Issue 24 - Article 8

Microfinance in war-affected countries

October 7, 2003
Tamsin Wilson

Why has microfinance such an undistinguished record in war-affected countries? All too often, microfinance projects in war-affected countries are marked by poor repayment discipline, confusion over grants and credit, the collapse of projects and little evidence of any sustained positive impact on the lives of beneficiaries. Insecurity, eroded social capital, high population mobility, macro-economic instability and, as a consequence, the diminished ability of clients to make use of microfinance services certainly constrain these projects in war-affected countries. However, the pressure to disburse funds quickly, short time horizons and a lack of capacity also have an influence. In addition, a series of preconceptions about clients’ wants and needs are used to justify non-adherence to the Donor Guidelines for Microfinance International Best Practice, the standard for donors and NGOs involved in microfinance in war-free countries.

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The Post-conflict Microfinance Action Research Programme

This article is based on an action research project funded by the UK’s Department for International Development (DFID) and managed by Concern Worldwide. The project consisted of qualitative field research in Angola, Mozambique, Rwanda and Cambodia in 2001; and the development of an innovative new microfinance organisation (MFO) in Rwanda, called Abazamukana. Abazamukana’s first branch opened in Mugina, Gitarama, in August 2002. The area was badly affected by the genocide in 1994, and infrastructure remains poor; there is no electricity and only unsurfaced roads. Population density is 317 people per square kilometre, there is heavy dependence upon agriculture and ill-health is perceived to be the biggest risk to the household.

Preconceptions about microfinance

Preconceptions about the situation, needs and preferences of clients have influenced the design of microfinance projects in war-affected countries.

  • Clients are too poor to pay interest as well as repaying the loan capital, so projects have low or no interest rates.
  • Clients need a large lump sum to restart activities after a conflict, so loan sizes are large (for example, more than one-fifth of annual income).
  • Clients prefer to use the loan for agricultural activities, so projects have long loan terms (six months to one year).
  • Clients have often lost all their assets and have no collateral, so projects use group-based methodologies.
  • Clients need micro-finance to kick-start their businesses, so projects are impermanent.
  • The remit of the organisation is to assist the poorest households, so projects target the most vulnerable households.

Challenging assumptions

Each of these preconceptions is discussed below in relation to the research in 2001 and the experience of managing Abazamukana in Rwanda.

Interest rates

Respondents in the qualitative study prioritised convenience and accessibility over the price of microfinance services.  In Sisophon, Cambodia, people preferred to pay more for moneylender credit than use the NGO Village Bank as it involved frequent meetings, delays in getting credit and discrimination against poorer, less reliable people. In Rwanda, loans cost as much as 100% per day immediately after the conflict of 1994. Today, a sack of beans borrowed from a shopkeeper two months before the harvest is repaid at harvest time with a bag of coffee worth five times the value of the beans.

Abazamukana’s experience supports the qualitative research. Sixty-eight per cent of respondents to preliminary market research stated that they would pay 10% interest per month for an individual loan product. In the first six months of operations and without advertising, Abazamukana attracted 945 savings clients, of whom 440 also became individual borrowers. They pay 10% interest on loans of less than three months’ duration for the first loan cycle, and 5% thereafter, and receive no interest on savings. Clients appreciate the convenient, rapid service, and state that cost is a lesser consideration.

Loan size

The research study found that poor people often took tiny loans from friends, traders and moneylenders. They gradually increased the amount they borrowed as their financial capital and business experience developed, and the environment improved.

Abazamukana experimented with loans as small as $10 for very poor clients. Such small loans incrementing gradually are costly to supply, but Abazamukana’s strategy is to create lifelong relationships with people who will become profitable and loyal clients. In contrast, some of Abazamukana’s first clients who took large loans of $50, but who failed to repay on time, have reported that they have lost respect among their peers or are in dispute with other members of the community as a result of their delinquency. Abazamukana’s experience shows that loans equal to several months’ household income can make clients vulnerable to external shocks, and unwittingly encourage further conflict.

Loan term

People choose not to invest in agriculture during and after armed conflict because of the poor economic and security situation. Khmer returnees sensed that the Khmer Rouge remained a significant threat and knew that agricultural land was seeded with landmines; instead of agriculture, they chose to trade or to process natural products such as timber. Such short-term measures are popular because they can be rapidly modified. Moneylenders, who provide loans for as little as half a day, often support these activities.

The situation has stabilised for Abazamukana’s target group, which now does a mix of short-term (trade and agro-processing) and long-term (agriculture) activities that require investment. However, agriculture loans with much of the repayment made at the very end of a long loan cycle after the crop has been harvested are risky for the client and the MFO. Abazamukana chooses to offer a short-term loan product of up to three months, and also a savings product, both of which can indirectly support agriculture.

