Mozambique: Week 4


By Trond Skramstad

My fourth week in Mozambique was spent in the northern part of the country.We visited with financial services businesses, NGOs and VSLA groups in and around the towns of Pemba and Nampula which lie in the provinces of Cabo Delgado and Nampula respectively. A relatively large and stretched out country’”almost two times the size of California and the distance from north to south almost twice that of California”s as well’”traveling around takes time here.Adding poor roads and infrastructure to the equation means that distances become multiples of what we are used to back home and as such the cultural differences and state of economic activity are also magnified.So, getting around to observe these differences is important for our project.

Pemba lies on the Indian Ocean in Cabo Delgado province which borders Tanzania to the north. It is a majority Muslim province and one of the poorest regions of the country (Mozambique is about 25% Muslim in total).Being closer to the equator it is a lot hotter than Maputo and the “cultural’ differences, not to mention the distance to the capital and central administration gives it a very different feel.Combine that with a beautiful stretch of beach and a bit of a backpacker”s destination, the mix of people there is interesting indeed.

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Probably four or five years old and hardly a toddler anymore, this little boy sat completely still in my arms, most of the time just resting his little head on my chest. He did not want to let go’”more than 30 minutes later I finally just had to put him back down… Photo by Alessandra Valent

One of the most exciting things about life in general I think, is the opportunity to not just experience the unexpected and serendipitous, but also that which makes you feel something genuinely new and surprising’”something that sets your thoughts off on a different path and ends up tweaking your view of the world and yourself just a little bit.Travelling to new places is one of the ways that affords you a chance to take these small steps into the unknown.While I am hardly a Dr. David Livingstone travelling up the Zambezi here, this trip has provided me with more than one such occasion.

Alessandra, my colleague on this project and a regular churchgoer, managed to find a place for herself to attend Sunday”s service located inside the Iris Ministries” orphanage at the outskirts of Pemba. Having been invited to come back, she asked me to return with her to get a tour of the place and meet some of the kids.We went back later in the day and found our way into the orphanage’”a first for me.The setting is special with baobab trees, notable for their enormously thick trunks and being many centuries old’”dotting a gently sloping hill down towards that blue of the Indian Ocean which in the late afternoon light no painting or photograph ever can do justice.By no means a fancy place though, the kids are fed, taught, nurtured and perhaps more important than anything, regularly given a little affection and a warm human touch.There are a good number of volunteers as well as the regular employees there but of course, the adults are far outnumbered by kids.It didn”t take long after we entered the little area set aside for toddlers and babies before a little friend stood in your way, arms stretched up just looking at you and wanting to be picked up.How could you not? I can”t see how anyone goes untouched by such experiences…at least it makes you stop and think.

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No, its not a Christo art installation. Samora Machel under wraps in Nampula, protected from damage from road work. Trained as a nurse, he was a socialist revolutionary leader and the first president of the country (at the age of 42) following its independence from Portugal in 1975. He was killed in a plane crash in 1986’”not sure what the circumstances were around that...

In Pemba we visited with the Aga Khan Foundation”s (AKF) offices. The AKF is a multi-sector charity and has a fledgling microfinance operation in Cabo Delgado and is launching a VSLA type project in the area as well, and as such someone we might garner further insight about our project. Also getting a glimpse into how another, and very different NGO type operates and understanding their underlying structural differences was fascinating.Although a charitable organization with Shia Ismaili roots, AKF has a secular mission but says it is guided by the Islamic principles of consultation, solidarity with those less fortunate, self-reliance and respecting human dignity’”ideals one hardly can argue with. The Imam Aga Khan is the leader of the organization and part of his family fortune is used to help fund it.

One of the things I had hoped to get out of this trip was to better understand how different charitable organizations operate and the types of people they employ’”not to mention how the “business’ of aid and development function at a grass roots level.The one thing I have found, whether it is a Christian orphanage, the Aga Khan or the people at CARE, at the source of the engagement there lies is a deeply shared intent of doing good, something I believe all healthy people share as part of their humanity.How one best helps out however, and which organizational types are the most effective is another and much more complicated question.I plan on getting back to that later, perhaps in one of my “weeklies’ towards the end of my stay here.

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One hen. Not leaving empty handed. It was given to us by a VSLA group as a “thank you’ for taking the time to visit. What do I do with this thing’”its alive! It would be very rude not to accept the gift…Photo Alessandra Valenti

After a few days in Pemba, we took the short flight inland to Nampula, which is the second or third largest city in Mozambique (depending on who you ask).The place has an industrious feel to it but little of the cosmopolitan flair of Maputo.Nampula is also the regional, and for some the national headquarters location for a number of NGOs. It is the site of CARE's second largest office in Mozambique, and the Natural Resources Management sector, for example is administered from here.One of the very helpful things about CARE”s significant presence in the country is that there usually is some infrastructure in place to handle the logistics and a friendly face to greet us when we arrive’”indeed, seeing someone with the "CARE" logo in hand as you exit the airport terminal in a place you have never been gives you a slight sense of relief in the knowledge that you will be well taken care of when in town.

