ngo-led microfinance: potentials and challenges in conflict areas
TRANSCRIPT
NGO-LED MICROFINANCE: POTENTIALSAND CHALLENGES IN CONFLICT AREAS
NEAVIS MORAIS1*,y and MOKBUL MORSHED AHMAD2z1Open University of Sri Lanka, Nawala, Nugegoda, Sri Lanka
2School of Environment Resources and Development, Asian Institute of Technology, Thailand
Abstract: This paper explores the feasibility and challenges of NGO-led microfinance in
conflict affected areas, based on the experiences in Shi Lanka. While NGOs have a distinct
advantage to operate in conflict affected environments, capacity constraints and linkages to
political network of the conflict actors can affect microfinance-led rehabilitation by influen-
cing their priorities. Also, emergence of hierarchical power structure and complex account-
ability arrangements can negatively affect community based initiatives by weakening their
capacity to organize social and economic activities. The paper argues for more analysis of
context specific insitutional and organizational level factors, which can help to devise better
rehabilitation interventions. Copyright # 2010 John Wiley & Sons, Ltd.
Keywords: microfinance; conflict; Sri Lanka; NGO; Vanni
1 INTRODUCTION
This paper sets out to discuss the issues concerning microfinance by local Non-
governmental Organisations (NGOs) in conflict-affected areas. Conventionally, in conflict-
affected areas NGOs have primarily adopted grant-based interventions, while credit-based
interventions have received less attention during the conflict. The recent literature on
microfinance in conflict-affected areas suggests that absence of conflict need not be a pre-
condition, and microfinance interventions can be implemented in the relief and
rehabilitation phases with minimum preferred conditions (Doyle, 1998; Ohanyan,
2002; Wilson, 2002). While NGOs have the advantage of functioning in conflict areas
because of their humanitarian mission, they undertake microfinance as add on programmes
often without professionally trained staff (Nagarajan, 1997). In the context of uncertainty,
Journal of International Development
J. Int. Dev. 23, 629–640 (2011)
Published online 8 March 2010 in Wiley Online Library
(wileyonlinelibrary.com) DOI: 10.1002/jid.1672
*Correspondence to: Neavis Morais, Department of Social Studies, Open University of Sri Lanka, Nawala,Nugegoda, Sri Lanka. E-mail: [email protected] Lecturer.zAssistant Professor.
Copyright # 2010 John Wiley & Sons, Ltd.
NGOs carry out microfinance projects based on trial and error method (Wilson, 2002),
which suggests that the outcome may be unpredictable.
However, it is argued that even in the most difficult environments clients can live up to
the disciplinary expectation of on time payments (Larson, 2001). This suggests that there
can be positive outcomes for microfinancing in unstable situations. There are evidences of
positive results of microfinance even in refugee settings, for instance in the case of refugee
camps of Kenya and Zambia. Here, microfinance contributed positively to practical
experience of entrepreneurship of many refugees (Phillips, 2004; Travis, 2004). Other
studies highlight the challenges posed by low human resource capacity and insecurity of
both clients and providers, which could potentially limit progress from aid-dependence to
self-reliance (Wilson, 2002). While the existing literature is providing useful guidelines for
organising microfinance activities in conflict areas, it remains that the outcome depends on
the specific conditions of the context, which differ from place to place, and socio-political
processes evolve in those areas. In this paper we examine various types of organisational
and institutional level factors, which influenced microfinance in the context of northern
Sri Lanka.
This paper, following explanation of the source of data, gives a brief account of
the context in which microfinance interventions were undertaken. It will then proceed
to discuss key aspects relating to organisational capacity, microfinance approaches
adopted, and underlying assumptions concerning conflict-affected groups. This will be
followed by discussion on potentials and limitations of microfinance as a tool for
rehabilitation.
