Micro-finance : Pros and Cons

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MICROCREDIT AND FINANCIAL INSTITUTIONS Rural Livelihoods and Agrarian Change Seminar Atsushi Someya Diana González Botero Jisoo Yun Ramkishan Singh School of International Development, UEA 15.11.2013 1

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The presentation is our take on micro-finance industry, its evolution and impacts on beneficiaries.

Transcript of Micro-finance : Pros and Cons

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MICROCREDIT AND FINANCIAL

INSTITUTIONS

Rural Livelihoods and Agrarian ChangeSeminar

Atsushi SomeyaDiana González Botero

Jisoo YunRamkishan Singh

School of International Development, UEA15.11.2013

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Microcredit and Financial Institutions

Contents:

• Introduction and background to the topic

• Brief overview of the chosen organization (BRAC) and it’s microfinance program

• Proposal for funding a new microfinance project within BRAC’s ELA (Empowerment and Livelihoods for Adolescent Girls) program

• Debate/critiques of microfinance (in general and case specific)

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Micro-credit and Microfinance: Often used interchangeably

Micro-credit: Extension of small loans (aka micro lending and microloans) for the poor, who otherwise do not have access to basic financial services.

Microfinance: Provision of financial services (e.g. savings, micro-credit, fund transfer/remittance and insurance) for the poor.

Introduction and Background

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Microfinance Micro-credit(i.e. loan)

Fund transfer

Savings

Insurance

*Vinod Kothari and Neha Gupta, Micro Credit in India: Overview of regulatory scenario

Hence microfinance is a broad category of services, which includes micro-credit.

Introduction and Background

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Financial Institutions

Microfinance is offered by many institutions like, Commercial banks, State development banks, MFI banks, Rural banks, Coops, NGOs, NBFI (non-banking financial institutions), Pawn shops, Money lenders, Informal groups etc. etc….

Two main approaches to micro-credit:

1. A “minimalist” approach (Only loan is given)2. A “credit plus” approach (Trainings, technical support, help with marketing the

products of the beneficiary etc. are also offered) (Berger, M., (1989))

Introduction and Background

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Source – Adapted from Meyer & Nagarajan (1999)

Features Old Paradigm New ParadigmProblem Definition Overcome market

imperfections Lower risks and transaction costs

Role of Financial Markets Implement State plansHelp the poor

Intermediate resources efficiently

View of users Beneficiary Clients

Subsidies Create subsidy dependence Create independence institutions

Sustainability Largely ignored A major concern

Evaluations Credit impact on beneficiaries

Performance of financial institutions

Paradigm shift in microfinance

Introduction and Background

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Why Micro-credit/Rationales (1/3)

Poor are bankable:

The success of Grameen Bank in Bangladesh has established the fact and several literatures in this regard also acknowledge the fact that poor are bankable in terms of capacity to save and repay the loans provided the same are collected at the doorstep in small amount at frequent intervals.

The Grameen bank experience of Bangadesh has demonstrated that if the poor are supplied with working capital, they can generate productive self-employment (Hussain 1998).

“If you can run a bank, lend money, and get it back, cover all your costs, and make a profit, and people get out of poverty, what else do you want?”Mohammad Yunus, Micro-credit pioneer and founder of Grameen Bank.

Introduction and Background

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Why Micro-credit/Rationales (2/3)

The multiplier effect:

The multiplier theory occupies an important place in modern economic theory. The basic concept of multiplier says that the effect of investment on income, output or employment is manifold than the original increase in investment.

This vicious cycle can be broken with the injection of credit

This is the result that is sought through the credit intervention.

Low income Low savings Low investment Low income

Credit intended for more investment More income More savings More

investment

More income

Introduction and Background

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Why Micro-credit/Rationales (3/3)

Microfinance & MDG:

The current literature on microfinance is also dominated by the positive linkages between microfinance and achievement of Millennium Development Goals (MDGs). Microcredit Summit Campaign’s 2005 report argues that the campaign offers much needed hope for achieving the Millennium Development Goals, especially relating to poverty reduction.

Microfinance has a positive impact on the following:

Eradicate extreme poverty and hunger

Achieve universal primary education

Promote gender equality and empower women

Reduce child mortality

Improve maternal health

Introduction and Background

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What is BRAC (Bangladesh Rural Advancement Committee)?

NGO Overview and Microfinance

• BRAC, which was established in Bangladesh in 1972, is a development organization that aims to reduce poverty by providing the poor with opportunities to make affirmative changes in their lives.

• BRAC has 2,661 offices, and covers all 64 districts in Bangladesh.

