One member of Trigger Change, then secretary Kira Hammond, took 8 months to research, plan, and meet with groups in the USA, Africa, India, Central and South America regarding microfinance. She met with micro-lenders, borrowers, government officials, economics experts, and NGOs to understand the full scope of micro lending today and how it can be leveraged around the world.
Kira then drafted the following informational article on microlending. Enjoy!
MICROLOANS AND MICROLENDING
An Overview and Best Practices Guide
Micro-Lender- Non Profit or For Profit?
One of the most serious and yet interesting topics is whether a micro lender should or can operate for profit and still call themselves a “Grameen-like” micro lender. There are actually two ways to operate a micro lending operation and both are equally valid.
I would agree that the label “Grameen like” or any association to Grameen bank should be limited to those in the first group- operating for social change and not for profit.
Grameen Like- Non profit format
This is the format most persons are familiar with it involves the following key points:
Micro Credit- For profit
1) High rate of interest is charged for the micro loan. This is offset by frequent payments and small loan amounts, more than one payment a month and best practice weekly payments. Interest rates are very high, on average between 40% and 80% interest rate.
2) Poorest of the poor are NOT targeted, these loans are aimed at persons who cannot qualify for commercial bank loans but who are not at the lowest end of the economic spectrum.
3) Savings accounts offered to the general public with a relatively high interest, generally 5-10%. These savings accounts are used to keep available money in the funds for loans.
**I believe interest rates of over 80% are taking advantage of the lenders and should be discouraged.
Micro lending Structure
*In many instances the NGO performs all three functions defined here.
NGO- Non Government Organization- in micro lending these are the agencies that either locate the potential persons or groups needing the loans, or advertise their services to include micro credit. The NGOs are responsible for vetting the potential persons or groups and ensuring that they are capable of paying back the loans. The NGO’s also provide the training or helper information to the persons receiving the loans.
Micro Finance Office- an agency dedicated to finding donors, either individuals or corporations to provide the funds for the initial loans. If a loan defaults this is the organization that “insures” the donor against loses, and pays back the loan. This agency is also responsible for administrative duties such as defining the interest rate, choosing the parameters of the loan agreement, and administering fines or fees to cover the costs of operation.
Optional:
Sometimes a third party banking agency is involved to actually handle the monetary distribution and collection. In some instances this is handled by an existing formal banking system and recognized by the host country as an official lending organization. Sometimes the banking system is not recognized by the government as an official lending agency.
BEST PRACTICE STRUCTURE
It appears in the initial round of research that a combination of 3 entities works best with the following division of labor:
1) NGO
a. NGO’s are in charge of the day-to-day administration of the loans. This involves all aspects of dealing directly with the community of people using the services.
b. Make the NGO visible to the local community who would use the services. (see below for PR to the general public and investors) Focusing on having people in the community come to the NGO, or ask local leaders to recommend groups to contact. Avoid “convincing” a group or individual to use the service. Employee a “come to us if you need us, we are here to help you” mentality in the community.
c. Define goals for the micro finance efforts in relation to the particular community. Determining issues such as loan capacity (how many people can receive a loan and training), diversity (which groups or areas will be targeted), and human capacity (how many people are needed to run the operation, what are the needed skills and hours of commitment, what is a fair wage for salaried employees and what roles can be filled by volunteers).
d. Ensure fair practices and act as an intermediary between the lenders and the Micro Finance Office who administers the loan if there are disputes.
e. Act as a central repository for depositing payments and training the persons receiving the loans.
f. Work with the Micro Finance Office to determine how the interest can be best reallocated into the target group (fund more loans, make larger loans available, improve training, employee more salaried workers etc)
2) Micro Finance Office
a. Develop the contract and system for repayment in tandem with the NGO to ensure a margin for error and to keep the costs in line with the needs of the community.
b. Raise awareness through PR to the general public and investors (ads, commercial ventures, put the work in front of the public, and the government). The aim is to increase the pool of available funds enabling the NGO to make larger loans or take on a heavier mix of high-risk ventures. Offloading this task from the NGO leaves them time to focus on the programs rather than the ‘public face’ aspect of the venture.
c. Maintain a balance of high and low risk ventures to protect the capitol of the investors. Make suggestions for areas to invest in to improve the balance structure. This is a critical function to keep the reality of micro finance as an investment strategy for donors.
d. Work to establish relationships between business owners in the community who are willing to volunteer time and expertise for training purposes. Saves money on training and makes community investment an appealing option for local business.
e. Develop creative ways to better train the staff and lenders such as working with community colleges and vocational training programs to teach classes and programs on business development and administration.
f. Explore cross-cultural or cross-program associations (see below). Seek these out and provide a structure to work together that is mutually beneficial.