The visits in Nampula were entirely focused on microfinance and VSLAs outside the auspices of CARE and we got an opportunity to visit several VSLA type promoters and NGOs as well as microfinance and "technical support" organizations.The main purpose of these meetings were to learn more about alternative models for delivering financial services to the poor, including ways to do linkages of VSLA like groups (other NGOs also organize savings groups but the structure is often a bit different).

Some General Thoughts on Microfinance and VSLA Groups

As “week five’ was spent in the office and at other meetings in Maputo’”with not much to report other than that we are making good progress on the project’”I have put some of my more general thoughts on microfinance and VSLA groups below.In summary, after having spent a little time on the ground here, I think the VSLA approach has a lot of merit and I am very excited about what I am seeing.That said, the VSLA methodology also has some obvious limitations that need to be addressed in a more systematic way, something we are taking a bit of a stab at with our bank linkages project.Furthermore, the more time I spend on the VSLA group methodology and the more I learn about microlending as a standalone activity, the more I like the VSLAs as the way to go when working with the very poor and the less I like the latter.

When it comes to giving financial services to the poor, there are some significant differences in how NGOs and microfinance institutions do this, not just in Mozambique, but around the globe.There are also some big questions with regards to what the objectives should be, what realistic expectations are as well as the efficacy of such programs. In my opinion, the biggest distinction is whether to take a “savings first’ or use a “credit driven’ approach. Importantly, microfinance is an umbrella concept and microcredit is not synonymous with microfinance’”it is just one of its dimensions as is savings, small ticket insurance and so on.While an oversimplification and not an “either or’ issue, in my opinion the main question is whether the better way to help is one of the immediate impact of microcredit vs. the more gradual one of a microsavings-led approach.Both have their advantages and shortcomings.The second and very important difference in my opinion is whether microfinance is provided as part of a “bundle’ of financial literacy education with other components of a broader development effort within a community or if it is done in isolation.In other words, the longer-term positive impact is likely to be broader and more lasting if microfinance is offered as part of a bigger picture effort although the measurement of the impact of the microfinance component in such “bundled’ deliveries of aid become near impossible to measure.In any circumstance, in my opinion microfinance is just one of many ingredients in aid, and that if done right may contribute to economic development in a meaningful way only over longer time horizons.

One way to do microfinance is to take a credit led approach where you effectively start out by immediately putting fresh cash into the hands of the poor in the form of a loan.This is typically done after a brief training period, usually a week or less’”sometimes none.While practices vary, some microcredit organizations administer a “financial literacy’ test before credit is extended, probably a good idea.The main thrust behind microcredit is that it provides an immediate economic lift through the financing of cash for working capital, like money for a farmer to buy seeds for planting his crop or perhaps a woman buying a sack of beans wholesale and repackaging them into small bags for "retail" sale at the local market.Such credit also can go to funding “capital investment’ like a seamstress buying her first sewing machine and thus dramatically enhancing her own productivity. Money borrowed on such credit also at times is used for tuition, school uniforms or perhaps buying medicine. This kind of use of microcredit is typically what donors like to hear about and is trumped as “how microfinance works’ on many NGOs” and microfinance institutions' websites. Often though, the actual numbers tell a somewhat different truth’”indeed a lot of credible research show that a lot of microcredit is just plain old consumer lending for small items like food, a basic TV set, taking a trip to visit relatives, in some parts of Africa even paying for a little girl's circumcision (yes, that's unfortunately a fact), or perhaps paying off another loan and so on.

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More than one hen. An entrepreneurial VSLA member has built her own prospering poultry business using her savings and borrowings from the group. We found this place one hour”s drive north of Nampula. Truth be told though, these success stories while great to see, are not all that common here. Photo: © 2010 Trond Skramstad/ CARE

