Carmen, a HOPE / Esperanza loan associate, sews some pretty amazing blanket, sheet, and pillow sets with this bad boy from Singer. I met Carmen this past Saturday on a HOPE Vision Trip in La Romana, Dominican Republic.
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I woke up yesterday morning with a knot in my stomach.
To be honest, I wasn’t excited about the day. It was my second day working in San Pedro de Macoris, and my first waking up in my new home here. Normally I’m excited about new things, new adventures, but I just wasn’t feeling it. I was tired of moving to places where I don’t know anyone. The challenges of working in a different culture had worn on me. I felt ineffective and unmotivated. I had forgotten my mission.
I passed the early morning catching up on emails as I waited to head out to the field with Isidro. Isidro is a loan officer who roves the dusty streets of San Pedro communities, his silver-speckled hair buried beneath his helmet. He’s been doing this for nearly 10 years. A quick “Vamos!” and we headed out into the radiant mid-morning Dominican sun, accompanied by the rattle of his Dominican motorcycle.
As we rode along, Isidro explained his job to me. He specializes in individual loans – larger loans to clients who have built up their credit and business over the years with Esperanza, or newer clients that already have successful small businesses. Even though individual loan clients mail their loan payments in each month, Isidro spends a lot of time visiting his clients. Just stopping by to see how the business is doing, talk about family or church. Not just a loan. A relationship. Isidro was clear on his mission – to be a partner and friend to these entrepreneurs.
We pulled over at José Lugo’s one-room mechanic workshop located in northern San Pedro. His hands greasy from working, José greeted me with a wrist-bump. You could tell he meant business, staring out at me from behind is protective glasses – but he quickly broke into a smile as he told me some of his story.
José specializes in making and repairing metal machine parts: gears, bearings, and other things with technical names I’m not sure of. He showed me a transmission gear he was repairing, while next to me his employee slowly drilled a hole in a part using a metal bore. José is relatively new to HOPE and Esperanza – this is his first loan, which he took out about a year ago. He talks about his clients – they come from all over San Pedro. He does a lot of work for manufacturers in the Zona Franca, or industrial free zone.
José pointed around his shop to the various tools he bought with his loan: a black power hand drill, a red gas tank, a pneumatic nozzle, and his pride and joy, the impressive green drill press that stands 6 feet tall at the back of his shop. None of it was brand new, top-of-the-line technology. He probably picked them up at various places – a hardware store, a friend’s shop, a factory looking to update equipment. But now in his hands, these tools are instruments of precision, creativity, and value. They honored him.
…
Yesterday, I woke up thinking of my own purposes. José reminded me that I am to be an instrument of the Master Craftsman, bringing honor to him. This morning I got out of bed on a mission, much greater than my own.
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Cool look at HOPE’s saving & credit association program in Haiti:
Off Cadiac’s main road, in a one-room rental house with no plumbing or electricity, Marimat Batis arranges chairs near two single beds and talks about saving money for the first time in her life. Batis, who lives here with her four children, sells clothes in the market. She’s using her modest savings for a long-term goal. “I’m buying sand,” she says with a smile. “I will build a house.”
WORLD Magazine, “Aid in action” (2nd half of the article)
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“Microlenders make the people of this country their guinea pig,” [Sheikh Hasina Wajed, prime minister of Bangladesh] said. “They are sucking blood from the poor in the name of poverty alleviation.”
From “Cradle of Microfinance Rocked,” by Amy Kazmin published in the Financial Times. The article explains some politicians’ critiques of microfinance. If you have trouble accessing the article: go to Google and search “Financial Times cradle of microfinance rocked” and click the first link.
India’s poor will, once again, have to rely either on failed public-sector efforts for financial inclusion, or on money lenders.
Exerpt from “Microfinance is not the enemy,” co-authored by 9 economics professors, also published in the Financial Times. This is a much better response to the Indian microfinance crisis, and to criticisms above, than my previous post (here). Again, if you have trouble accessing the article: go to Google and search “Financial times microfinance is not the enemy” and click the first link.