2 FIELD RESEARCH
This paper is based on a field research carried out in the rebel controlled Vanni area of Sri
Lanka, during the period from October 2005 to April 2006. The research involved direct
participation with aid agencies in the study area, and much input came from our
involvement in the evaluation of small scale microfinance projects of five local NGOs,
which received financial support from two International NGOs; Oxfam GB and CARE.
These microfinance projects were implemented as part of their livelihood improvement
programmes. Although there were 10 field-based local NGOs, which received financial
support from these international NGOs, we selected five that continued to have active
programme at the time of the field study. The field study concentrated on the organisational
capacity, practices and underlying assumptions in relation to microfinance and clients,
to understand the scope of microfinance-led rehabilitation in a protracted conflict
situation. We carried out 15 interviews with local NGO officers (coordinators/heads of
the NGOs, programme managers and the accountants), and five focus group discussions
with the participation of project coordinators, field officers and the finance staffs of these
NGOs.
Field observations, supplemented with brief interviews with recipients and non-
recipients of loans, based on their availability during field visits, helped understand general
social and economic activities in the project villages. In each project location a minimum
of 10 such conversational type interviews were carried out. In addition, structured
interviews with 30 purposely selected microfinance recipients were undertaken to study
client perspectives on the existing microfinance practices and the influence of the local
political context on microfinance-led livelihood improvements. Loans were provided on a
Copyright # 2010 John Wiley & Sons, Ltd. J. Int. Dev. 23, 629–640 (2011)
DOI: 10.1002/jid
630 N. Morais and M. M. Ahmad
sectoral basis; agriculture, livestock and small enterprise, hence, the respondents were
purposely identified to represent various sectors. Furthermore, five focus group discussions
with existing savings and credit groups were also undertaken to examine the status
concerning community based microfinance operations in the area. There were 12 such
groups functioning with membership ranging from 25 to 35. One of the focus group
discussions was organised with the leaders of these 12 groups following their district level
meeting. To gauge the viewpoints of the funding organisations, six interviews were carried
out with programme personnel of the international NGOs (Oxfam GB and CARE), which
supported microfinance projects of the participant NGOs. Discussions were also held with
key individuals representing local organisations; Tamil Rehabilitation Organisation
(TRO)1 and Social Economic Development Bank (SEDB),2 to elicit the views of the
institutional actors, which influenced microfinance project implementation in Vanni.
We adopted narrative analysis method to analyse the data. We developed narratives for
each interview and focus group discussion. Putting the data in such an ordered form helped
gain valuable insights into the issue examined. Furthermore, we carried out triangulation of
data obtained from interviews, focus group discussions and observations, which helped
combine the insights.
3 VANNI CONTEXT AT THE TIME OF STUDY
Vanni area is a part of the Northern Province of Sri Lanka, which, during the study period,
was controlled by the Liberation Tigers of Tamil Eelam (LTTE). Although control of areas
in the north often changed hands between the government forces and the LTTE, for over
10 years since mid 1990s Vanni area was under the control of the LTTE, where they began
to establish parallel institutions of administration, judiciary, police, customs and finance to
project an image of a de facto state (Stokke, 2006). These institutions, which were under
the purview of the Development and Political Wings of the LTTE, influenced the process of
rehabilitation, although these provided a framework for the local NGOs and external aid
agencies to engage in such work.
The Development Wing had several units, and the dominant one was TRO. Aid agencies
in Vanni had reservations in working with rebel controlled partner organisations, as it could
cause problems of legality.With the introduction of field based local NGOs, registered with
the social services department of the government, while in reality supervised by the
Development Wing, a mechanism was created for the donor NGOs to channel relief and
rehabilitation funds to the conflict-affected groups.
It is also important to understand how rehabilitation work was organised in that context.
