A Model For Micro Finance

For the second time in a week, I was late for work following a conversation with a street “chugger.” I’m not really in a financial situation to be committing to all these direct debits (which in the past have caused me to ‘donate’ more to the banks with their extortionate overdraft charges) but I always like to hear their pitch, see what the charities are pushing and get an indication of how they’re doing. Its a bonus too that usually the collectors are genuinely interested in the cause and it always makes for an interesting conversation.

But it came to me, when making my excuses upon arrival at work, that I seem to spend far too much time defending charity. Lately I’ve found myself mounting this defence, particularly to the upper-class, ‘more experienced’ friends of my parents who generally take a sympathetic, but sceptical approach to it. Anything that you’re passionate about you will defend to the death. But if something keeps failing you have to reconsider your stance.

As passionate as a Tranmere Rovers football supporter may be, does he really believe it when he sings that his team is “by far the greatest team, the world has ever seen”? That kind of blind passion, leading the heart to rule the head is something that the developing world does not need. And constant criticism causes you to analyse your stance. If I think about charity honestly, it has a vital part to play in a lot of people’s life, but should not be considered the be all and end all. The major focus should be on development – a concept so broad it is difficult to define and effectively evaluate in a lengthy textbook, let alone a humble blog post. So following these defences my focus today is on one particular developmental concept I have some experience of – micro-financing.

Micro financing as an ideal is a fantastic concept. Small, manageable loans presented to families within a community where their services are paramount to the whole group. Where their financial advancement can encourage and inspire business and investment among the whole community. When the results yielded are positive, as they often are, then it is an undeniably great service. As such, micro-financing has been widely embraced in the developing world, but like many other great ideas in life, has been open to be exposed by the greedy and the selfish. Whilst development initiatives have, by their very nature, their fair share of hurdles to cross, the added bonus of corruption and greed is particularly unwelcome. It can inspire cynicism and retrogression, and become a significant and disheartening stumbling block.

When the weak financial systems in place in developing nations are relied upon so heavily by the vulnerable, uneducated and, to be frank, predominantly desperate population, it’s a recipe for disaster. If we’ve learnt anything about development in the last few decades, it’s that progress must not rely on the goodwill of the more fortunate. Providing a poor population with the means to provide for their own needs is the basis of all development ideals. It’s why, when successful, this concept is so great.

Unfortunately a number of micro-finance institutions (MFIs) have found that there are weaknesses to be exploited. Generally speaking, much of the developing world has been without both education and experience of money. Both of which are clearly useful when considering how to handle a loan. At the start of the micro-finance process, literacy levels are generally low (the majority of MFIs I came across used a fingerprint instead of a signature due to widespread illiteracy), moreover a prior knowledge of the notions of interest, structured repayments and banking are often lacking too.

All of this means this means that the naivety of the loan applicant is so often easily manipulated. In placing down collateral, the only option is often land and what little property they might have, which subsequently may, and often will be repossessed. Even those micro-finance organisations with a moral conscience will not be too eager to take on such high risk applicants in this ‘current economic climate.’ Especially considering that even if the applicant happens to own land, the legal system in their respective country may not have afforded them effective title to it.

A major problem is reliance on good will and a charitable nature. No-one needs to explain to people living in the third world the notion that the wealthy majority are not only willing to benefit off the poor majority, but often actively seek to do so. This international relationship can map onto power relations at a national level. Rather than inspire some sort of revolution, this injustice can encourage local entrepreneurs to follow their lead, and exploit any marginal position of power they may gain. Small, local NGOs providing micro-financing facilities often have bad reputations for corruption in poverty stricken areas due to this very process. It alienates the community and restricts the grassroots organisations by limiting funding opportunities. The powers-that-be all to often prefer larger, more trusted organisations to handle the financial resources. If one of the primary goals of micro-financing – that it should be able to fund itself and provide economic growth to an area is to be achieved, then this cannot continue to be the case.

Regretfully there are no simple solutions to this problem. We also have to navigate problems concerning the traditions and customs of poverty stricken areas. Having experienced cultures around sub-saharan Africa and southern Asia, it immediately became apparent that males are held with much higher regard than females. In Uganda for example, the stereotype of a male, head of the house, was of little assistance to the family – floundering the family’s money on alcohol and ladies of the night. The usual reaction appeared to be to accept it as being “part of the culture” reminiscent of a disability that society has managed to adapt to. It’s unfortunate, but not always a million miles from the truth, which makes a MFI’s scepticism more understandable.

It’s not in my nature, however to take such a gloomy, pessimistic view on great ideas like this and it doesn’t take much searching to find great results.

I came across a hugely inspired example of this in northern Uganda, an area still very unstable despite the near expulsion of Joseph Kony’s child-fuelled LRA. A noticeable side effect in post-conflict areas is on the male to female ratio. A side-effect, that in areas often dependent on a male breadwinner often proves very serious. In northern Uganda, traditionally women are far more poorly educated, have far fewer rights, and are considered as being of far lower standing than males. For a woman to elevate herself to the status of breadwinner requires a significant level of achievement. This societal oppression has forced adaption to long hours, tough work, and set-backs – the flipside of which is that it makes an ideal candidate to benefit from a properly executed education and opportunity for a life-changing loan. In taking this focus it can also strengthens bonds among the community. Walking though rural villages it was alarming how few adult males were amongst the hordes of children and mothers, popping in and out of random huts and sharing responsibilities amongst themselves.

