Microfinance and street children: is microfinance an appropriate tool to address the street children issue ?

2.3. How best to match microfinance with street children?

This section is aimed at discussing the core elements that need to be part of a microfinance intervention targeting street children. Our challenge in the next pages is to propose a well-designed microfinance framework for street children, taking into account the need to reach a good balance between effectiveness and sustainability.

This will be done through a progressive approach, by building up three microfinance frameworks: a minimalist (section 2.3.1), a microfinance plus (section 2.3.2.), and finally a comprehensive microfinance plus framework (section 2.3.2.)

2.3.1. Financial services

A. Microsavings for street children

Thirty years ago, whenever talking of poor adults financial needs, we were pointing out that those people did not need savings services for two reasons (Aghion and al., 2005: 160):

· They are too impoverished and too undisciplined to be forward looking (Bhaduri 1973)^79(*)

· Even if they are forward looking, there are many informal ways to do so, and there is therefore no sense in providing this through a semi-formal way.

These two hypotheses have now been rejected for adult people, and considerable evidence tends to show that even poor households are eager to save, if given appealing interest rates, a conveniently located facility and flexible accounts (Morduch, 1999:1606).

Concerning street children, our second chapter, having reviewed the demand of street children for financial services, pointed out how those two arguments were false:

· Street children are forward looking, but are quickly trapped into a vicious cycle due to the street insecurity.

· Because of their perceived statute of `destitute' and `criminal', very few safe informal ways of saving money do exist for them.

Therefore, at this stage, we know that street children need savings deposits. Then, one question remains: what sort of savings services do street children need? Rutherford (2002) teaches us that a saving scheme must have three main characteristics: reliability, convenience and flexibility. Let us review it in application with street children.

1. Reliability

Reliability is the «quality that, above all others, is conspicuously missing in the world of money management of the poor» (Rutherford, 2002). The need of security is therefore important for each poor, and it may even be more important for street children. Indeed, our demand analysis has demonstrated how street is an unsafe environment for them and how the informal devices were as much risky. Street children need therefore a place where their money will be in high security. It is therefore essential for such saving scheme to be very secure.

Morduch (1999) points out that only tightly regulated institutions should be entrusted to hold savings, but this would exclude most microfinance programs worldwide. Moreover, as pointed by Rutherford (1999), many state-owned banks in developing countries are unreliable. So, security conditions must be a priority of all saving scheme. In case of street children, any place which serves as deposit (centre-based or not) must carefully check its security conditions.

2. Convenience to pay-in and take-out

We have underlined how street children need savings in order to cope with emergencies. Saving deposits need therefore to be convenient, i.e. to be both accessible and quick, so that children will find it easy to withdraw money when a sudden emergency hits them.

In order to be accessible, the deposit service has to be local, i.e. to be based in the location of the child. Placing a deposit service far away from the children living and working place would be inappropriate, as the child will have no incentive to deposit his/her money. A particular place can meet this first criterion: the drop-in-centres. Indeed, street children, after integrating some programs launched by diverse NGOs, are provided with various services in some centres. Those centres are places where children can feel relaxed and comfortable, safe and looked after (Ennew, 2000: 111). It can also provide night shelters, but it is not always the case. In those protected places, street children usually gather and spend a large part of their time. It seems therefore that the best accessible solution would be to settle the saving scheme in or near drop-in-centres^80(*).

In order to be quick, minimum delay must follow the child's request to access his account. In order to guarantee such mechanism, transaction costs have to be restricted (i.e. no heavy paperwork, etc.). Two options do exist in terms of registering:

1. Personal passbook: even if this has the big advantage to create a positive effect on the child's willingness to save, as the child may feel more committed to the project, this has two disadvantages:

1. Costly to administer: the passbooks, even if done in the most basic material, have a cost; moreover, given the high probability for the child of loosing it in the street, it does need a specific place in or near the drop-in-centre in order to store it.

2. Not quick: the registering officer must record the amount on the saving book of the child and on a register in order to keep general records in the organisation in case children loose their passbooks or for reporting data.

2. Register book based in or near the drop-in-centre seems to the best solution. Two options do exist: a manual book and a computerized system, the latter being the best one (a simple Excel file may be appropriate, or better a specialized microfinance software if available)

3. Flexibility

Flexibility is a key element of deposit services quality. Indeed, our demand analysis pointed out that street children do generally handle very small amounts of money, which they may need to deposit though. Consequently, the system in place needs to guarantee flexibility by allowing the children to save and to withdraw any amount of money, as small as this could be. Therefore, the core of the process must be based on voluntary savings, and the organisation should not avoid children withdrawing their money for any kind of imaginable reason: it is the children's money, and the only person that must have control on it is the child, nobody else.