The coordination work, relating to channelling projects, was entrusted to the district-based
council of local NGOs, commonly referred to as Consortium. There were two such
councils established in Vanni, and the local NGOs were required to obtain membership
with these councils. The local NGOs, which were operating at sub-district level, were
responsible for implementation of projects in a cluster of villages (see Culbert, 2005). The
allocation of projects was based on the extent of work an NGO in an area could carry out,
1TRO was a major unit of the Development Wing of the Liberation Tigers of Tamil Eelam. It was responsible forplanning and supervising humanitarian, rehabilitation and development work in Vanni.2SEDB was operating under the management of the TRO. One of the key functions of SEDB was facilitating theimplementation work of the local NGOs associated to the TRO.
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NGO-led Microfinance 631
irrespective of its capacity to deal with specific issue addressed in such interventions. These
NGOs were reporting their performance to the Council on a regular basis, in addition to
reporting to the funding organisations.
At the field level, the NGOs created community level formations called Social Economic
Development Groups (SEDGs) to facilitate implementation of projects. The number of
members in an SEDG was dependent on the number of households in project villages,
usually at the ratio of one member for 10 households. These groups assisted the NGO in
selecting beneficiaries, and in some cases played the role of contractors for community
infrastructure projects. While this arrangement technically provided avenues for
participation of local people in project implementation, in practice implementation
appeared to have adopted a top-down approach. Also, in many cases, these groups were
perceived to be extension of the DevelopmentWing. In microfinance, these groups assisted
NGOs in identifying loan recipients and assessing the clients’ personal background and the
ability to repay the loan.
While SEDGs were functioning under the Development Wing, similar grassroots
committees called Village Development Forums (VDFs) were introduced by the Political
Wing. In many cases VDFs absorbed members from SEDGs, and such members were
accountable to both the Development and Political Wings. This often created ambiguity at
the field level as the VDFs began to increasingly influence the implementation decisions of
the local NGOs. And in some cases these took over the roles played by the SEDGs, and the
local leaders of Political Wing presided village level meetings. However, in many locations
SEDGs and VDFs functioned concurrently. Whilst these aid channelling arrangements
were viewed as having the motive of diverting resources into the Development Wing
(Culbert, 2005), they nevertheless provided basic institutional infrastructure for aid to
reach the remote communities.
4 MICROFINANCE INTERVENTIONS OF NGOs
Even as formal financial institutions operated in Vanni, which offered regular financial
services, the larger rural areas of Vanni remained financially under-served. In this context,
the aid agencies provided local NGOs with Revolving Loan Funds (RLFs), which helped
establish the seed capital to extend credit services to the conflict-affected people. RLF was
generally an add-on component of livelihood improvement programmes of the aid
agencies. At the time of the study each NGO, which participated in the study, had roughly
USD 20 000 worth RLF. This seed capital was much smaller than that allocated for grant-
based projects such as water and sanitation, shelter improvement or provision of livelihood
implements.
These microfinance projects were credit-only with no training or advice related to the
chosen activities of the clients. Loans were provided to individuals after an evaluation of
their ability to repay. Clients were selected from different sectors; agriculture (rice, cash
crops), livestock (poultry, goat keeping), small business (shop keeping, trading) and skill
work (carpentry, weaving). The stated criteria for selection of clients included female
headed households, households with more children or more female members, and those
having previous experience in the proposed activity. These criteria were developed in
consultation with the funding agencies. To obtain loans, therewere requirements to provide
two personal guarantors preferably with a steady income, which was a difficult condition
for the poor clients to satisfy. The period of repayment and the method of collection varied
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depending on the type of livelihood activity the clients pursued. For instance, the credit
given for rice cultivation was collected only after harvesting of the crop. There was
flexibility to extend repayment period if the clients were confronted with difficulties, and
the clients had to pay the stipulated interest for the extended period.
