Financial inclusion has been broadly recognized as critical in alleviating poverty and achieving inclusive economic growth. Undeniably, there is a close relationship between economic development and financial inclusion (Deb and Kubzansky 2012). Demirgüc-Kunt et al. (2018) showed in the Global Findex 2017 that between 2011 and 2017 the number of people with a bank account grew by 1.2 billion worldwide. However, 1.7 billion adults (31% of the global adult population) remain unbanked, most of whom are women living in rural areas in developing countries. Other important results of the Global Findex 2017 are the most common reason for not having an account. The principal one is the lack of money, 66% of adults without an account identified this as the primary reason, and 20% said it was the only reason. Other reasons include (in order of diminishing importance) no necessity for an account; accounts are too expensive; financial institutions are located too far away; lack of enough credit information; lack of trust in financial institutions and religious reasons (Mookherjee and Motta 2016; Giné and Karlan 2014; Karlan et al. 2014). In other occasions, the problem is that they are excluded by other members of the group (Marr 2004; Hulme and Mosley 1996). However, there is also the case that although they are creditworthy, micro-entrepreneurs have no interest in borrowing from formal institutions because they do not understand or trust the banking system (Ciravegna 2006) or they do not have a “savings culture” (Adusei 2013; Ashraf et al. 2006; Benartzi and Thaler 2004; Duflo et al. 2006; Van Rooyen et al. 2012).
The absence of formal financial institutions in rural areas drove Yunus to develop the idea of microcredit in the early 80s in Bangladesh (Yunus 2003). In its original vision, the microfinance concept consisted of giving small loans, primarily to female entrepreneurs at the bottom of the pyramid, for productive and survival purposes. These women were unserved by the regular banks because of the lack of collateral or simply because they did not have easy access to banks. The primary purpose was to provide an alternative way of finance to the oppressive regime of traditional moneylenders, which was the only source of credit available to the most vulnerable population. Moneylenders were viewed as exploitative of poor borrowers, often charging usurious interest rates (Mookherjee and Motta 2016; Pellegrina 2011). Yunus’s proposal was based on the idea of the close relationship between economic development and financial inclusion (Deb and Kubzansky 2012). The final purpose of providing access to financial services to the unbanked population was to improve the quality of life of the more vulnerable and to promote entrepreneurship as a way out of poverty (Morris et al. 2018).
The core of Grameen’s innovation was “the group”. The group-based approach enables poor people to accumulate capital by way of small savings and facilitates their access to informal credit facilities. Borrowers at most Microfinance Institutions (MFIs) were organized into groups which have joint liability; if anyone in the group is unable to repay its loan each other member of the group should pay for some portion of the loan obligation. This system promotes close monitoring of individual behaviour by the group (Karlan 2007; Ghatak 2000). Group borrowers tend to be less delinquent than individual borrowers (Mokhtar et al. 2009).
The second Yunus’s core purpose was the focus on women because they are more vulnerable. Worldwide women have been historically disadvantaged in terms of education, social exclusion, discrimination, and access to assets or other resources (Demirgüc-Kunt et al. 2018; Raihan and Uddin 2018; Fafchamps et al. 2011; Pitt and Khandker 1998). In addition, women are considered better administrators than men and are more concerned about their families. FMBBVA (2019) stated that supporting women means supporting the following generations. Although women’s access to credit has improved in the last few years, there is still a strong gap between women and men (Demirgüc-Kunt et al. 2018). Currently, following the United Nations 2030 Sustainable Development Goals (United Nations 2015), various policies and support mechanisms are being implemented to elevate the status of women to fulfil international recommendations. Finally, Microcredit groups usually have weekly or monthly meetings where members repay their loan instalments and serve both as a social occasion and as an opportunity to receive financial literacy training.
MFIs have expanded rapidly all around the world, according to the Microfinance Barometer 2018, reaching 139 million low-income clients with a loan volume of US $114 billion in 2017. Lately, MFIs have undergone a huge transformation, offering a wider range of financial products and services and many of them have become formal/regulated institutions (e.g. Gutierrez-Nieto and Serrano-Cinca 2019; Giné and Karlan 2014; Van Rooyen et al. 2012; Hermes and Lensink 2009 among others).