However, the children's development bank and SKI do point out the question of compulsory savings, which may be important for two reasons: as a learning opportunity for the child; and as financial collateral for loan disbursements. This point will be discussed in our next section, dedicated to credit.

Now that those three fundamental criteria have been underlined as being the foundations of a microsaving scheme for street children, we need to highlight two other important elements, namely the need to find innovative ways to attract saving deposits, and the need to provide more than money deposits:

#177; Stimulate saving deposits: the importance of returns

It is generally said that returns are important in order to stimulate savings. The Children's development Bank, for example, is giving 10% a year, and 50% for those who do not withdraw savings for six months. Although interesting, this solution can cost a lot to the organisation and may impact the program sustainability. How can we therefore find another way of stimulating saving?

As pointed in our chapter 1, street children are vulnerable and this vulnerability may impact their self-esteem. Providing them with what we can call «non monetary returns» may therefore be useful. Those returns can consist of giving some rewards in public to the street children who saved regularly. Apart from enhancing the self-esteem of the child, it could be a high incentive for other children to save more and more and to feel more concerned by the program.

Finally, we must point out that our aim is not to avoid giving «monetary returns» to children, which can enhance their income and be profitable to them and their family, but we try in this paper to find some ways to maximize the effectiveness of the intervention, given the sustainability criteria, which one requirement is a cost minimization. Indeed, without the last aspect, we could argue that providing both monetary and non monetary returns are needed. However, we think that «non monetary returns» may be sufficient in stimulating saving deposits and that given the high need of street children to save money, interest rates may be of little importance to them.

#177; Assets deposits

As pointed by Ennew (2000: 112) street children may not only need to save money, but also to store some valuable things, such as working materials, or personal belongings. Therefore, offering the possibility to the children to deposit their assets is crucial, particularly after a child may start his/her business.

B. Microcredit for street children

Our chapter 1 (section 2.3) highlighted how street children accumulate skills and are plenty of capacities due their street life experience. Moreover, our demand analysis (chapter 2) pointed out how some street children need credit in order to start their own income generating activities whose returns are used for meeting their diverse expenditures and their families' expenditures, but do have a very low access to credit and hence can not initiate their own enterprises.

This finding is coherent with our three programs outlined below and it tends to show that this need is not only confined to Bangladesh. For example, SKI (2002) points out interestingly that:

Poverty combined with the lack of access to credit are some of the biggest obstacles that face street youth wanting to engage in healthy and safe income generation. Without money, street youth are unable to make the investment necessary to buy the initial assets their business needs. Most lending organizations do not trust the credibility and reliability of street youth seeking loans. Hence, street youth are left feeling discouraged». (SKI, 2002: 15)

Access to credit is therefore perceived as way to secure the future of the children, as it encourages economic empowerment and supports their socialization process. Moreover, it is a way to enhance their self-esteem by the success of their business activity, enhancing therefore their personal agency.^81(*)

This section is therefore aimed at throwing light on the appropriate product design and delivery needed in order to address street children effectively and in a sustainable way.

1. Product design

As pointed in our first section, a microcredit is characterized by three elements: a size, a term and an interest rate. Let us review those three components in application with street children

1.1. Loan size: small but tailored

Our previous case studies tend to demonstrate that loan sizes provided to street children must be smaller than conventional microcredit scheme and that the credit amounts tend to be comprised between US $ 20 and US $100, depending on the program. Indeed, small loan sizes have advantages both in terms of effectiveness and sustainability:

ü Effectiveness: it limits the risk faced by the child to fall into high indebtedness in case his/her investment fails, compromising his/her ability to repay, and creating instability in the future as the child must look for other ways of repaying back the money during a considerable long period.

ü Sustainability: it limits the risk of default facing the provider and it increases the provider's outreach.

However, the loan amount should be sufficient to meet the child's investment costs, and needs absolutely to be tailored to the child individual needs and his/her ability to repay (depending on his/her ability to make good investments, to manage correctly his/her business, as well as the child's repayment discipline). So, different categories of credit amounts must be proposed, from the smallest one, to the «largest» one.

