relevant research to policymakers, practitioners, investors and donors around the world. The paper, entitled ‘Teaching Entrepreneurship: Impact Of Business Training On Microfinance Clients And Institutions’, was jointly authored by of Economics Professor Dean Karlan of Yale University and Senior Researcher Martin Valdivia of the Group for the Analysis of Development (GRADE), a non-profit research organization focused on development issues. Based on a study in Peru, the paper concluded that Peruvian villages who had received microloans and who had been randomly selected to receive business training performed significantly better than their peers who had received microloans and no financial education.

The findings referred to above were broadly consistent with the views expressed by Mr. Bruce McNamer of TechnoServe. TechnoServe was founded in 1968 to help entrepreneurs in developing countries build sustainable businesses. TechnoServe currently works closely with the United States Agency For International Development (USAID). The New York Times report cited an example where TechnoServe assisted the Jorge Salazar cooperative in Nicaragua that initially focused on cultivating coffee. TechnoServe launched a large-scale coffee diversification project with the support of the USAID’s Global Development Alliance. The programme focused on farmers in regions producing low-quality coffee to diversify into more profitable crops. TechnoServe identified an export demand for root crops as an opportunity for the Jorge Salazar farmers. It helped them to obtain better planting material and improve their production techniques, resulting in more consistent quality and a six-fold increase in yields. TechnoServe also providing marketing support to the cooperative by linking them to exporters such as TecnoAgro (a private company focused on promoting the sale of agricultural goods produced by Nicaraguan farmers) and Hortifruti (a subsidiary of supermarket chain Wal-Mart), negotiating for cooperative members to sell their best-quality produce for a significantly higher price compared to what it would fetch in local markets. The cooperative’s bookkeeping systems were strengthened, and members received help to get microloans for working capital. TechnoServe also showed them how to increase the value of their produce by washing and trimming it prior to sale. The programme created 80 new full-time processing and packing jobs and an additional 200 seasonal jobs. From about 44 members, the Jorge Salazar cooperative has doubled in size. Profits help cover school fees (including university scholarships) for a number of the members’ children. The Jorge Salazar cooperative’s sales rose from about USD 126,000 in 2005 to more than USD 700,000 in 2006. In that same period, their export volume rose from two large shipping containers to forty.

The provision of financial education for microfinance clients is an important issue. Reportage on the educational and training needs of microfinance borrowers is to be welcome particularly during difficult economic conditions when basic debt and business management skills may make a noticeable difference to the lives of poor households. More information on this topic can be found on the Microfinance Gateway portal, an online database which houses articles on microfinance related issues that are published by various sources. Some related articles have been set out in the ‘Additional Resources’ section below.

Additional Resources:

MICROFINANCE GATEWAY PORTAL: Assessing The Outcomes Of Financial Education (by Sebstad, J., Cohen, M. and Stack, K.)

MICROFINANCE GATEWAY PORTAL: Financial Education For The Poor (by Sebstad, J. and Cohen, M.)

MICROFINANCE GATEWAY PORTAL: Financial Education: A Win-Win For Clients and MFIs (by Cohen, M., Stack, K. and McGuinness, E.)

MICROFINANCE GATEWAY PORTAL: Financial Education Support the Social Entrepreneurs of Asia-Pacific: PlaNet Finance Experience (by Ahmmed, M.)

MICROFINANCE GATEWAY PORTAL: The Contribution of Financial Education to the Enlargement of Access to Finance: WSBI Involvement, Views and Proposals (by the World Savings Bank Institute)

MICROCAPITAL STORY: New Professional Body For The Microfinance Sector Launches In The United Kingdom