• In Bangladesh, there are 106,507 staff members, including teachers and project staff.

• Currently, BRAC’s microfinance programme is also conducted in Afghanistan, Pakistan, Sri Lanka, Sierra Leone, South Sudan, Uganda, Liberia and Tanzania.

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Microfinance in BRAC

• The microfinance programme is an essential component of BRAC’s method to support livelihoods of the poor.

• For the past 40 years, BRAC has developed to become one of the largest providers of monetary services to the poor by providing tools which a great number of people can use to improve their lives.

• Most of the borrowers are women. By using the loans, they control their household finances to have better livelihoods.

• The main borrowers are people who are not be able to have access to traditional banks such as marginal farmers and small entrepreneurs.

NGO Overview and Microfinance

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BRAC’s Microfinance Programme in Bangladesh at a Glance

Village Organisation (VO) 279,175

VO members (million) 5.84

Total borrowers (million) 4.19

Cumulative disbursement (million) BDT 694,956 (USD 9,034.44)

Outstanding loan (million) BDT 60,067 (USD 780)

Repayment rate 98.76 %

Average loan size BDT18,579 (USD 245.53)

Saving Deposits (million) BDT24,907 (USD 323.80)

Cost per loan BDT1,716 (USD 22.3 )

Source: BRAC web site issued in December 2012

NGO Overview and Microfinance

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The Impact of BRAC’s Microfinance Programme: A Case Study of a Village

Length of Attachment (Year)

No. of Respondents

Average per capita Income Before Joining BRAC

Average per capita Income After Joining BRAC (Tk)

Average Changes of per capita Income (Tk)

Average % of Changes

3 to 9 years 208 USD 14.52 USD 51.02 USD 36.50 254(+)

Table2: Changes of Monthly Income

Source: Kamal, M. H. 2012.

Note: Figures are rounded to the nearest whole number.

Pattern of Occupation No. of Respondents Before Joining BRAC

No. of Respondents After Joining BRAC

Unemployed 68 0

Low paid works 66 15

Selfemployment works 74 193

Total 208 208

Table1: Changes of Occupation Pattern of the Respondents

NGO Overview and Microfinance

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ELA Uganda

In Uganda, where the ELA program is largest, 31,000 adolescent girls are provided with ELA centers, a safe place to read, socialize, play games, sing, dance and exchange views and experiences – all activities that were often frowned upon in there homes. The program, first launched in Uganda in 2008, has increased gradually the number of clubs up to 1,200 and affected girls’ life in many ways, giving the girls a confidence they need to assert themselves and resolve conflicts and making them aware of their rights.

ELA Project Proposal

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ELA Project Proposal

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Why adolescent girls in Uganda?

- Nearly 60% of Uganda’s population is aged below 20.

- Teenage pregnancy rate in Uganda : 30%

- Uganda has one of the highest rates of young women being out of the labor force and most of the works are restricted to household chores.

- Uganda is a patriarchal society where women has subordinate roles within a family and community.

- Youth population should make smooth transition to adults.

- Adolescent is the period when girls tent to lose their mobility, friends, and limited freedom they might had (Amin et al. 2002)

- Lives stay in vulnerabilities of early marriage, dowry, frequent pregnancy, abandonment or divorce, domestic violence, marginalization.

- Illiteracy, early motherhood have life-long damaging consequences.

- To break the vicious cycle, enable girls should take control over their lives and allow them the opportunities that will build human capital.

ELA Project Proposal

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Proposal Introduction (1/3)

1) Missions of MFELA

● Income increase of adolescent girls for schooling, family support, and livelihood.

● Developing empowerment and awareness of women’s right. - create empowering opportunities and choices for the girls to support them in defining and implementing their own agenda for changing their situations.

● The provision of life skills and vocational skills - life skills : sexual issues, family planning, negotiation, leadership among peers, legal knowledge on women’s issues - vocational skills : hair-dressing, tailoring, computing, agriculture, small trade operation. Financial literacy courses included like budgeting, financial services, accounting skills

2) eligibility : aged between 13-21, especially who are out of school

ELA Project Proposal

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3) Target number of participants : 30,000 adolescent girls

4) Target village

● Villages with At least 35 girls are selected for the intervention. ● Anticipate 30 adolescent girls will participate on average.

5) Application procedures

● Adolescents form their own groups and will be offered savings and credit facilities by BRAC (Ex) 30,000 members in 1,000 groups ● Skill training for loan beneficiaries - Income generating activities : hair-dressing, tailoring, computing, agriculture, small trade operation - Microfinance access : financial literacy courses included like budgeting, financial services, accounting skills - Small business owners will be encouraged to take on an adolescent girl as an intern.