Group-based methodologies

The research study recorded numerous complaints about time ‘wasted’ in group meetings; the exclusion of the very poor because the group did not trust them; inheritance of other people’s problems as soon as one joined a group; and a slow and cumbersome process of approving loans in weekly or monthly meetings.

Rwandans in rural areas were coerced into groups to facilitate the genocide of 1994, and there is understandable ambivalence about involuntary group activity. Abazamukana thus decided to offer individual products, using a combination of savings, a personal guarantee and a rule that a new loan cannot be issued if an applicant’s neighbours are late in repaying. A strong relationship between credit agent and borrower and easy access to future loans are also important.

Portfolio at Risk (the value of all loans outstanding that have one or more instalments past due), is currently 30%, which is 25% higher than the internationally accepted standard. However, this trend has been reversed with the introduction of more robust collateral.

Permanence and sustainability

The research showed that, when NGOs withdrew their support to a microfinance initiative, clients sometimes refused to repay the departing NGO.On other occasions, weak community-based organisations collapsed within a few years. Consequently, MFOs are reluctant to move into areas where relief and rehabilitation organisations have been unable to recover loans, or where loans turned into grants when it was hard to establish repayment discipline.

Some of Abazamukana’s clients believe that they need not repay their loans because, like the NGOs that went before it, Abazamukana will soon be gone. Others are encouraging friends and neighbours not to repay ‘American money’. Abazamukana is developing a marketing campaign to counter these perceptions. The organisation has achieved 15% operational self-sufficiency in nine months, which is acceptable given the difficult environment.

Target group

The research study showed that, immediately after conflict, even very poor people often choose to put aside a few cents a week. In Rwanda, people saved tiny amounts with friends and relatives to create a small lump sum for business. In Cambodia, poor people borrowed small amounts from moneylenders for a short period and repaid frequently – sometimes several times a day.

In Rwanda, people who are not economically active rely upon assistance from friends and neighbours, the church and NGOs. Some do not have the capacity to set aside even a few cents a week, and consequently microfinance is unlikely to be of benefit to them and they should not be allowed to take out loans. There is a widely-held belief among Abazamukana’s clients that loans are for the poor, and savings for the rich, who have spare cash. However, whether clients save to create a lump sum or save after they have borrowed a lump sum (i.e., to repay a loan), they will still have to save.

Preconceptions and best practice

The results of this action research project challenge assumptions about the kinds of microfinance services preferred and needed by poorer people affected by armed conflict. Two conclusions emerge: that people’s wants and needs are often diametrically opposed to what they are imagined to be; and they closely correspond to the Donor Guidelines for Microfinance International Best Practice.


In trying to reach the poor in war-affected areas, the common preconceptions of NGOs have sometimes helped to create MFOs and credit projects that are in practice unattractive and unhelpful. Although traumatised, economically vulnerable, dislocated from society and operating in insecure environments, war-affected people still want permanent, convenient and accessible microfinance services – even if these are more expensive. They can make use of smaller, short-term loans, and often prefer individual products to group-guaranteed ones. The only requirement is that clients can put aside at least a few cents a week.

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Two important conclusions should be drawn. First, in war-affected countries more rigorous and detailed market research needs to take place so that MFOs really understand the financial service needs of their clients. Second, the Donor Guidelines for Microfinance International Best Practice can and should be followed far more closely than they are at present.

Tamsin Wilson is an independent consultant. She coordinated Concern Worldwide’s qualitative research in Angola, Mozambique, Rwanda and Cambodia, and now provides technical support to Abazamukana. Her email address is

References and further reading

Nat Colletta and Michelle Cullen, The Nexus between Violent Conflict, Social Capital and Social Cohesion: Case Studies from Cambodia and Rwanda (Washington DC: The World Bank, 2002). Available at

Donor Guidelines for Microfinance International Best Practice, Committee of Donor Agencies for Small Enterprise Development, June 1995. Available at

Dave Larsen, Microfinance Following Conflict Technical Briefs, Microenterprise Best Practices Project, Development Alternatives, September 2001. Available at

Thierry Van Bastelaer, Does Social Capital Facilitate the Poor’s Access to Credit? A Review of the Macro-economic Literature (Washington DC: The World Bank, 2002). Available at <>

Tamsin Wilson, Microfinance During and After Conflict: Lessons from Angola, Cambodia, Mozambique and Rwanda (Concern Worldwide and The Springfield Centre, 2002). Available at


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