Microfinance a New Found Interest

For Christmas 2010 Scott Farmer gave Kay and Me a present that will last forever – it was a gift card, inspiration, education and access to one of my new favourite websites – http://www.kiva.org/ – the US-based not-for-profit micro-lending sensation.

Also see Microfinance at a glance.

This site (and others like it) allows you to make micro-loans (starting at $25) directly to some of the world’s poorest entrepreneurs.  They, in turn, use the money to start a business, and in the process often pull themselves (and their families) out of poverty.

This gift for me was inspirational in that it opened my eyes and sometimes finding gifts can often be difficult, but Kiva gifts are a nice choice.  Our gift allowed us to give the gift of helping someone in accordance with Kiva’s mission, “to connect people through lending to alleviate poverty”. Add that to my Rotary mission of “Service above Self” and you have one powerful combination.

From an interesting website http://cgap.org/ “CGAP” – which is an independent policy and research centre dedicated to advancing financial access for the world’s poor I looked at microfinance.  CGAP is supported by development agencies and private foundations who share a common mission to alleviate poverty.  They are housed at the World Bank and provide market intelligence, promote standards, develop solutions and offer advisory services to governments, financial service providers, donors, and investors. CGAP’s policy work focuses on building favourable policy and regulatory frameworks for financial service providers serving the billions of poor people worldwide who lack access to safe, appropriate and affordable financial services.

They say that Microfinance offers poor people access to basic financial services and people living in poverty, like everyone else, need a diverse range of financial services to run their businesses, build assets, smooth consumption, and manage risks.

Poor people usually address their need for financial services through a variety of financial relationships, mostly informal.  Credit is available from informal moneylenders, but usually at a very high cost to borrowers.  Savings services are available through a variety of informal relationships like savings clubs, rotating savings and credit associations, and other mutual savings societies. But these tend to be erratic and somewhat insecure.

Traditionally, banks have not considered poor people to be a viable market. Different types of financial services providers for poor people have emerged – non-government organisations (NGOs); cooperatives; community-based development institutions like self-help groups and credit unions; commercial and state banks; insurance and credit card companies; telecommunications and wire services; post offices; and other points of sale – offering new possibilities.

These providers have increased their product offerings and improved their methodologies and services over time, as poor people proved their ability to repay loans, and their desire to save.  In many institutions, there are multiple loan products providing working capital for small businesses, larger loans for durable goods, loans for children’s education and to cover emergencies.

Safe, secure deposit services have been particularly well received by poor clients, but in some countries NGO microfinance institutions are not permitted to collect deposits.

Remittances and money transfers are used by many poor people as a safe way to send money home.  Banking through mobile phones (mobile banking) makes financial services even more convenient, and safer, and enables greater outreach to more people living in isolated areas.

Financial services for poor people have proven to be a powerful instrument for reducing poverty, enabling them to build assets, increase incomes, and reduce their vulnerability to economic stress.

If you have a look at the Kiva 2011 Annual Report, their first one released online, you will see what Kiva has accomplished over the course of the last year in alleviating poverty.  As you read about the innovations and achievements from the past year, keep in mind that their reach is dependent on an amazing lender community with lender help; we can all continue to make a world of difference in the lives of many.

This has also been fun for me.  I have set my own lending criteria and I am learning as I go.  So far I have targeted Cambodia and women as recipients as I wanted to work within my own region and I am a true believer that women are a better risk.

In an article by Charlotte Lott, an Associate Professor of Economics at Chatham University in Pittsburgh, titled “Why Women Matter: The Story of Microcredit”, http://jlc.law.pitt.edu/articles/27_2/Lott.pdf  Charlotte says that women have both reproductive and productive roles in the economy.

In their reproductive roles, women maintain the family through bearing and rearing children. In their productive roles, women contribute to family income through household production or work in the informal or formal sectors.

Many economic development programs have focused on women in their reproductive roles, such as health programs to improve maternal and infant health care; family planning programs to provide reproductive choices for women; programs on household management to improve sanitation, nutrition, and basic health care; and literacy and numeracy programs that focus on women’s roles in educating children and improving the household.

Inversely, the microcredit movement focuses on women in their roles as producers of income for the family.  Credit, or the ability to borrow money for expenditures in the present that is paid off with interest in the future, can be used by women in their reproductive role to smooth consumption or in their productive role to increase output.