Loans from these microfinance projects in the 3–4 year duration up to the field study, had
reached around 1500 clients. The loan size varied from Rs 10 000 (USD 100) to Rs 30 000
(USD 300). There were only a few cases of default reported, because the local NGOs had
the patronage from the LTTE administration, which helped them to easily recover the
loans. While the outreach of microfinance was limited, we, however, observed certain
positive outcomes in the households, which had utilised the loans properly. These
outcomes included improvement in food security, particularly of those obtained loans for
rice cultivation, and recovery of portable assets, such as gold jewellery which was an easily
convertible asset and a form of self-insurance to many households during displacement.
Loans also facilitated expansion into secondary income earning activities of petty trade and
backyard poultry keeping that helped smooth the daily consumption needs. Such outcomes
directly contributed to building resilience to recurring vulnerabilities. On the other hand,
the status of loan recipients that were unsuccessful in their income earning initiatives, for
instance due to crop failures, was found descending to a level of dependency due to
depletion of their asset base. Overall, there was less evidence to suggest possibility of
broadening the positive outcomes that would have an impact on wider section of the
conflict-affected people. In addition to constraints such as lack of market access, we
observed several institutional limitations that constrained the growth of microfinance in
the study area. These factors are discussed below.
5 GOALS AND PRACTICES OF LOCAL NGOs
Microfinance services in conflict-affected areas need to target a broad range of the
population in order to have an impact on vulnerability reduction of a cross section of
conflict-affected people (Nagarajan, 1997; Doyle, 1998), which points to the rehabilitation
goal of microfinance. NGOs in Vanni generally specified certain vulnerable groups in order
to protect or rehabilitate their livelihoods on a priority basis, which seemed to have a
humanitarian motive. Whilst microfinance was said to be targeting the vulnerable section
of the conflict-affected people, who lacked productive assets, in practice such groups had
less access to credit, due to the requirement to demonstrate ability to repay and to prove
creditworthiness such as having productive assets (e.g. own land, access to water,
established small business) or at least one earning household member. In a context
characterised by widespread loss of productive assets, these requirements were naturally
preventative for poor clients to have access to NGO loans. In some cases allegiance to the
‘local authority’ had been considered as better creditworthiness. Still, checking the clients’
means to repay remained an important criterion.
On the other hand, while donor consultation was obtained in selecting the clients, loan
distribution at the field level was based on the relationship between the NGOs and the
intended clients. Certain practices, such as diverting loans to unintended clients, created
distrust. Furthermore, using the recovered funds to extend loans more readily to small
businesses than expanding credit services to the intended clients was paradoxical to the
goal of restoring productive capacity of weaker segments.
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Such practices had led to eventual exclusion of the originally intended vulnerable groups
(seeWilson, 2003). Limiting the financial services to secure clients was viewed by the local
NGOs as necessary to prevent erosion of the core funds. Such a financial goal was evident
from the types of conditions imposed by the SEDB in releasing funds for microfinance
operations. As the custodian of the RLF and the savings of the clients, the bank influenced
the decisions regarding the utilisation of the funds by the local NGOs. These arrangements
gave more emphasis on strengthening the emerging financial institutions than on financial
empowerment of the target groups. In this context, individual-based microfinance seemed
to have limited scope in reaching weaker segments of conflict-affected groups.
Dominance of institutional goals over rehabilitation goals was also observed from the
practice of retaining recovered funds for institutional purposes instead of distributing for
new clients. Moreover, suspension of loan distribution until all the clients in a particular
location pay back the first loans was an added policy of the NGOs that led to termination of
loan facilities in some locations. This, a form of requiring joint responsibility in individual
lending programme was a contradiction. These policies and practices adversely affected
clients’ confidence and trust on NGOs as partners in improving their living conditions. In
this respect, it can be argued that microfinance failed to develop as a major strategy for
economic recovery of conflict-affected groups.