Examples of the above: Kiva (US based), DhanaX (India based)
Training and Governance Associations
By far the most cost effective and time efficient way to provide both training and continued checkups on the lenders is to form associations with groups already working in those areas. In every country there are already government run entities for small business owners, and formal banking systems administered by a branch of the government.
One key point: AVOID CREATING PARALLEL SERVICES! There is a great need to improve existing services rather than create new services to fulfill the same need. ALWAYS CHECK TO SEE WHAT SERVICES ARE AVAILABLE IN THE LOCAL AREA BEFORE CREATING A NEW SERVICE! Repeatedly there were NGOs doing the same or very similar thing that the government was already providing to the populace (albeit most of the time inefficiently). It is both a time and cost savings to invest in improving the local governments ability to provide these services rather than re-creating them!
Remember that often these services are rights of the population; encourage the populace to fight for these rights and continued access to these services in a timely manner with a minimum expectation of the quality of service received. FIGHT with the populace for good quality service from the government rather than creating a parallel service. Election time is a great chance to see some changes. News outlets are a good place to go to get some free press/PR to back any changes requested.
Another example, two NGOs trying to provide the same service, competing against each other!
Where to look/ask:
iii. Non partisan local government organizations
iv. Local labor unions (e.g. Electricians Union, Teachers Union etc)
v. Local labor associations (e.g. Agriculture Associations, Farmers Associations)
vi. Find the local activists in the population and ask them where their efforts are focused to improve the same services.
vii. The local government. Avoid partisan relationships! However many local governments have programs that could use help and guidance and exist regardless of the political contingency in power. These agencies receive funding through local or regional taxes and are by law required to provide a service. Working with them saves your organization time, money, and forces the local government to provide effective service!
viii. Other countries working abroad. It is surprising how many international groups are working in the same field in the same general areas completely siloed from each other. Check with local embassies, with local governments (who is working where and on what?), and with local officials to see which countries have current work contracts in your area.
Successful Selection of Donors
How to fill the coffers to get you started.
There are three main strategies for finding donors to fill the initial need for capitol.
BEST PRACTICE FUNDRAISING
Employ all three methods for maximum effectiveness. If your organization cannot dedicate equal time the success verses man hours needed seems to fall in the following order: grant writing, business to business, peer to peer.
1) Grant writing or applying for large scale funding from a larger charitable trust organization, then dividing that funding into smaller loans that can then be doled out.
Advantages include:
No need for website or “in the field” man hours to locate donors, research and grant writing can done from any location world-wide, year-round with minimal man hours.
Size of the donation is often larger than what would be given by either an individual or a business, sometimes in the tens of thousands of euros or dollars. Probably the best ratio of man-hours versus cash influx of all the options.
No need to insure the funds, if money is lost it was a donation to begin with rather than an investment. In other words there is little expectation that the money will continue to ebb and flow, making risk management much easier.
Disadvantages include:
Very little public outreach or awareness is raised through this method; it’s an NGO to Government or another NGO method of fundraising bypassing the public and business owners in the community.
Many grants have stipulations on how the money can or cannot be used limiting the groups who can be awarded and who can use the money received.
Highly competitive, you must employee professional grant writers to have a chance at success with this method.
2) Elicit funds business to business. An example of this type of funding strategy is employed by DhanaX in Bangalore, India. Utilizing in-person sales pitches DhanaX seeks to encourage corporate giving to fund local micro lending in Bangalore.
Advantages include:
Local businesses see the need and are able to donate locally in their community with the ability to watch the impact in their own backyard.
Micro Lending Office will insure the loan, so if the lender defaults the Micro Lending Office would repay the donor.
The Micro Lending Office can pitch the idea as an investment strategy rather than a donation, it becomes a way to actually build money for the donor rather than just a charitable contribution, and it can earn the donors interest. A creative approach involved pitching the micro loans just like a “stock” as part of a retirement package for employees.
Disadvantages include:
The margin for error is very small, with just a little interest to cover capital expenses, and to cover insurance for the funds the group must be extremely cautious when choosing NGOs to work with, if a loan defaults it’s a much more difficult situation for the micro lender.
The business-to-business pitch requires more man-hours and field work then the more automated peer-to-peer method.
3) Elicit funds peer to peer from the public at large. An example of this type of funding strategy is- Kiva in San Francisco, USA. Using a web portal Kiva allows potential donors to choose the group they want to fund.
Advantages include:
Donors enjoy the process of choosing a group to fund, and have the option to watch or follow their progress. Engages the public in a real way, allowing individuals to make a direct impact on another person’s life with minimal “middlemen.”