When families borrow to cover ongoing costs or to purchase large cost items, this credit can smooth consumption by spreading expenditures over a series of payments.  This type of borrowing is associated with a woman’s reproductive role in managing the family’s income and expenditures.

The stories of microcredit told by practitioners, however, include examples of how microcredit works to improve the woman’s productive capabilities: borrowers utilise their loans to purchase a sewing machine to make and sell garments, to purchase a stove to sell prepared foods, to purchase inventory to increase the size of a business, or to purchase small animals to increase and sell agricultural output.

The microcredit movement differs from many development programs that are directed at female clients since it emphasises women’s productive rather than reproductive roles in the economy.

Our first contribution of assistance was toward Mrs. Muong K. who had been selected as group leader by the four members of this group loan in Thnoas village in Takeo province.  Each of these ladies used their portion of the loan in varied ways to improve the standard of living of their families.  Muong and her husband, Set Phouch, are farmers who own a half-hectare plot of land where they cultivate rice to sell to earn a living.  Set Phouch is also a fisherman and farming labourer.  Although they work hard, their income is low so to improve their situation, Muong asked for a loan to buy piglets, chickens, and chicken food for breeding to start a new business.

That loan is fully repaid.

Next, in Prey SnuO. village in Takeo province, there were twelve people joining together for a bank loan and Mrs. Poeng S. was selected by the other members to be the leader. They also used their portions of the loan for different purposes in order to improve their families’ living.  Poeng is a pig breeder who earns money to support her family while her husband, Mr. Sim Thean, is a labourer and basket maker.  Since her business is going well, Poeng wanted to expand and she asked for a loan to buy more piglets, and also for rice for eating.

That loan is fully repaid.

I was really getting into the Pig breeding at this stage!!

Then I contributed to Thon, aged 50, who is married and resides with her husband and four children in Kampong Chhnang Province, Cambodia.  She and her husband run a business buying rice and bran to sell.  Two of her children are employed; one is a staff member in World Vision Organisation and another one is a staff member in Vision Fund Cambodia.  Thon requested a loan of USD $1,000 to purchase piglets to raise and sell when they gain weight.  By doing so, she can generate more income to support the family.  In the future, she would like to run a rice mill and support her children to study until they get a Bachelor’s degree.

Here I moved on to support La, aged 28, married and residing with her husband and two children in Takeo Province, Cambodia. She is a rice farmer, earning income of US $1 per day.  Her husband is employed in a mirror shop, earning an income of US $4 per day.  Each month, she has to spend on food US $25, on utility US $5, and other expenses US $40. In order to improve their living standard, La is requesting a loan of US $500 to buy ducks to raise in order to sell. In the future, she wants to expand her poultry farm. Moreover, she wants to build fences around her house and support her children to study to get a higher education.

So Pigs to Ducks!

And my last assistance package to Saroeun a 38-year-old farmer who has been growing maize and beans as her primary business for more than 20 years.  She is a resident of a village in the Ratanak Mondul district of Battambang province where crop farming is a common way to make a living.  Saroeun now has two dependent children who are still in school.  This is Saroeun’s second loan with Kiva partner VisionFund while her group member Mom has just joined VisionFund for this loan.  Saroeun is now requesting another loan with VisionFund, which she plans to use to buy fertiliser for her farmland.  She hopes to increase her crop yield and make a better living in order to keep her two children in school.

Pigs to Ducks and now agriculture!

The Simplified Version of How Kiva Works:

  • The borrower meets with the Field Partner and requests a loan.
  • The Field Partner disburses a loan to the borrower.
  • The Field Partner uploads the loan request to Kiva, it’s reviewed by a team of volunteer editors and translators and then published on Kiva.org
  • Kiva lenders fund the loan request, and Kiva sends the funds to the Field Partner.
  • There are more than 500K lenders around the world.
  • The borrower makes repayments. The Field Partner sends funds owed to Kiva. Kiva repays lenders.
  • The lenders can make another loan, donate to Kiva, or withdraw the money to their account.
  • Throughout the life of the loan, you will see progress updates from Kiva through your email, and if you come back to the site.
  • As the borrower repays the loan, the money becomes available in your account. This is called your Kiva Credit.
  • You can now use it to fund another loan, donate it to Kiva, or withdraw it to spend on something else.
  • 70% of all lenders choose to make another loan!