However, microfinance projects seemed to have had helped the local NGOs in smoothing
their operations, for instance, by way of providing contingency funds. In addition to funds for
microfinance, donor NGOs provided separate funds for the local NGOs to invest in income
generating activities, in order to strengthen their capacity. Institutional strengthening is an
important aspect in improving microfinance services (Manalo, 2003). However, in complex
emergencies like our study area, where accountability of NGOs is primarily towards
institutional actors, our observations suggest that institutional strength may not complement
the goal of reducing vulnerability and relief dependency of the primary stakeholders.
6 CAPACITY CONSTRAINTS
Lack of capacity of local organisations was a commonly observed phenomenon in Vanni
area. Shortage of skills needed for financial activities was a major drawback for enhancing
microfinance operation (see Nagarajan, 1999). The coordinator of a local NGO noted, ‘It is
difficult for us to find skilled people to work as accountants and finance officers because of
migration of skilled people from this area, and the few remaining ones are also recruited by
the international aid agencies’. While higher remuneration from International NGOs was
one reason for the local NGOs for not being able to attract skilled people, recruitment in
local NGOs, on the other hand, was subject to internal security concerns of the Political
Wing. Hence, not everyone with skills could find employment in local organisations. In
some cases ex-combatants were appointed as heads of local NGOs, which implied
influential role of the Political Wing in staff recruitment.
On the other hand, improving the finance related capacity of local organisations, formed
primarily to operate as relief intermediaries, remained a difficult task. Microfinance related
capacity building programmes such as training on record keeping and financial
performance reporting, though spending a considerable amount of funds, seemed to
have less impact on their operation. For instance, even after the training, in some cases the
information on repayments could only be found in the field notes of the field staffs, rather
than in the account books. This also raised questions about the quality of trainings
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634 N. Morais and M. M. Ahmad
provided. While in general there was a lack of training institutions in the conflict areas of
Sri Lanka (GTZ, 2007), the training programmes were often provided by the donor NGOs,
which were primarily teaching their own financial reporting systems rather than imparting
specific financial related skills. The difficulty in fostering basic financial system for
microfinance operations offered significant challenges to improve access to microfinance
and benefit from it. The understanding concerning the requirement to establish such a
system with trained personnel was lacking too. The thinking that microfinance was just like
other humanitarian interventions, and could be managed by those received training on
social mobilisation, was common.
However, this did not affect repayments. The NGOs’ political linkages had served as an
important instrument to recover the loans. For instance, a warning of reporting defaulters to
the LTTE police served as a deterrent for likely defaulters. This was often interpreted as a
form of disciplining the clients. On the other hand, community-based methodologies of
trust building and peer pressure were assumed ineffective. While external pressure seemed
convenient and effectual, it also promoted a tendency among local NGOs to rely
excessively on their political linkages rather than on social collateral, which needed
rebuilding the social network (see Karlan et al., 2008).
7 APPROACH LIMITATIONS
NGO-led microfinance in Vanni adopted a narrower perspective, in which its scope was
limited to the technicalities of delivering and recovering loans. The inadequacy of such a
minimal approach to bring about desired outcomes could be explained from the
experiences of client failure cases. While the demand for loan was generally related to
clients’ livelihood arrangements (see Wilson, 2002), the actual usage, in several cases,
rarely helped minimise income vulnerability, and in some cases had worsened the asset
status of the clients. For instance, many clients who changed the usage of the loan, with the
consent of the NGO, failed to sustain the new livelihood activity, and in some cases also
failed to retain their traditional or primary livelihood activity. This placed their households
in further vulnerability as in the following case.
John: ‘I am a weaver, and on return from displacement I was able to restart this
activity by mortgaging gold jewellery of my wife. I received a loan from the local
NGO, but I invested in dry-food packaging. I lost the business. I did not know the
costs involved in this business. I am unable to pay the loan. We could not continue
weaving as well. Now we are made ineligible for a grant programme to renovate our
dug-well’ (April 2006).