Website makes the process fairly automated, only requiring the organization to track progress, evaluate performance (payback rate), and add information, without the need to be in the field, or visit the local NGOs to administer funds.
Disadvantages include:
There are fewer loans administered in their own country, in other words the majority of funds are sent out of the country. This method is more effective when people can see the results of their participation in their own backyard, rather than relying on news from the field in a place thousands of miles away.
They offer no money back guarantee to their donors, meaning if the group defaults on the loan the donor is not refunded their money.
Advantages to a Microfinance Office – Help Managing Money Influx
There are currently at least two such organizations DhanaX and Kiva who fill this role.
Kiva is the first person-to-person micro-lending website, so their focus is a bit different and that model will be discussed bellow.
India- Case Study DhanaX
- Finding Capitol for Micro lending Business to Business Method-
What differentiates DhanaX from other groups is that they recognized the need to raise funds from a business-to-business standpoint. DhanaX does not solicit funding peer to peer such as Kiva.
This B-to-B model has the potential to raise larger stores of cash available for backing funds, along with several other perks.
For example, positioning micro loans as a moneymaking venture turns the idea from donating money into investing money that is more attractive to a business. Businesses can use the micro loan as part of their retirement plan, or overall investment strategy.
In addition some of the businesses have offered expertise or training to the micro finance groups. Lending in terms of time rather than money, and tutoring the small lenders on business practices, accounting, or management techniques is a nice option.
In the past it was not as easy for businesses to invest in micro lending because micro lenders do not have a credit history, or the records are not made available to the public. DhanaX acts as this vetting system for the business owners, making the idea of lending more attractive as well as safer for the investors. DhanaX then acts as a regulatory body of sorts who can intervene on behalf of the investors, and safeguard their investment.
The members of DhanaX had the following advice for persons wishing to start a Microfinance organization geared towards driving donations and business into the coffers of micro lenders.
In terms of seeking out potential NGO or micro lenders to partner with the DhanaX group cautions that running a micro finance organization is volume based, so it is advantageous to maximize the number of people you work with at any given time.
However each investment has a small margin of profit so being patient and cautious when vetting potential micro lenders is key. Expand slowly but surely to increase the margin, making strategic partnerships along the way. Evaluate the success or failure of each partnership and continue to monitor their default rates, offering assistance when needed to ensure on-time repayment and low default rates.
Part of being able to appropriately vet micro finance institutions to partnering with them is to really understand your borrowers needs, work locally, get to know them, understand their troubles and obstacles for repayment, and to work with the micro lenders to address those issues. To be able to vet micro lenders DhanaX suggests hiring from other locally based micro finance groups with borrower experience. These individuals can help qualify institutions that “get” their constituents and can therefore provide appropriate support.
DhanaX utilizes the NGOs to meet with and qualify the borrowers; the NGO acts as a liaison between DhanaX and the locals receiving the loans. Using the experience of the feet on the ground to qualify groups of borrowers keeps costs low and is more effective. The NGOs are better equipped to assess the risk level of individual borrowers.
In their home base of Bangalore, India there are several dynamics that effect micro lending. Three of these factors are religion, the caste system and the industry of the borrower. Finding local persons who understand these issues makes the system of lending and borrowing more successful.
One of the main activities DhanaX focuses on is raising awareness about micro lending. This includes publishing articles or being interviewed for articles, media reviews, news stories, word of mouth, close networking, public postings, and having a web presence.
There are some issues that DhanaX has to address when working B to B.
They are a relatively new NGO and some companies haven't heard of them yet. Micro lending does not have the same credibility or money back guarantees as big bank.
DhanaX wants to keep their circle of influence inside of Bangalore; yet some companies are looking for a broader user base or international investment option rather than a community based investment option.
In terms of the level of investment DhanaX recommends focusing less on charity donations of under one thousand dollars and more on investment strategies that yield $40,000.00 to $50,000.00 of capital invested in the system.
Most of the NGOs in Bangalore, India focus on the following areas:
- HIV Aids
- Agriculture
- Education
- Women's rights
So when speaking to businesses, DhanaX is sure to discuss how the investment makes great strides in improving conditions in all of these areas, and in improving the overall community in Bangalore.
A significant part of the mission is to raise income of BOTH the persons receiving the loans and those providing the funds, this makes it a very attractive investment strategy as well as appealing to a business persons perspective who might not want to donate to a charity, but would be willing to invest and see a profitable return.
DhanaX manages risks by providing a third party guarantee, meaning that if the borrower defaults on the loan DhanaX will cover the investors’ share. This gives the business a certain level of comfort knowing they will not every loose their initial investment. DhanaX bypasses the local lenders and goes directly through the NGO to lower their risk level, allowing the local NGO to do the management, vetting, and training of the borrowers.