This is the beginning of my microfinance/ microcredit/ microlender journey and I have much to learn and understand. The more you read the more amazing this all becomes.

In an article in the Vancouver Sun by Don Cayo (see his blog at vancouversun.com/cayo) titled – “Microcredit success stories don’t add up to much without proof” he argues:

“It’s easy for any lender to count the money loaned out, the number of borrowers, the repayment rate and so on.

 But there’s a harder-to-measure question facing microlenders around the world.  Their mandate isn’t simply to lend money and make sure repayments come in on time.  It is also — and more importantly — to be agents of social change.

 So these agencies and their backers really need to know if they’re doing long-term good.

 Having looked for and found microcredit success stories in several diverse parts of the world, I’m convinced many agencies do great good. Everyone I’ve met in the business can point to heartening examples.

 But anecdotal evidence is of limited use.  Without solid statistical backup, it’s impossible to be sure if showcased successes are the exception or the rule.  And, even if it has many successes, how does a given agency’s performance compare with its past track record or the job done by others in the field?

 Well, some microlenders are beginning to use some sophisticated tools to track social indicators in order to find out.

 For example, two years ago Oikocredit, a Netherlands based agency with more than $500 million loaned to 17 million borrowers in 70 countries, launched a large-scale but simple survey of clients of several of its representative partner agencies to look at their lives.

 Follow-up surveys are about to begin to track the changes from the baseline, but the findings should be telling.

 Ylse van der Schoot, Oikocredit’s director of investor relations, told me last week during her visit to Vancouver, where the agency’s B.C. division recruits investors, that the questions differ a bit in each country where the survey has been done in order to reflect cultural realities and norms.

 In general, the surveys looks at things such as family assets, food security, housing and age-appropriate schooling for children.  (One of the 10 questions asked in the Philippines is whether a family has a karaoke machine, which is so culturally entrenched as to be seen as a near-necessity — like video games for kids in Canada.)

 Depending on the degree to which answers in the second survey show better, worse or unchanged results, the strengths or weaknesses of the various partner agencies should become clear.  And, van der Schoot notes, Oikocredit will know where and how it should work with its partners for improvements, or even stop funding a particular group. \

 I’m struck by how, on a small scale, these measures parallel those proposed by Nobel Prizewinning economist Amartya Sen as a way to track progress in the developing world.

 Conventional economic indicators — national or per capita GDP, GNP, GNI and the like — have flaws but are still quite useful in an economy like ours.  But in a place where many people rely on subsistence and high degree of non-cash transactions, they become less useful and, at times, so distorting as to hide the real truth.

 When a poor country builds a new hydro dam, for example, all the conventional indicators will likely rise smartly.  But there’s no way to know if the benefits fall short of, equal or exceed the losses to subsistence farmers or others living hand-to-mouth off the land.

 So Sen proposed looking at what portion of a population has a fair range of what he calls entitlements and capabilities.  Entitlements are basic — to eat, to not die of preventable disease and so on.  Capabilities are more sophisticated.  The question is whether you could have them if you chose — an education, for example, or the ability to participate meaningfully in the life of your community.

 In rich countries like ours, virtually everyone has a full complement of both, and these measures can’t indicate much about our progress or its lack.  But in many poor countries, they could be telling, indeed.

 As will Oikocredit’s assessment of its clients’ progress — at least, I hope and expect it will be progress — toward attaining a few of the things that we Canadians take for granted.  Plus karaoke machines which, thankfully, I and most of my neighbours don’t have.”

So let my journey take me to more awareness and understanding of how I may make a difference directly to some of the world’s poorest entrepreneurs. They, in turn, use the money to start a business, and in the process often pull themselves (and their families) out of poverty.


One thought on “Microfinance a New Found Interest

  1. Very interesting Peter. It certainly is a worthy cause. The tv article I saw was a microfinance organization in India doing much the same thing. The miniscule amounts these people have to live on and how they do it is beyond my comprehension in light of the fact I earn a couple of hundred times more!! I will follow up on this. It’s something which I would like to do.

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