Also, repayments were often made from sources other than the income earned through
the credit supported livelihood activity. In times of failures, clients adopted various
strategies such as short term intra-household borrowing or mortgaging gold jewellery to
meet the repayment deadlines, which weakened their asset status. Therefore, high rate of
loan recovery could not be interpreted as success in terms of client livelihood improvement.
Here, minimal approach proved largely inadequate to ensure livelihood improvements,
as there were significant constraints to income generation; destruction of productive assets,
lack of skills and poor market access (see Shaw and Clarke, 2004). Aside from these
contextual factors, tax on all locally produced goods and services, by the revenue
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department of the rebels, also considerably lowered the income from credit supported
activities, as in the following case.
Raj: ‘I have been operating this mechanic shop for the past few years. I received two
loans to expand the shop. However, I could not do that because of increased tax. I
have moved the shop from the town to a less visible location, my income has dropped
and I have also lost customers’ (March 2006).
Based on such experiences, it can be argued that microfinance in conflict areas need to
adopt a broader approach, which includes assessment of household circumstances, market
access constraints and institutional barriers (see Wilson, 2002). This could help to expand
the scope of microfinance beyond recovering of loans to improving a families’ ability to
ensure household sustainment.
While economic recovery could be aimed through such a broad approach, Vanni
experiences also suggest that a community approach to microfinance in conflict areas can
help achieve important goals of reintegrating displaced people, and easing post-traumatic
stress. Such activities constitute peace building and empowering objectives at the local
level (Marino, 2005). For this, the experiences of savings and credit groups operated in
Vanni can be considered a case in point. The women members of these groups explained
their experience saying ‘we meet to discuss about the use of loans, but we also share a lot
about our problems, we feel greatly relieved and it helps us overcome painful memories’.
In addition to economic benefit this approach had facilitated psychosocial recovery (see
Strand et al., 2003). The positive impacts observed include household economic progress,
improvement of banking skills and financial knowledge among women members and
greater confidence of women to contribute to the economic welfare of their households.
Such outcomes helped reduce dependency on relief. The following responses explain the
advantages of community-based microfinance compared to individual credit scheme in
Vanni.
‘We encourage our members to diversify their livelihood activities. Each time they
receive small loans we advise them to invest in new activities. Most of our members
are engaged in multiple income earning options. They are able to settle the loan
instalments regularly even if one option fails’ (March 2006).
‘We are grateful to the agency which helped us form this group. Wewere reluctant to
join the group at the beginning, because we thought we would not be able to make
regular contribution, and also thought that the savings would not bring any
immediate benefits to our family. Later we realized the importance of savings, which
helped us obtain loans for productive purposes with no difficulty. Also, more than the
loans, we value the association with other members in our group’ (March 2006).
These responses support the view that rebuilding social networks can contribute to peace
building at grassroots level and economic empowerment of women (Doyle, 1998). This
approach also facilitated improvements in the loan absorptive capacity of poorer groups in
Vanni (see Dichter and Conway, 1996). Although the existing savings and credit groups
demonstrated abilities to increase financial access to grassroots people, there existed a
preference among NGOs for a more formal approach of delivering individual loans, with
the assistance of SEDGs, over which the NGOs had direct control.
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636 N. Morais and M. M. Ahmad
The disinclination to adopt a community driven approach, particularly the reluctance to
encourage formation of new independent Community-based Organisations (CBO)
prevented growth of alternative forms of financial empowerment of conflict-affected
clients. It was argued by the NGOs to us that existing CBOs, such as SEDGs, could be used
for any expansion of microfinance activities, hence less justification for new CBOs. In that
process the savings and credit groups, mobilised by CARE in a pilot project, were
subsequently required to function under the supervision of the NGOs. It transpired that
empowerment approaches found less scope, as the concept of empowerment was
politically sensitive in a context where a strong hierarchical power structure was
considered legitimate in the early stages of state building.
The hierarchical power structure undermined the traditional role of grassroots level
formations in facilitating participation. Community level formations, such as SEDGs and
VDFs, mostly served as entry points for the institutions, which created them. Promoting
community participation in rehabilitation, through such units, was given a lesser priority.
