Financial Inclusion #5: Removing Barriers

This is the last entry in my short blog series around financial inclusion. However, the topic could be the overarching theme of my entire blog going forward. All the clients we serve face significant barriers in their efforts to find a job or start a micro-enterprise to create an income. The work we do comes down to inclusion – creating opportunities for marginalized people to acquire the skills and assets needed to attain a sustainable livelihood and build a better future for their families. 

The work we do comes down to inclusion – creating opportunities for marginalized people to acquire the skills and assets needed to attain a sustainable livelihood and build a better future for their families.

Wandering around the sprawling central market area in Kumasi, Ghana, is a multi-sensory experience. For a non-shopper like myself, the vast array of shops, stalls, merchandise, food, smells, colourful signs, and sounds was overwhelming. I did not know where to begin. In the end, I simply tagged along with my more intrepid colleagues who were undaunted in their search for certain items, such as the beautiful Kente cloth for which the area is renowned.  

As we wandered, we stopped to talk with a range of vendors, in some cases picking up a piece of luggage here, a souvenir there and several bolts of cloth. People were very friendly – no doubt hopeful that I might be a customer, but the encounters were genuine and warm. I was impressed at the vast display of entrepreneurial spirit, tenacity and dignity of the people who worked there to earn a living and provide for their families.  

Eventually, we wandered to one of the food courts, where the smells were intoxicating, arriving at the booth of Erica, a client of Sinapi Aba Savings and Loans (SASL), one of our Implementing Partners in Ghana.  Erica is one of those indomitable force-of-nature entrepreneurs that I meet everywhere among client groups.  A long-time entrepreneur, she operates a kitchen and catering business serving tasty and healthy meals to individuals and organizations. Meals served at the market are the tip of the iceberg in her business.  

With the opportunity for growth in her business, she needed to invest in additional equipment and appliances and needed a loan. This is where the difficulties began. 

At the lower end of the economic ladder, most banking regulators permit small microloans to be extended without the requirement of formal collateral. This is the world of Trust Groups and savings groups where the social contract ensures a high repayment rate. 

However, as these clients grow from a micro-enterprise to a micro-SME (small to medium-sized enterprise), they need larger loans, bringing them under traditional banking regulations that require formal collateral or, failing that, signatures from a guarantor with collateral. Both requirements were not possible or acceptable for Erica, and she was stymied in her growth.  

Erica is not alone. Many of our clients are women, and in several countries where we serve, women are not listed as co-owners of common family property. The need to seek a guarantee from a (usually male) relative is not always possible, as there is often discrimination against female entrepreneurs. It can also be humiliating to seek a guarantor, or it could be a problem to effectively invite a new partner into the business. 

Thus, the existing banking regulations, meant to ensure a stable banking environment, end up introducing a systemic barrier to emerging female entrepreneurs. To address this, we launched the Alternative Collateral Pilot Project with SASL, in collaboration with Global Affairs Canada and a few other generous partners. These partners put up capital for a Loan Guarantee Fund that would absorb the loss in the case of any defaults. 

The essence of the pilot project is to identify alternative forms of collateral not historically recognized by Central Banks and to demonstrate that they are just as effective, if not more so, as traditional forms of collateral at preventing default. 

The essence of the pilot project is to identify alternative forms of collateral not historically recognized by Central Banks and to demonstrate that they are just as effective, if not more so, as traditional forms of collateral at preventing default.

Examples of alternative collateral include existing used equipment, family heirlooms such as jewelry or, in Ghana, precious hand-woven Kente cloth (pictured left) that has been passed down from generation to generation. These invaluable items are so dear to clients, that putting them up as collateral has more import than most traditional forms of guarantee. 

With the regulating body satisfied with the loan guarantee fund and SASL comfortable with the alternative collateral items, 100 women with solid loan histories were included in the pilot project. The first phase was completed earlier this year, with 99 of the women fully repaying their loans on time. The last woman did eventually repay her loan but was delayed by an illness. 

Erica was one of the pilot project participants. By the time I met her, the new equipment had already been installed for several months. She told me she was able to use her existing appliances and equipment as alternative collateral and that she was incredibly grateful to SASL for the opportunity. She was also thrilled that she did not need to seek a guarantor.  

Her business was booming, and at that time she had nine employees and expected to hire more. Financial inclusion is not just the right thing to do from the perspective of economic justice, it is also smart from the perspective of economic development. 

Financial inclusion is not just the right thing to do from the perspective of economic justice, it is also smart from the perspective of economic development.

Unleashing the entrepreneurial potential of millions of people in the margins lifts them and their families out of poverty, but also can have a positive impact on entire communities. 

The project did come to the attention of the regulator, and it received warm verbal support. However, such changes to the regulations are likely to be slow in coming. Hence, with additional capital, together with SASL, we have launched a larger second phase of the project.

Creative solutions are required to overcome barriers to financial inclusion, and the alternative collateral pilot project is one of those that I find to be very inspiring.

Dan Murray, CEO