However, in the last decade, Yunus’s vision has been questioned because of the proliferation of MFI's applying aggressive lending practices to extend the borrower base. As a result, there were “over-indebtedness” and “loan overlapping”, meaning, borrowers taking loans from one MFI to pay back another (Haldar and Stiglitz 2016). In 2011, India’s SKS Microfinance ambitious project produced a serious MFI’s repayment crisis and trust on these institutions (Mader 2013, 2017; Ghosh and Ray 2016; Pole et al. 2014). Moreover, although much economic and financial literature has highlighted the importance of microfinance as a factor in development, there is an intense debate about its effectiveness as a development tool given the multidimensional components of poverty (Maity 2019; Ditcher 2007). Some researchers even suggest that microcredits may have a negative impact on the most vulnerable (Cull et al. 2018; Bateman and Chang 2009; Vogelgesang 2003; Prahalad and Hammond 2002) with over-indebtedness and lack of financial education being some of the main problems (Bali and Varghese 2013; Berge et al. 2012). Authors like Gutiérrez-Nieto and Serrano-Cinca (2019) believe microfinance is a robust banking idea but not as an anti-poverty intervention on its own. Pollin and Feffer (2007) suggested that credit accessible to poor people is a laudable aim, however, as a tool against global poverty, microcredit should be judged by its effectiveness.
Currently, a profound digital revolution is taking place, characterized by unstoppable technological advances (Ochoa et al. 2016). This digital revolution not only affects mobile communications and new ICT solutions, but also the microfinance industry. Mobile phones, and other technological devices, had an exponential increase in recent years; this is mainly due to the global investment in mobile network and the design of low-price devices. Seven out of ten homes belonging to the poorest 20% of the population have a mobile phone (GSMA 2019; Global Microscope 2019). Ontiveros et al. (2014) claim that increasing digitization of financial services provides enormous potential for improving financial inclusion with less-expensive financial services models, more accessible and efficient, such as branch-less banking models or mobile payment with simple text-based phones.
Microfinance Institutions can be classified in three different groups: deposit-taking institutions like commercial banks, credit-only non-deposit-taking institutions, and informal organizations. The latter category includes savings groups (SGs), club pools and financial services associations and this is the area where we are going to concentrate our research (Kodongo and Kendi 2013; Kirkpatrick and Maimbo 2002). The purpose of these informal organizations is to provide finance to the population that is excluded from the formal financial sector.
In recent years and parallel to the development of the microfinance industry, many non-profit organizations (NPOs) and social enterprises have begun to promote savings-lending groups among the more vulnerable population. Nelson (2013) suggests that savings groups must be the starting point for financial inclusion. These savings groups (SGs) emulate and improve Yunus’s original idea of voluntary formed groups of borrowers applying for credit with joint liability (Yunus 2003).
Foundations and development organizations have mobilized over 700,000 savings groups in vulnerable communities across 75 countries worldwide (Allen 2018). A systematic review of 53 studies conducted between 2004 and 2017, carried out by Gash (2013, 2017), concludes that SGs have a positive impact on household savings, access to credit, asset accumulation, consumption, business investment and social capital. Thus, SGs are considered a first step for unbanked customers to become formally financial included (Ballem et al. 2012). So, when SG’s members demonstrate their capacity to repay their debts, bank loans can be accessible for them.
SGs were originated from the Rotating Savings and Credit Associations (ROSCA) that was described by Bouman (1983) as “the poor man's bank”. ROSCA are created on informal appreciation among friends or family and tend to have simple structures. Each SG acts as a financial institution owned and managed by the group members. The basic element is the group, and the most effective component is the “forced” saving element. Members regularly contribute money to a common pot that is assigned to each member in turn. Most of the time, the order is predetermined. The group meets regularly for the repayment of loans, and allocation of proceeds. Money is not idle for long but changes hands rapidly, satisfying both consumption and production needs (Gugherty 2007; Armendáriz and Morduch 2005). The risks of this system are the difficulty to increase the size of the resources, the impossibility to move resources across communities, the right allocation of resources when the pot is excessive and the high interest rates. The ROSCA concept has been adapted to the needs and characteristics of different countries (Gigante 2017; Umuhire 2013; Ardener 1964) so that some sort of short-term savings club can be found in most low-income communities around the world. For example, the denominated “Tontine” in rural Cameroon, where members contribute with a fixed amount that is assigned fully to one of its members (Nzemen 1988). In Asia, a “Hui” is organized in a way that members can bid for the pot (Ardener 1964). The system called “Likelemba”, mostly used in the Democratic Republic of Congo, is a common container or “pot” assigned to one of the group members, it works as a “turbine” where the money flows from one group member to the next in the following meeting (Urquía-Grande et al. 2017). In Latin America, the most common format is the mutuality which is called differently along the countries: for example, “Tanda” in Mexico and “Polla” in Chile. Mutualities are more organized and have more rigid structures than a family group (Armendáriz and Morduch 2005).