The grassroots, non-profit MFI I encountered took this community element as a core focus of its work. In doing so it showed great ambition to attempt to empower women within the community. Rather than depriving resources due to cynicism of the males’ supposed spending, it encouraged groups of women to come forward and apply for community based loans. Completely blurring the lines between an advice and education centre and an MFI it followed aims that were simple enough, but each idea was thought out to benefit the community at large:

  • Acquisition of the loan requires a community based group of at least 5 people, but is open to anyone, regardless of tribe, wealth, age, social status or level of literacy.
  • All prospective applicants must be willing to complete a course of education prior to collecting the loan. It is strongly impressed on all new applicants that it is not ‘free money’ but an aid for investment, and an opportunity to build a business.
  • Only once every member of the group has been assigned a role (eg treasurer, president) and demonstrated enough of an understanding of interest, business and how the loan works, will they be eligible for the loan.
  • The whole point of a community-based loan is that there is no need for collateral. Trust is an incredibly important part of the process and works two ways. If one party cannot make a repayment then it is the other parties’ responsibility to help with repayments.
  • If a group feel that they will be unable to make a repayment then as long as they come to the office and honestly explain the situation they will be able to arrange extensions and seek assistance.
  • Once a loan has been fully repaid, the group are encouraged to keep in contact and to share their experience and the things they have learned with prospective applicants.

The organisation didn’t take long to be able to support itself through the low level of interest accumulated, and has subsequently branched off to support and rehabilitate former child soldiers, provide community based education regarding HIV/AIDS and support groups for sexual and gender based violence. It has incorporated the culture of the area and furthered the empowerment of women by arranging tribal dance and drama performances with an educational focus to school groups, whilst providing further opportunities to strengthen businesses and investment opportunities amongst the poor communities who have suffered so much in the past few decades. If this blueprint were more universally applied at a grassroots level, the development possibilities could be endless.

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5 thoughts on “A Model For Micro Finance

  1. Could this idea work in the West? Because the dominant theme from the Left is that we should restrict “damaging” debt being sold to the poor, to which I always answer “microfinance . .. “

    1. The thing that really made this work was the emphasis on community and the neighbour.

      Personally I’d find it hard to envisage the idea working in the west. In Uganda particularly, the bonds that neighbours seemed to share are far greater than anywhere I’ve witnessed in the western world. I’ve lived in the same house for nearly 10 years now and I’d walk past my next door neighbours in the street without even realising. In my experience, the sense of community always seems to be lacking.

      The reason that the success rates were so high in this MFI was due to the applicants inability to flee. The camaraderie amongst the community created a shared level of dependence that was a stronger tie than any legal contract could be in a recent conflict zone where legal enforcement mechanisms were incredibly weak.

  2. So you’re advocating a model which is not too far from the model developed by Grameen Bank in Bangladesh in the 1970s, and well proven as effective both in terms of inter-lender support/motivation and low default rates (both related).

    It’s now used worldwide, including in the US (it used to be called Working Capital there but I think time has moved on) and through variations such as this http://en.wikipedia.org/wiki/Lending_Club

    So in general we know it works at least to some scale (the upscaling to take business to a next level remains a challenge).

    I’m then not really sure what point you’re trying to make. Are you simply saying that this is the model the big donors should be advocating/tying into national agreements, or something else?

    1. I suppose if I felt like I needed to make a post like this then I’m addressing a problem that is still relevant. I don’t think I’ve made any implications that this is a unique and new idea. The problem is how the idea has been interpreted by MFIs acting in poverty stricken areas. As I highlighted in the post, the ideal is rarely the reality. You can look at development models, but how it is applied, and how it has been interpreted and has subsequently evolved in the real world is a different issue.

      Having discussed micro-financing with a range of different people, I’ve generally been met with two responses: Those who the concept is new to and see it as a great idea, or those who have come across it in some way and are sceptical having seen the damage it can cause to such a vulnerable population. One of the aims of my post was to tie the two together. I’ve also yet to come across an MFI that has such an emphasis on community development. Economics is certainly not my area of expertise, but the empowerment of deprived peoples and communities certainly is something I care a great deal about. An area which I think the model demonstrated by this organisation really addresses. Having experienced the effects it can have on a community, and even in forging new, extended communities, I fail to see how if properly applied, it cannot be of benefit to a lot of developing areas.

      I guess big donors should be advocating this model. As someone who aspires to a development based career it’s hypocritical of me to say so, but to encourage grass-roots organisations to be self-sustaining should be a primary policy for the big organisations. However, I addressed the problems with corruption in local NGOs in my post so I can understand the cynicism that larger donors hold.

      If nothing else, the post was to indicate that despite the problems that this concept faces, there are bright lights that shine through and genuinely do offer real opportunities to those who are so frequently deprived of them.

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