1.2. Loan term: flexible but delimited

Flexibility is a key issue, in both savings and credit. Regarding credit, flexibility means that the term of the loan could be changed if the child is not able to meet the first deadline. This has been pointed by SKI as an essential factor of success, for both the lender and the borrower.

ü Effectiveness: it avoids the child to fall into indebtedness (borrowing money from other people, and creating tensions if the child is not able to repay to the informal lender) in order to meet the deadline.

ü Sustainability: it guarantees a higher final repayment rate, as non flexible loan terms might push the child, who is witnessing that he might hardly be able to repay the loan before the deadline, to run away.

However, the child must be aware that flexibility is not unlimited, but is settled between correct boundaries (e.g. between 6 months and 1 year)

1.3. Interest rate: low but adequate ^82(*)

The three programs outlined below show a mixture of practice in terms of interest rates. For example, SKI is charging 15% and the children's development bank stands relatively low with either an interest of 5% (development advance), either no interest (welfare advance). Foy (2000) indicates that some other programs worldwide are charging no interest at all.

Charging interest rate can have two impacts on effectiveness and sustainability

ü Effectiveness: an interest rate reduces the total available income of the children

ü Sustainability: more than the question of bringing additional revenue which may cover a part of the administrative costs, it can also be a barrier to entry to those who do not have a business project, limiting therefore the amount of loss (given a successful investment)

But in order to avoid depleting too much of the effectiveness, such interest rate must remain small. The range of 5-15% seems to be the most commonly used among practitioners.

So, we should suggest designing two different products, as does the Children's Development Bank: one with interest (for business starting activity) and one without interest (for emergencies, etc.)

2. Criteria for accessing credit

One of the core elements that could guarantee the effectiveness and the sustainability of microfinance for street children programs is the setting up of conditions to be met before any loan is disbursed. Those are essentially based on two pillars:

2.1. Good targeting:

Targeting the appropriate children is essential. Indeed, our chapter 1 illustrates the diversity existing among street children, across and inside countries. Therefore, it is important to keep in mind that not all street children are potential entrepreneurs and need to start a business. Our chapter 2 has highlighted this point, some children stating that «they do not need credit» at all. This implies the necessity to have a well-designed targeting strategy in order to target the children that will be the most committed, able and motivated of doing so. This targeting could be built on four elements:

ü Age: all programs do highlight the necessity to provide loans for older street children, as the younger ones have lower capacity to start businesses. For example, the children's development bank gives business loans to children of minimum 15 years and SKI to children of minimum 14 years.

ü Membership: one of the key considerations in such a program is the necessity to know the child before disbursing the credit; this means that a loan must only be disbursed to the child who has been «member» for some months. This allows avoiding disbursing a credit to a child who may be too much vulnerable (e.g. drug addicted); but this implies also disbursing credit to the ones who showed good performances in the past.

ü Willing, motivated and able: a microcredit program needs to address the street children who are willing, motivated and capable to start a business activity in order to analyse if such activity may be the most suitable for the child.

ü Feasible business plan: Pronats and SKI highlight the necessity for the child to think deeply of his business and to propose a small business plan before disbursing the credit. This business plan must be feasible and take into account the local informal market structure and competition.

2.2. Collateral substitutes

The collateral can take two forms

a. Compulsory savings: loans are given to children who had previously saved and the loan amount provided will be equal to «x» times the last saving balance

b. Guarantors: the children's development bank is giving loans to children who can provide two guarantors (e.g. a shopkeeper and another street working child)

3. Product delivery

Now that we have an idea on the product that may suit the best street children and the criteria for accessing such product, we need to discuss the way of delivering such product, in order to ensure both effectiveness and sustainability.

3.1. Group-lending

Our chapter 1 (section 2.3.) underlined that one of the main characteristic of street children is their altruistic behaviour and the supportive networks they do create among themselves. Kobayashi (2004) indicates interestingly that, because solidarity among street-involved children and youth is very strong in general, and they tend to enjoy interacting among themselves, many programs have incorporated group activities and promoted interaction to maximize the positive effect of peer groups»

Moreover, microfinance best practices demonstrate how the providers need to integrate the strength of their beneficiaries into their programs to transform it into an advantage. In that regard, the prevalence of solidarity among a particular group is a precious strength, which can both benefit the children and the provider.

