ngo-led microfinance: potentials and challenges in conflict areas

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NGO-LED MICROFINANCE: POTENTIALS AND CHALLENGES IN CONFLICT AREAS NEAVIS MORAIS 1 * , y and MOKBUL MORSHED AHMAD 2z 1 Open University of Sri Lanka, Nawala, Nugegoda, Sri Lanka 2 School 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] y Senior Lecturer. z Assistant Professor. Copyright # 2010 John Wiley & Sons, Ltd.

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Page 1: NGO-led Microfinance: Potentials and Challenges in Conflict Areas

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.

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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

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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.

Copyright # 2010 John Wiley & Sons, Ltd. J. Int. Dev. 23, 629–640 (2011)

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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

Copyright # 2010 John Wiley & Sons, Ltd. J. Int. Dev. 23, 629–640 (2011)

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632 N. Morais and M. M. Ahmad

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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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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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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, 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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DOI: 10.1002/jid

638 N. Morais and M. M. Ahmad

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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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