For instance, VDFs mostly helped mobilise support for the Political Wing at the local level,
while playing an influential role in decisions of aid distribution. This meant more upward
accountability than lateral accountability for such grassroots formations, which also
implied lesser role for these in organising social and economic activities.
On the other hand, political linkages promoted rigid tendencies and distanced NGOs
from their grassroot connections. Clients’ expressions such as ‘I will have troubles if I do
not repay the instalments in time, I can’t fight with them’ indicated a detached attitude
when referring to their relationship with NGOs. Such negative perceptions explained that
microfinance approaches adopted in this context reflected the strict governance
arrangements, which was less conducive for participatory microfinance.
8 ASSUMPTIONS ABOUT TARGET GROUPS
An assumption that most of the conflict-affected people were aid dependants and would be
unable to participate in a formal microfinance programme, until such time they re-establish
their income earning activities, was common. These highlighted the challenge of switching
out of a relief mindset, and into a more self-sustaining non-relief approach required in
times of relative stability (see Frasier and Saad, 2003). Responses from the NGO officers
such as ‘we can’t lose the money by lending to people who do not have means to repay;
those people need relief’ meant lack of disaggregated assessments on the productive
abilities of the conflict-affected people.
While such assumption might have some validity, in terms of preserving the seed capital,
the objective of reaching vulnerable groups required adaptability of microfinance
programme to the needs of different groups, and ability to build trust in the perceived
weaker segments (Doyle, 1998). Such adaptability received less importance primarily
because of the assumption that conflict-affected groups were poor in all aspects. However,
in Vanni, there was evidence that several client households, which were perceived to be
poor, had obtained and repaid loans from moneylenders at a significantly higher rate of
interest, some up to 36 per cent. This explained the abilities of the economically active
clients to save and pay higher interest rates on loans during conflict (see Wilson, 2002).
The process of screening out the poor clients in the belief that they would be unable to
make the loan repayment had created some concerns among potential borrowers. Such
assumptions also negatively impacted on the keenness of poor people to save with the
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NGO-led Microfinance 637
NGO, as there was uncertainty of obtaining loans after accumulating required savings. This
meant less motivation to expand microfinance through generating local savings.
Exploiting local potential also refers to promoting community driven microfinance,
which requires promoting social capital and trust building. Social capital is important to
generate peer pressure for repayment of the loan (Velasco and Marconi, 2004). In Vanni,
mobilising conflict-affected people into mutual groups was generally assumed by the local
NGOs as a difficult task since social bonds were perceived to be fragmented due to the long
conflict. Though lack of trust was a likely condition among conflict-affected people
(Williams et al., 2001), the experiences of savings and credit groups pointed that it was not
a general condition in Vanni.
The mobilisers of these groups pointed out to us that even though there was difficulty at
the beginning in convincing poorer members to join the groups, later on they became
enthusiastic to participate after realising thewider and multiple advantages of membership.
The initial reluctance to join the groups was due to lack of immediate monetary benefit after
joining the groups. This case indicated existence of a preference for community-based
microfinance in a protracted conflict situation (see Wilson and Nagarajan, 2003). This
approach had the potential of minimising aid dependency of community organisations on
donor grants as some groups had achieved growth in terms of satisfying the credit needs of
almost their entire membership. In one group, for instance, the loan sizewent up to Rs 50000
(USD 500), which was not available from commercial banks even through collateral.
Such methodologies also demonstrated a potential of community-based microfinance appro-
aches to improve financial literacy of the conflict-affected groups. After receiving basic training,
the poorer members especially became conversant in banking activities and asset portfolio
management, which increased their confidence to secure their own livelihoods. This prompts,
even in conditions of minimal stability, community-based approach can systematically reduce
reliance on donor funds through mobilising local resources (Strand et al., 2003).