Proposal IntroductionProposal Introduction (2/3)

ELA Project Proposal

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● Follow-up after lending loan

- Facilitated by the Programme supervisor (PS) - For credit activity, meet weekly to pay loan and saving installments.

● Periodic meetings with the parents and community people

- To create positive attitude among the parents and community members to the participation of their daughters in activities beyond study and household chores. 5) Installment plan : Weekly basis, interest rate 25% annual (for 6 month, 1 year loan)

6) Savings mobilization : 20% of loan must be deposited.

Proposal Introduction (3/3)

ELA Project Proposal

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Institutional Sustainability (1/3)

1) Decision making structure, efficiency and transparency

● Decentralized administrative structure and professional management workforce

● Field-level managers (regional managers) have authority to plan, organize, and implement the organization’s policies and services at various levels, with little supervision from the head office → increase in flexibility to branch operators

● Governing body : elected from among distinguished individuals with sound reputation in social development, business who have demonstrated their personal commitment to poor causes There are 10 members.

ELA Project Proposal

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2) Staff development and motivation (professional staff, training)

● Management training to plan, organize, and implement bank programs.

● Entry-level personnel are program organizers and they must be university graduates and are selected only after a careful screening process

● Introductory training at the head office and probationary year in the field

● Staff performance incentive schemes were introduced in Microfinance Program → staff motivation and performance has tremendously improved

● Introduced self insurance fund that help to cover liabilities arising out of death and other injuries of local employees.

Institutional SustainabilityInstitutional Sustainability (2/3)

ELA Project Proposal

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3) Partnership with External Stake Holders

● MasterCard Foundation. ● Memorandum of understanding signed with the government of Uganda in 2008. ● Partnership with Ministry of Education in implementation of MasterCard Scholars Program, UN agencies. Signed with agreement with Family Health International USAID community connector project.

4) Program Approach

● Financial and training service adapted to the local context and in high demand by clients described in the mission statement. ● Impact study according to BRAC’s research and evaluation unit in partnership with the World Bank and London School of Economics expects MFELA is effective in lowering pregnancy rate, increasing the use of contraception, and etc. ● Evaluation system : on-going study with BRAC’s research and evaluation unit in partnership with the World Bank and London School of Economics.

Institutional SustainabilityInstitutional Sustainability (3/3)

ELA Project Proposal

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1) Group-based loan as a credit union

● Through interactions with group members, MFELA can offer more personalized services to each borrowers and ensure individual’s continued access to MF service.

● Group monitoring and social pressure for repayment → savings mobilization → affordable for interest rate → increase in self-sustainability ♣ Final goal : reduce dependence on external resources and realize self-financing and increase internal validity

● Savings are managed by the group itself, resulting in access to both ‘internal loans and ‘external loans’. - ‘ownership’ of the fund plays a great role in setting interest rate and repayment

● Savings (20% of loan) are compulsory on monthly basis. - Savings cannot be withdrawn, resulting in significantly higher effective borrowing rates.

● Internal and external audits carried out at regular intervals.

Financial SustainabilityFinancial Sustainability (1/2)

ELA Project Proposal

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2) Installment plan

* General expenses : stationery, free gift, maintenance and other consumables

Financial Sustainability (2/2)

Loan period Repayment Highest loan amount ($US)

Lowest loan amount ($US) Interest rate

6 months Weekly basis 100 100 25%/yr, flat

1 year Weekly basis 300 100 25%/yr, flat

Budget PlanProgramme

Expenditure ($US)Income grant 4,500,000

Sub total 4,500,000

Administrativecost ($US)

Manpower 431,000

Traveling/transportation 110,000

Training, workshop/seminar 250,000

Occupancy expenses 50,000

Other general expenses 280,000

Sub total 1,121,000

TOTAL ($US) Total 5,621,000

ELA Project Proposal

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The impact of ELA in Uganda (1/2)

Before ELA After ELA

a month USD 12 USD 60

6 months USD 72 USD 360

Changes of Income per person

Loan money: USD 100 for 6-month periodInterest rate: 25%Interest: USD 25Profit for 6 months: USD235 (360-100-25)Profit for a month: USD39.16 (235/6)USD39.16×30,000people=USD1,174,800=OUTREACH/a month

Source: UGANDA PeacebuildingData.org

ELA Project Proposal

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• According to the research of BRAC and the researchers from London School of Economics, they found that:

- 70% INCREASE in rate of average savings of the girls with ELA programme.