SGs are informal associations consisting of 10 to 20 members, usually women from similar social backgrounds, that have voluntary come together with the purpose of improving their economic situation out of mutual help, solidarity and joint responsibility (Wydick et al. 2011). Some of the SGs characteristics are small-sized memberships, homogeneity of composition, cohesiveness and effective participation of members in the functioning of the group (Husain et al. 2010). Additionally, usually SGs offer poor women a platform to receive information regarding financial education, health, nutrition and governance (Shivaprasad 2020; Navajas et al. 2000). The majority of the SGs are promoted and driven by NPOs.
Most of these types of SGs follow the same three basic principles: joint liability, regular meetings and no grants in the common “pot”, only members’ savings. Joint liability means that if anyone in the group is unable or unwilling to repay, each member of the group should pay for some portion of the loan obligation. Joint liability increases repayment because borrowers know each other and try to avoid risky profiles. An incentive for the repayment of group loans is the joint liability. Repayment improves among borrowers with strong social ties and deteriorates among borrowers with weak social ties (de Quidt et al. 2016; Maria 2009; Conning 2005). In addition, group reputation could affect individual credit rating for future access to credit. Attanasio et al. (2013) suggest that joint liability will also prevent borrowers from using loans for non-investment purposes.
The second principle, and probably the most important, is the regular meetings. Initially conceived for screening the repayment of loans, they are also used for facilitating member training on financial and business skills and monitoring loan use. Feigenberg et al. (2014) found out that an increase in the meeting frequency created social capital, which led to a subsequent improvement in repayment rates.
The third principle is that there are no grants in the common pot, only member's savings. All the money in the pot is put together and is allocated for different borrowers each time. This group-lending model is becoming more flexible in relation to the quantity of the contributions and the fact that participants could be entitled to the loan without waiting for their turn.
Dellien et al. (2005) discuss key differences between group lending and individual lending regarding screening and monitoring. In Savings groups, the group pressure, and social ties reduce repayment risk, while individual lending repayment discipline is created by strict enforcement of contracts.
SGs relational model is very intensive in terms of transactions, given the number and size of loans, and the number of repayment sessions, therefore transaction cost can be very high (Karlan 2007). As a result, it is necessary to promote the use of technology to maintain a proper bookkeeping and accounting system to help controlling the regular meetings transactions (receipts, vouchers, cash books, members individuals’ books) as the time consumed in meetings.
The capability of borrowers to repay their microcredit loans is a very important issue and is the first risk of MFI’s sustainability. Default is a failure to repay a debt including interest or principal on a loan or security and can occur when a borrower is unable to make timely payments, misses payments or stops making payments. Default not only causes a reputational effect on the group but also has an impact towards future borrowing capacity and group formation. Individuals and businesses can fall into default when they are not able to keep up with their debt obligations. A high rate of non-performing loans (NPL) is one of the main causes of bank failures. Exploring the determinants of ex-post credit risk is an issue of substantial importance for financial stability and for bank’s management (Reinhart and Rogoff 2010). However, factors affecting loan delinquency in microfinance can be dramatically different from developed countries (Kodongo and Kendi 2013; Field et al. 2010). In contrast to commercial banks, microfinance institutions cannot secure loans with collateral or screen borrowers, given the lack of assets or reliable financial information. MFIs prefer to offer group-lending contracts when the size of the loan is high, transferring the monitoring role to the group of borrowers (Giné and Karlan 2014; Maria 2009).
Potential factors determining loan delinquency among microfinance customers have been widely covered in the literature (Baland et al. 2017; Beg and Bashir 2017; Muthoni 2016; Field and Pande 2008; Adongo and Stock 2005; Churchill 2004; Norell 2001 among others). These factors include interest rates, age, loan amount, repayment period and loan category (group or individual). In relation to loan category, Kodongo and Kendi (2013) suggest that group-lending programs are more effective than individual lending programs in mitigating the risk of default. Individual loans are three times more likely to default on their microcredit obligations than group borrowers, the reason being that, although everyone is responsible for repaying their own loans, if any member defaults, other members will have to repay the loan (Baland et al. 2017). Al-Azzam et al. (2012) empirical analysis suggests that peer monitoring, group pressure and social ties reduce delinquency. In addition, group lending allows MFIs to identify individuals within the groups whose credit risk has improved and offer them progressive individual loans.