In the case of individual lending, the patron client relationship between NGOs and
the members affected trust building. Since the clients viewed the NGOs as an extension
of the Development Wing, rather than organisations emanated from within the community,
there existed a sense of disbelief in their operations. For instance, there was scepticism
among a section of clients that the NGOs had converted the grants from aid agencies into
loans for their own benefits. It implied that the local NGOs were preventing grants from
external agencies reaching the clients directly, although the funds were actually meant for
revolving loans.While, on one hand, this can be attributed to a preference for grants instead
of loans among the clients, on the other it indicated a lack of trust building measures prior
to or in the process of launching microfinance projects. Trust building remains a key factor
that can improve community participation and self-esteem of the clients suffering under a
long conflict (Marino, 2005).
9 NGO-LED MICROFINANCE: POTENTIAL AND LIMITATIONS
NGOs in Vanni had the advantage of taking financial services to the poorer segments of
conflict-affected people due to their presence in the field (see Premchander, 2003; Yunus,
2003). These implemented microfinance projects as part of their rehabilitation work, and
many experimented financial intermediation largely due to the availability of grants from
the donor agencies. The manner in which microfinance was operationalised explained that
the potential of microfinance in reducing relief dependency had not been adequately
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638 N. Morais and M. M. Ahmad
recognised. Though microfinance services were reaching the initial targets agreed between
the local NGOs and the donor agencies, its progress in terms of subsequent expansion did
not appear to be an objective. Aside from capacity limitations, inadequate or no savings
mobilisation among the clients and the utilisation of RLF for institutional purposes caused
restrictions on continuing and expanding microfinance operation. In contrast to NGO-
driven microfinance, community driven microfinance appeared to have produced better
outcomes in terms of both social and economic recovery of conflict-affected people.
Furthermore, functioning formal financial institutions in Vanni demonstrated a potential
to provide necessary impetus to extend microfinance at a large scale (see Doyle, 1998;
Wilson, 2002). However, practically the NGO linkage to the local banking network in
Vanni seemed to have had a retarding impact over their microfinance operations. It was
apparent that NGO-Bank linkages were less supportive for microfinance growth, largely
because of strong institutional focus of the bank and limitations from the Development
Wing in releasing funds for microfinance activities. It can be argued that these conditions in
Vanni appeared to have benefited more the institutional actors and less the needy clients.
Moreover, Vanni experiences explain that NGOs’ positioning as part of the political
network of the local authority, had a negative impact on microfinance viability as a
rehabilitation tool. This was due to an implicit requirement of the NGOs to represent the
political interests of the de-facto state at the community level.
10 CONCLUSION
This case study of Vanni provides useful insights for practitioners and aid agencies, which
adopt microfinance as a rehabilitation tool in conflict-affected areas. Preferred conditions
for microfinance interventions, such as a functioning local economy, a stable population
and functioning local financial institutions may demonstrate a potential to extend
microfinance services to such groups. And, extension of microfinance in such situation
would be expected to accelerate the goal of reducing relief dependency and restoring
livelihoods of the conflict-affected groups. However, emergent local organisations in such
a context inevitably face internal limitations such as low human resource capacity, which
can limit the possibility of microfinance growth.
On the other hand, while the local organisations may have the capability to operate in
such circumstances, translating that potential into promoting welfare of the local people is
contingent upon the political and institutional factors. In Vanni, major constraints arose due
to direct linkages of the NGOs to the political institutions, and complex accountability
arrangements to the institutional actors. These arrangements had a negative impact on the
abilities of the NGOs to work with people at the grassroots. Furthermore, strict governance
arrangements also constrained the abilities of the local communities to organise social and
economic activities freely at the local level. In order to make more informed decisions, aid
policies in such a context need detail analysis of emerging institutions and governance
arrangements of the non-state actors. Political and institutional factors need to be
considered while planning in the conflict-affected areas.
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