HT Aidwatch for the 2nd article, and to the Financial Times for allowing Google to access its articles.
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Indian microfinance has seen better days.
In case you hadn’t heard, last week the microfinance industry in India was sent into a default crisis. The storyline: microfinance institutions lent irresponsibly to poor clients who couldn’t possibly handle the debt, then used coercive collection methods, which led to a growing number of suicides. The NYTimes reported:
But microfinance in pursuit of profits has led some microcredit companies around the world to extend loans to poor villagers at exorbitant interest rates and without enough regard for their ability to repay. Some companies have more than doubled their revenues annually.
Now some Indian officials fear that microfinance could become India’s version of the United States’ subprime mortgage debacle, in which the seemingly noble idea of extending home ownership to low-income households threatened to collapse the global banking system because of a reckless, grow-at-any-cost strategy.
The bad guys are the profit-greedy lenders, the victims are the helpless poor, and the saviors are the government officials who acted swiftly, passing harsher regulations and encouraging debtors to renege on their loans.
Hold the phone.
I don’t know a lot, but in my few short trips around the sun I’ve learned it’s never that simple, especially when politicians are telling the story.
Enter Eric Bellman at the Wall Street Journal. In an open letter to the legistlators in Andhra Pradesh, India, he writes:
Up until a month ago, at the biggest lenders, less than 2% of borrowers in the state were missing payments on their microloans. The payment crisis, where people abandoned their repayment schedules, happened only after you told borrowers they didn’t have to pay. If this borrowers’ rebellion was triggered by dirty lenders, one would imagine the default rate would have expanded gradually before tipping into crisis.
Check out the article, he has a lot more to say.
My thoughts? I am still no expert on the specifics of what happened, but here are a few takeaways:
- Not all microfinance institutions are the same. There is a wide spectrum of credit policies, recollection policies, level of efficiency, interest rates…you get the picture.
- A government -encouraged boycott on repaying loans has a devastating effect on all microfinance institutions, both efficient and inefficient, respectful or predatory.
- If any or all microfinance insitutions used force or fraud in gaining clients or collecting payments, then those institutions should be prosecuted for their specific crimes.
- Poor people are poor, not stupid. The VAST majority of micro-borrowers know what they are doing when they voluntarily choose to take out a loan with a micro-lender. I know this because I’ve met them, visited their homes and businesses, and seen responsible micro-lending at work (in the DR). You can fool some of the people some of the time, but you can’t fool all of the people all of the time.
- Stricter regulations sound good (capping interest rates, for example), but the inevitable unintended consequence is to limit the number of organizations competing to supply poor people with the financial services they demand. The more competition, the better the customer focus. Less competition…loan sharks rejoice.
- Ethical norms are absolutely needed, in every industry including microfinance. But these norms (i.e. loan policies, interest rates, repayment policies) can, do, and must emerge from within the industry, not externally imposed by outsiders who don’t understand how microfinance works.
- We need to de-sensationalize the microfinance conversation. Microfinance is NOT, nor has ever been, the silver bullet for solving poverty. There is no silver bullet for poverty, or any other problem. There are, however, normal bullets that do damage here and there. Microfinance has proved to be one of those bullets.
HT to VN at AidWatchers.
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Last time, I listed a 3 reasons why microfinance hasn’t been successful in the US. Here are 3 more challenges (again, not in order of importance).
4. Stricter regulatory environment in the US creates barriers to entry.
Developing countries tend to have large, dynamic informal sectors where regulation and taxes are largely absent; businesses are started every day without the aid or authorization of the government. In the United States, businesses face a series of discouraging regulatory hoops: permits, taxes, and licenses, where, in the United States, business owners face the task of having to apply for, and manage, the various permits, licenses and inspections which must be obtained before legalization. Adding in taxes and other operational regulations is enough to discourage many from attempting to run a micro-business.