In terms of effectiveness, a group lending system can be doubly beneficial:

1. The peer support gives the children the opportunity to share skills, opinions and ideas. This is a good learning opportunity - they support themselves and collaborate for the success of their respective businesses and therefore reinforce each other's efforts towards positive change.

2. This enhances their self-esteem and self-confidence, as they feel that they have a place and a role in the society, and that their voice does account for something.

In terms of sustainability, it can:

1. Increase repayment rates, thanks to the peer monitoring and peer support.

2. Enhance the sustainability of the project, from a double perspective: a good repayment rate, and a higher feeling of belonging to the organisation, guaranteeing therefore their long term commitment.

Concerning the size of the group, SKI advises to limit it at about 5-7 members per group, as a bigger may lead to less flexibility for children in choosing their partners.

Moreover, concerning street children, we can broaden the traditional concept of group-lending (i.e. disbursing credit to individuals who are part of a group) to include the notion of group-enterprise, where the loan might be disbursed to a group of street children in order to create together their enterprise. For example, the children's development bank, after having witnessed the limitations of individual lending, is orientating its future activities towards group-enterprise:«...in a group enterprise there is peer pressure and the children are motivated to move along with the group and continue to put in their efforts to make the enterprise successful. Thus, now the focus is on providing skills to a group of children and initiating a solid group enterprise» (CDB, 2005).

The idea proposed is therefore to try to launch, in parallel to or in place of individual business, a group business where the children will initiate and manage together their own business.

3.2. Progressive lending

All organisations point out the importance of starting small, and of expanding the loan size with the performance of the child. SKI does adhere to such philosophy, by offering a first loan up to US $ 40 and a second loan up to US $ 80 and a third loan up to US $ 85. As a consequence, the child's reliability will be tested and this will increase his/her opportunity cost of non repayment.

3.3. Frequent repayment schemes

Padakhep's repayment period is weekly based. This has been emphasized as a necessary condition for street children, as it would enable them to avoid falling into debt if trying to repay a high amount at the end of a longer period. Moreover, it is a way for the institution to screen the child's ability and willingness to repay the loan amount. Starting very early after the loan disbursement seems to be also of high importance, but it has to consider the child's ability to repay in order to avoid indebtedness of the child.

3.4. Linking the guardians

Our chapter 1 pointed out how the majority of street children around the world are closely connected to their families, passing most of their time on the streets in order to support their family and returning back home at night. Linking the guardians (i.e. parents or relatives) is therefore important and, as pointed by SKI, the importance is to guarantee that they approve the child's participation in the program, without interfering with his/her business, but supporting the child whenever he faces any problem. The youth workers may do this, as proposed by SKI, through the signature of a contract by the guardians.

C. microcredit and microsaving: a bridge

Providing credit in order to allow the child to start an economic activity will not be effective if the child is not pushed to save his/her money in order to reinvest it into his/her business.

D. A minimalist microfinance framework: visual summary

FIG. 3.1.

EFFECTIVE AND SUSTAINABLE FINANCIAL SERVICES FOR STREET CHILDREN

CREDIT

SAVINGS

· SIZE: SMALL BUT TAILORED

TERM: FLEXIBLE BUT DELIMITED

INTEREST RATE: LOW

RELIABLE

CONVENIENT

FLEXIBLE

NON MONETARY RETURNS

ASSETS DEPOSITS

DESIGN

CRITERIA BEFORE EDELIVERY

DELIVERY

GROUP-LENDING

PROGRESSIVE LENDING

FREQUENT REPAYMENT SCHEME

LINKING THE GUARDIANS

* ⁷⁹ Quoted in Aghion and al (2005)

* ⁸⁰ Our two determinants «in» and «near» are maintained here, as we still need to keep in mind our double delivery strategy, i.e. YSO («in») and MFI («near»)

* ⁸¹ «Agency can be an individual or collective (group) attribute and refers to the ability to act on and/or take control of one's life, to change one's circumstances etc. It is an important component of self-efficacy and can make all the difference in situations of adversity to individual or group survival. ie. people who passively accept their fate rather than actively strive to overcome it are more likely to be overwhelmed» (Jo Boyden: personal email communication: 21 May 2006)

* ⁸² The high majority of programs call it «service charge» instead of «interest rate», for both economic reasons (to avoid falling into the regulation process) and ethical reasons: as pointed by Padakhep staff, we should not speak about «interest» with street children, as we are not making profit, but just try to cover costs.