Another microcredit “story line’ is that poor people can be very good credits and that women in particular pay loans back as promised.While this is true in general, the reality that someone pays back a loan may not correlate with any significant increase in their level of prosperity but rather that if ones reputation in a tight knit community is on the line (or one is hooked on credit) the borrower will go to extraordinary lengths not to default.While there is definite evidence that microcredit can provide an economic uplift to the recipients of the loans and does help a number of people out of poverty, other studies that look more broadly and longer term at the overall economic impact (i.e. also including the non-recipients of microcredit) show that the total community may only be moderately better off. In other words, it is perhaps not quite the magic bullet some rather well know figures in the development community claim it to be.So, the exceptional stories of rags-to-riches entrepreneurial types getting their start with a $100 loan that you can find on a number of websites are just that’”exceptions, and probably say more about the unique entrepreneurial talent of some people than it does of the merits of microcredit, although the latter may have been an important catalyst in the mix. Microcredit, that is if it is used for economic activity in the first place, is for the great majority just a means of basic self-employment.That isn”t necessarily a bad thing but it doesn”t set the stage for sustainable growth either. The petty trading it often funds and the jobs it creates because of the lack of skill and available opportunities of the borrower does often not amount to much more than a “lemonade stand on steroids’ and has such has little to do with true entrepreneurship.Real entrepreneurial talent and drive, as in the developed world, is not something most people are naturally endowed with but is rather something that occurs “naturally’ in a few people.In the US for example which is one of the most dynamic economies around, only about one in ten people are self-employed.All this doesn”t mean to say that a credit led approach is all bad. Rather, it suggests that one may have to lower ones expectations and look very carefully at the details and try to understand how a microcredit program is structured and how it is delivered as well before deciding to get involved.

Although a bit of an “aside,’ from a very important “bigger picture’ perspective the history of consumer credit in the so-called developed world has generally been that your average citizen started to save first.These savings became an additional source of capital for industry that then could invest in size and employ a large number of people, a critical component in putting these economies on a path to prosperity driven by economies of scale and the very important productivity gains that were generated on the back of this.And, looking to Asia as a real life example today, places like China are growing rapidly from low levels of income based on a culture of thrift that likely is an absolutely critical component in funding the manufacturing capabilities that now has made that economy a global powerhouse.Neither VSLAs nor microcredit in their own right can provide this capital, but at least with a savings led approach as promoted in the VSLA framework, there is hope that the building block of “thrift’ is put in place, eventually leading to a more significant economy wide capital deepening on a much longer but more realistic time horizon.Indeed, an ample supply of microcredit (particularly if it comes at the expense of the availability of funding to SMEs and bigger businesses) may not encourage scale but could perhaps actually encourage economic fragmentation as an unintended consequence.

The "other" model then, is a savings led approach. A savings led approach doesn”t necessarily mean that credit is not involved but rather that the guiding principle is that one learns to put aside savings first before one gets to borrow.While it may sound disingenuous and arrogant to teach people barely above subsistence the value of deferred gratification, if done on a small scale the longer term educational component from learning how to save may be more valuable than quick access to credit.While there isn't that instant impact of fresh cash into your hands, you are starting a process of teaching financial literacy and understanding that “delaying’ now can result in greater “gratification’ later but where “later’ still is within a reasonable horizon (for the VSLA groups less than one year). To me, financial literacy involves a lot of components.Some of the more important ones, like understanding what it takes to live within ones means by doing “savings first,’ provides an opportunity for a person to learn how much money they can put aside each month’”and importantly, understanding what the limits are to how much they can borrow to reduce their risk of over indebtedness later. Understanding that there are meaningful rewards from routine and diligent discipline, whether it is with your money and savings over time, or something else that demand such “skills,’ I believe this kind of training also can be of great value. Hence, if you skip the savings step I think there is not just a greater risk of getting into more debt than what you can handle, but perhaps more importantly, a missed opportunity for learning and personal growth.

While I by no means am an expert on aid and development, one of the most important things I have gotten out of my visits around Mozambique thus far is that I have an even greater level of conviction than before that the longer-term efficacy of development probably is much, much more dependent on the “mindware’ than the “hardware’ in giving aid. What I mean by “mindware’ are things like education in the broadest sense of the word and work effecting attitudinal change’”some as basic as helping build the self confidence and self respect of individuals and communities’”another important byproduct of the VSLA approach as well. When the VSLA group methodology works as intended there is almost a year”s worth of NGO involvement and learning, and “mindware’ development can go hand in hand with the practical benefits of the VSLA that can help put more food on the table.

The VSLA methodology does have its own limitations on the path to financial literacy and economic development though. Inherently, the VSLA groups are a “closed’ system. i.e. the savings and borrowings as well as the learning once the NGO assistance is over, is limited to the group”s own resources.Indeed, the poverty reducing impact (and improving financial literacy and “mindware’ development) can only go so far for the VSLAs.What I am very excited about with respect to the bank linkages project we are working on now is that this may perhaps be one good way of clearing a path to the next level of financial literacy while building on the very important lessons already learned by the VSLA members in their group.

The table below is taking a look at a study done of a relatively similar group format in India and shows that there is an initial uplift from implementing a VSLA type, or Self Help Group (SHG) methodology, as it often is called there.It also points out that if left to its own devices, there are clear limitations on how far such groups can take it which may not just be borne out of this study but also makes intuitive sense to me. What I am hopeful about and what would be very exciting to me indeed, is if “linkages’ could become one of the components that help produce a further incremental reduction in poverty after the initial round of benefits from the “traditional’ VSLA methodology have been harvested.