5. Government welfare programs discourage the poorest in the US from working, acquiring assets, and taking on entrepreneurial risk. Examples:
• If you purchase an expensive sewing machine in order to become a dress maker, you now have an asset that reduces your welfare benefits;
• Many leases in public and subsidized housing prohibit you from running a business in your home;
• Limits on vehicle equity value, a practice of counting business assets as personal resources, make it difficult for entrepreneurs to keep business and personal accounts separate;
• Rules prohibit self-employed recipients from deducting costs of capital, purchases, depreciation, and repayments of loan capital in calculating gross countable income;
• A loss of welfare benefits if you work more than 100 hours a month.
6. Poverty needs are much greater outside of the US.
To put it simply, the floor is higher in the United States (or Europe) than it is in developing nations. People starve frequently in DR Congo as compared to the United States. Even where poverty is quite severe by US standards, having the opportunity to earn (only) a little more cash by starting some kind of business is perceived by many as not worth the risk or effort. In less developed nations, the efforts required to be successful are likely to produce quite measurable benefits for individuals and their families; they will be noticeably better off. If that loan and its renewal stood between the individual and starvation, it would be paid off. Otherwise it can be perceived as a windfall, something like winning the lottery.
This list is merely an explanation of past challenges. Hopefully we’ll be able to make microfinance work someday, or develop an even more innovative solution to poverty. In the meantime, this reminds me of the unintended consenquences that government policies can have on the poor. And it shows that a “one size fits all” approach to helping others rerely works.
Further Reading:
- Mark Schreiner and Jonathan Morduch on replicating microfinance in the US. (PDF)
- Richard Taub on the Grameen Bank’s attempt to bring microfinance to Southern Arkansas (Word doc)
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If microfinance is so great in other countries, let’s bring it to the US!
A lot of folks have shared this thought (myself included). Maybe its a surprise, but its already been done. Well, “attempted” is probably a better word. As early as the 1990′s (I know, pretty ancient) groups like the Grameen Foundation started experimenting to import microfinance to the US. So, far it hasn’t really taken off. How come? Good question.
1. Group cohesion is more rare in the US.
Micro-lending models used by organizations like HOPE International, Opportunity International, and the Grameen Foundation depend on group lending for loan repayment accountability, training, and sharing of best-practices. High degrees of trust and friendship are necessary for group loan effectiveness. In the US, this level of group cohesion is not the cultural norm. Few poor people have 4-5 friends they consider trustworthy who are also interested in running their own business. Artificially constructed groups are ineffective and often break up over time.
Even trust falls can't solve group cohesion problems...
- 2. Lower population densities increase microfinance operating costs.
In many developing nations, the poorest members of society live in densely populated areas. Microenterprise institutions can serve many through fewer locations, which lowers operating costs. In the US, however, population density is lower, and the cost of delivering microfinance services increases. (Yes, even nonprofits have to worry about the bottom line.)
3. US markets are much less localized, limiting the types of small business opportunities.
Microfinance is successful in economies characterized by small and highly localized markets. In that setting, it takes little capital to insert oneself into the system. In the United States, however, there are international, national, and state-wide markets. Products like milk are available in supermarkets or grocery stores, and the amount of capital needed to enter a production and distribution network is likely to be substantially larger. So a micro-enterprise loan will only be helpful for small, local service-oriented businesses (rather than businesses selling goods), and only services not easily connected to a national or statewide distribution system.
Stay tuned for reasons 4-6…
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Muhammad Yunus, microfinance pioneer and Nobel Peace Prize recipient. Bonus points for argyle socks!
Loans. Muhammad Yunus. Kiva. Poverty. Grameen Bank.
This is what comes to mind for most people when you mention the world ‘microfinance’. But you’re not alone if the details are a little fuzzy. In fact, the fact that microfinance has become trendy and hip means that more people are likely to feel embarrassed for not knowing what it is, and avoid asking questions.
If that’s you, then help is here. Here’s Microfinance 101:
Microfinance is the provision of financial services like loans (microcredit), savings, insurance, and training to people living in poverty. It has been a great success stories in the developing world in the last 30 years and is widely recognized as a just and sustainable solution in alleviating global poverty.