- 12.6% INCREASE in contraceptive use among ELA participants.

- 28.6% DECREASE in pregnancy rates among the participants of ELA programme

- 83% DECREASE in rate of unwilling sexual intercourse among girls with ELA programme.

- 35% INCREASE in probability that an adolescent girl with ELA would be participated an income-producing activity.

- 22.5% LOWER in rate of childbearing by girls with ELA programme than girls without ELA programme.

Source: BRAC Uganda Annual Report 2012

ELA Project Proposal

The impact of ELA in Uganda (2/2)

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Sustainability of microfinance (1/2)

• About training- (Berger, 1989) • Error of excess: Training and technical assistance

raise the cost of credit projects + add administrative burden.

• Diverts the organisation’s attention away from the effective administration of credit.

• Might place a burden on women borrowers

Critiques of microfinance and the programme

Reducing women’s demand for credit.

•Training is often inappropriate to the economic role of women.

Recommendation: Institutions should explore ways to separate simple lending from technical

assistance and training.

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Critiques of microfinance and the programme

Sustainability of microfinance (2/2)• Donations: Few credit programmes can cover their operating and indirect costs and recover initial investments without repeated donations! (Berger, 1989)

• According to rough estimations, only 1–2% of all MFIs in the world (i.e., some 150 organizations) are financially sustainable (Hermes and Lensink, 2011).

• As borrowers take larger loans over time, repayment rates drop.

• Interest rates must be high enough to cover costs and inflation.

•Must operate efficiently maintaining expenses at a minimum level, to keep costs to borrowers low.

• Minimalist approach to credit evidence shows that diversification should come after mastering a first activity. Start out simply.

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Social outreach of microcredit (1/2)

•Breadth: Quantity – Number of borrowers over a period of time

•Depth: Quality – Access to credit disbursement to poor people: the poorer, the deeper• Problem: measuring the level of poverty of borrowers

• There is a strong positive correlation between the income level and the size of the loan:

Critiques of microfinance and the programme

The poorer the borrower is, the smaller the size of the loan.

• In job-trainig programmes selection plays a key role in who participates.

• Financial performance has a positive impact on the depth of outreach of an MFI

•Do girls have strong enough social networks?

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Critiques of microfinance and the programme

Social outreach of microcredit (2/2)

• Financial systems approach vs. Poverty lending approach

• FSA claim that lending to the poor can be very costly

Need for subsidies = conflict between sustainability and outreach goals.

•PLA claim that focusing on financial sustainability goes at the cost of lending to the poor.

•Cull et al. (2007) provide evidence for a trade-off between both and stress the importance of institutional design in determining the existence and size of such a trade-off.• 124 microfinance institutions in 49 countries

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Impact of microfinance: A debate (1/4)

There has always been a debate on effectiveness of microfinance programs in reducing poverty.

But, more recently, these debates have been extended to the possible implications of such programs for women's empowerment, with some evaluations claiming extremely positive results while others suggesting that microcredit leaves women worse of than before (Kabeer, N., (2001))

Critiques of microfinance and the programme

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Impact of microfinance: A debate (2/4)

Degree of women’s control over loan:

The study carried out by Kabeer suggests that a majority of women, particularirly married women have little or no control over their loans (Kabeer, N. (2001)).

Goetz and Sen Gupta (1996) developed an index to show the control of women over loan use:

17.80%

19.40%

24.10%

17.00%

21.70%

Women's control over loan use

FullSignificantPartialVery LimitedNo Involvement

Critiques of microfinance and the programme

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Impact of microfinance: A debate (3/4)

Another study done by Ackerly (1995) with 613 women loanees in the Grameen Bank, Save the Children Fund (USA), and BRAC also suggests loss of direct control over loans.

Women’s control over loan use has a direct correlation with the loan amount. A study done by R. Rehman (1986, p. 33) with Grameen Bank women loanees suggests that women seem to have 100% control over cash if it is small amount (around 1000 TK). This figure can go as low as 46 % if the amount of loan is more than 4000 TK.

How do women repay when their loans are not invested by themselves?

There could be three possible repayment scenarios (See Goetz and Sen Gupta (1996)):

Male member utilizes the loan and agrees to repay. He is unable to repay it fully and woman has to substitute it from other sources. He is unwilling to repay the loan.

Critiques of microfinance and the programme

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Impact of microfinance: A debate (4/4)

On these grounds the proposal, with its proposed impact, put forward by BRAC’s team today can also be debated. One might argue whether or not, these participants would actually be able to utilize the loan themselves (given that these are adolescent girls, aged 13-21, living with their parents)?