Another factor of discussion in loan default risk is group gender composition (Banerjee et al. 2015; Giné and Karlan 2014; Adusei 2013). A higher percentage of female clients in MFIs are associated with a lower portfolio risk, fewer write-offs and fewer provisions (D’Espallier et al. 2011). Eckel and Grossman (1998, 2002) find that women are more cooperative than men and their behaviour is less selfish. In theory, females have a stronger internalization of pro-social values than men; therefore, it would be expected that women might be less likely to default on their loan payments. Furthermore, repayment of loans represents one kind of cooperative behaviour. When tension exists between the individual interest and the welfare of the group, women are more likely to make choices that contribute to group welfare. In addition, people tend to behave in accordance with those around them even against their own interest (de Mel et al. 2009; Hermes and Lensink 2009; Anthony and Horne 2003). The influence of some members of other group can influence other members (Karlan et al. 2014, 2017; Prina 2015).
In relation to group sizes there are different theories. Ahlin (2015) highlights the benefits of larger group size based on the intragroup monitoring role, while other authors such as Conning (2005) argue that too large groups with loose social ties may not be able to enforce the cooperative agreements necessary for group repayment.
In terms of age, Mokhtar et al. (2009) and Bhatt and Tang (2002) suggest that older borrowers are more responsible and disciplined in repaying their loans than younger borrowers. The lack of experience in the business involved could be one of the reasons for younger borrowers not to repay their loans.
The amount of the loan and terms are other factors that can affect client delinquency (Norell 2001). Mirpourian et al. (2016) consider that repayment rates increase as borrowers get closer to the loan limit. Some authors like Field and Pande (2008) explain that a less rigid repayment schedule would decrease default rates. The problem is not the loan term but the repayment capacity. MFIs should consider lowering the weekly repayment amount and providing longer duration of payments in response (Mokhtar et al. 2009).
Many authors consider interest rates one of the most important factors in microfinance default risk (Le Polain et al. 2018). In fact, savings groups were born to serve the unbanked and to protect them from the abusive interest rates charged by moneylenders. Group-lending interest rates were lower than individual lending because group joint liability reduce default risk. Authors such as Kodongo and Kendi (2013) confirm that high interest rates increase the chances of client delinquency. Other authors consider that high interest rates are necessary for first time borrowers. There are also dynamic individual contracts that involve a “penalty” interest rate after default, and favourable rates after success (Ahlin and Waters 2014).
Ultimately, the lack of financial skills is one of the main problems for micro-entrepreneurs when managing their micro-business. It has been proven that financial education improves microcredit beneficiaries’ financial outcomes (López-Sánchez et al. 2020; Drexler et al. 2014; de Mel et al. 2014; Deb and Kubzansky 2012; Karlan and Valdivia 2011). The impact of training programs improves when tuition is adapted to the micro-entrepreneur’s needs.
Finally, other factors could be taken into account as determinants of default risk such as inflation rates (Owusu-Manu et al. 2016), weather conditions (Golden et al. 2007), financial, health (Ashraf 2020) or political crisis (Cuadra and Sapriza 2008) occurring in a country. However, in this research these will not be taken into account as they are considered too macroeconomic and volatile for the constructed model.
The economy of Ecuador is the eighth largest in Latin America with a GDP of 107.4 billion dollar and mainly lives from agriculture and oil. In the past few years, Ecuador has been facing serious economic and social problems, such as large inequality gaps, informal economy and low income. Likewise, access to credit, availability of ATMs or Internet access is very low in rural areas (ASOMIF Ecuador 2019).
The Global Microscope has been building for years a ranking of countries in relation to the enabling environment for financial inclusion, which consists of a weighted and dynamic model of assigning scores to a series of selected indicators. During the past few years, Ecuador has had a significant deterioration in the Global Microscope ranking. It has gone from a sixth outstanding position in the 2009 to the 26th position in 2019. The main cause of this deterioration is the lack of a political environment to ensure the provision of affordable and quality financial services in the country and that Ecuador does not have a national strategy for financial inclusion or concrete plans for the digital transformation of the country (Global Microscope 2019).
The difficulties to access formal credit in rural areas have led to the creation of informal intermediaries such as savings groups. Groups of people, mainly women, that save and periodically contribute a quantity of money to a common “pot” that will give loans among their own members. The effectiveness of savings groups is based mainly on the social sanctions that occur if a member of the group does not pay back its loan. A limitation of this model lies in the low amounts of savings and credit generated (Bicciato et al. 2020).
We chose Ecuador because of the dramatic economic situation together with the importance of Saving Groups in microfinance programs in the country.