Benefits: Clients use services to learn skills, grow businesses, employ others, and transform their own communities. One of the harshest aspects of poverty is irregularity and undependability of income. Access to credit and savings helps the poor to spread out cash flows to avoid periods where access to food, clothing, shelter, or education is lost. They can better manage shocks like sickness of a wage earner, theft, or natural disasters. The poor use credit to build assets like buying land, which gives them future security. Women participants in microcredit programs often experience important self-empowerment.
Microfinance Institutions (MFIs) are organizations that provide financial services to the poor. MFIs are, in effect, banks. MFIs can be owned by governments, like the rural credit cooperatives in China; members, like the credit unions in West Africa; socially-minded shareholders, like many transformed NGOs in Latin America; and profit-maximizing shareholders, like the microfinance banks in Eastern Europe.
Sustainability: Microfinance has proven to be a sustainable model of development. This means that when it is done right, relatively small up-front subsidies (from donors or governments) lead to permanent institutions that can continue providing services year after year with no further subsidy needed, and can expand those services to reach many millions of low-income clients.
Microfinance is very complex and there’s a lot to learn, but hopefully this is a good start. If you’re curious for more, go here, here, or, of course, Wikipedia.
What questions about microfinance do you have? Let me know and I’ll attempt an answer in subsequent posts.
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Some thrive of the rush of closing a sale, others live for the thrill of helping someone learn a new skill or discover a new truth. Me? I get fired up about efficiency. Conversely, inefficiency irks me.
There HAS to be a better way...
That’s why I was excited to start reading my technical guide for the microfinance product costing tool I’ll be implementing for HOPE/Esperanza in the DR.
The tool was developed by CGAP (Consultative Group to Assist the Poor), an independent policy and research center dedicated to advancing financial access for the world’s poor. Here’s what they say about the tool:
CGAP developed and field tested this activity-based costing tool to help MFI managers understand and analyze individual product costs, especially administrative/organizational costs. Once a product’s costs are determined, the tool suggests methods for understanding why and how the costs were incurred and how the product contributes (or not) to the overall financial viability of the MFI. Activity-based costing, the preferred method outlined in this tool, traces indirect costs in microfinance to core operational activities. It is a potent tool for identifying opportunities to improve business process effectiveness and efficiency.
So here’s the theory behind what I’ll be doing in the DR: measure cost >> understand profitability >> identify improvement areas >> become more efficient >> alleviate poverty using fewer dollars. BAM!
Can’t wait to finish the 100+ pages!
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“It’s déjà vu all over again.” – Yogi Berra
In 2009 I had my first taste of life in the Dominican Republic. (See posts here and here). In just under 2 months I’ll be back for seconds…and this time it’ll be more of a smorgasbord.
From October 2010 – June 2011, HOPE International is letting me cut my teeth in on-the-ground microfinance as a Dominican Republic Fellow. I’ll stumble through Dominican Spanish, commit many cultural faux pas, and attempt to implement a new cost measurement system in bank branches around the Caribbean nation.
HOPE is a Christian international microfinance nonprofit whose mission is to invest in the dreams of the poor in the world’s underserved communities so that they might be released from physical and spiritual poverty. HOPE doesn’t have the size as some of the “giants” of the microfinance community (i.e. Opportunity International, FINCA, Grameen Foundation), and yet it has a deep impact wherever it operates.
HOPE International's global reach
What distinguishes HOPE is its holistic definition of and approach to poverty - certainly a physical condition, but also emotional, relational, and spiritual. To some this might seem nebulous and unnecessary, but I think it reflects an understanding of what it is to be human – body, heart, mind, and soul. I obviously have much more to learn about the organization, but I’m very happy to be joining the HOPE team (which includes my cousin-in-law Chris Horst).
In the Dominican Republic (DR), HOPE operates through another nonprofit, Esperanza International. If you know a little español, you’ve realized that “esperanza” means “hope”. Despite this fortuitous coincidence, they are distinct organizations.
Over the next months I’ll be prepping for the 9-month adventure, raising support, and blogging about thoughts on microfinance, culture, economics, poverty, and…if we’re lucky…a few UFO sightings.
So stop back here like Chicagoans vote: early and often!
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