Also since the program focuses on out of school girls who have very limited or no formal education, what kind of business training will be provided in order for them to become an entrepreneur?

Do they have control/access to market to sell their produce?

Where and how would they get the raw material required for their business?

Can these small businesses provide sufficient returns to cover a high rate of interest?

Is there enough support system to help the clients to deal with these challenges?

Critiques of microfinance and the programme

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MICROCREDIT AND FINANCIAL

INSTITUTIONS

Rural Livelihoods and Agrarian ChangeSeminar

Atsushi SomeyaDiana González Botero

Jisoo YunRamkishan Singh

School of International Development, UEA15.11.2013

THANK YOU!

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Kamal, M. H., 2012. Measuring the Impact of BRAC Microfinance Operations: A Case Study of a Village. International Business Research, Vol.5(4), pp.112-123

BRAC, 2013. Overview. [Online]. Available at: http://microfinance.brac.net/overview [accessed: 13 November 2013]

BRAC, 2012. BRAC Annual Report 2012. [Online].

Available at: http://www.brac.net/sites/default/files/BRAC-Annual-Report-2012.pdf

[accessed: 13 November 2013]

BRAC, 2012. BRAC Uganda Annual Report 2012. [Online]. Available at: http://www.brac.net/sites/default/files/ar2012/BRAC%20Uganda%20high%20res.pdf

[accessed: 13 November 2013]

Ricketts, C., 2013. Investing in girls is paying off BIG in Uganda (thanks to BRAC!). [Online]. Available at: http://kivanews.blogspot.co.uk/2013/01/investing-in-girls-is-paying-off-big-in.html

[accessed: 13 November 2013]

Anonymous, 2010. Socio-Economic Characteristics. [Online]. Available at:

http://www.peacebuildingdata.org/uganda/results/socio-economic-characteristics

[accessed: 14 November 2013]

References

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Meyer, R.L., & Nagarajan, G. (1999) Rural Financial Markets in Asia: Policies. Paradigms, and Performance, Oxford University Press

Microcredit Summit Campaign (2005), State of the Microcredit Summit Campaign Report 2005, Washington, DC

Tarique and Thakur, (2007), Growth of Microfinance in India (90th Conference volume of Indian Economic Association)

Vinod Kothari and Neha Gupta, Micro Credit in India: Overview of regulatory scenario

Economic and Social Commission for Asia and the Pacific and UNDP. 2003. "Promoting the Millennium Development Goals in Asia and the Pacific: Meeting the Challenges of Poverty Reduction, New York.

BRAC, 2008. Providing Microfinance and Social Space to Empower Adolescent Girls: An Evaluation of BRAC’s ELA Centres: BRAC Research and Evaluation Division

Berger, M., 1989. Giving Women Credit: The Strengths and Limitations of Credit as a Tool for Alleviating Poverty, World Developmet, 17 (7), pp. 1017-1032.

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Johson, S. and Rogaly, B., 1997. Microfinance & Poverty Reduction. Oxford: Oxfam

Khandker. S. R., 1998. Fighting Poverty with Microcredit: Experience in Bangladesh.

Washington, D.C: Oxford University Press.

Ledgerwood, J., 1999. Microfinance Handbook: An Institutional and Financial

Perspective. Washington, D.C: The World Bank

UNICEF, 2012. Child Poverty Insights, BRAC’s Empowerment and Livelihood for

Adolescent: Changing Mind-sets and Going to Scale with Social and Financial Skills

for Girls: UNICEF

Quayes, S., 2012. Depth of Outreach and Financial Sustainability of Microfinance

Institutions, Applied Economics, 44:26, 3421-3433.

Bandiera, o., Goldstein, M., Rasul, I., Burgess, R., Gulesci, S., Sulaiman, M., 2010.

Intentions to Participate in Adolescent Training Programs: Evidence from Uganda.

Journal of the European Economic Association, 8 (2-3), pp. 548-560.

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D’espallier, B., Guerin, I., Mersland, R., 2013. Focus on Women in Microfinance Institutions, The Journal of Development Studies, 49 (5), pp. 589-608.

Hermes, N. a nd Lensink, R., 2011. Microfinance: Its Impact, Outreach, and Sustainability. World Development, 39 (6), pp. 875-881.

Cull, R., Demirgu¨c-Kunt, A., & Morduch, J., 2007. Financial performance and outreach: A global analysis of lending microbanks. The Economic Journal, 117(1), F107–F133.