The part of the equation that falls to DhanaX is the due diligence process to investigate their NGO partners. DhanaX uses the following criteria:
- Minimum 3yrs in existence
- Registered by the state government
- 100% repayment history
- DhanaX does offer some management training or consultation to the NGOs; they find that this increases the effectiveness of the NGO lender.
In terms of which companies to target for investment, DhanaX uses the following criteria:
Fortune 500 companies.
Companies with an investment strategy or interested in starting an investment strategy.
Case Study- Peer to Peer Loans
-Finding Capitol for Micro lending Peer to Peer Method-
Kiva is the world's first person-to-person micro-lending website, that works to connect the public to a micro finance institution in another part of the world. The web platform is used to funnel money from individuals wishing to donate to micro lenders in need of funds.
The model is a cheaper simpler version of the “sponsor a child” programs that have existed for quite some time.
Through the Kiva website, micro finance institutions create profiles of their entrepreneurs’ and include the terms of the loan, pictures, and biographies of the groups seeking loans. Kiva includes which micro finance institution is backing the loan (ensuring payback and providing on the ground support) and gives each micro lender a rating. Also included are statistics on the success rate of the micro lenders and a Kiva rating so those donating money can feel that there is some level of assurance that the micro lender is legitimate, or at least be aware of the risk associated with a particular micro lender. Those wishing to donate browse entrepreneurs' profiles on the site, choose someone to lend to, and then make a loan. Throughout the course of the loan which is typically six months to a year the person receives updates and can track repayments through Kiva’s website.
Kiva partners with existing microfinance institutions, just like DhanaX they do NO lending of their own. Even further removed they do no training of their own for lenders or borrowers.
After researching the system on the ground the following benefits are gained by having an institution perform this service:
1) Foremost it provides a qualifying or regulatory system for micro lending. Micro lending in general suffers from a lack of a governing or regulatory body. Even the minimal amount of statistically accurate assurance that Kiva can provide through rating micro lenders based on their payback rates is the biggest value add to micro lending that Kiva provides.
2) Next, Kiva is the only avenue individuals have to look directly at what the groups using the loans are doing with the money and track their progress. There simply aren’t any micro lenders who provide as thorough tracking of their groups and persons receiving the loans. Making this aspect transparent encourages involvement and keeps everyone in the loop from user donating, to group receiving, to micro lender managing. The management tools Kiva provides and level of transparency that provides is the second contribution Kiva offers to micro lending.
3) Lastly, the fact that Kiva allows individuals to donate to a group of folks wishing to use micro loans is unique and provides an important and underdeveloped link between the public and micro lenders.
*Some members of the US based micro lending community expressed interest in being included in Kiva’s website to provide their US based groups access to donations from US Kiva users. This same sentiment was expressed by several individuals. People who would donate to micro lending organizations but do not because they wish to see their donations used locally, or at least within the United States.
*In the process of writing this Kiva launched a beta plan to support US based businesses by providing internal US based micro loans. Before 2009 it was not possible to donate to any US based micro lenders through Kiva.
Choosing a Target Audience- Loan Recipients
One point I found repeatedly was the exclusion of certain groups from receiving the loans. The reasons were diverse but the effect was always the same- NEGATIVE! Group dynamics often involved exclusionary practices when groups specifically banned or discouraged certain individuals from applying. Micro lending is particularly dependent on a strong positive group dynamic both for support and for re-payment needs, fostering a positive group dynamic is critical for success.
The best most successful groups integrated target members and fellow community members together!
Inclusive NOT Exclusive- Micro Credit for Everyone!
Avoid following the Grameen model word for word when it comes to women only, there is a strong recommendation to avoid any exclusionary practice in micro lending.
Arguments to Restrict Micro Lending for Men
Frankly, this is a bad practice in micro lending. We want to, as a culture of humans, encourage equality, freedom, libration etc we cannot do so while excluding a segment of the population. I hope these statements will encourage more micro lenders to loan to men as well as women.
- Argument 1: Men will not/historically have not paid back loans-
Hold everyone accountable for paying back the loans! If the sentiment is that men are not responsible enough to re-pay the loan then what better way to change this action then hold them accountable for repayment by submitting them to the same peer pressure and group system used in the majority of micro lending practices.
If you want equality you have to ask men and women to be equally responsible. A large number of women receiving loans told me the following:
Isn’t this the same exact change in behavior that men would need in order to be accountable for paying back the loan? Isn’t it possible that with the additional help and training provided by a micro lender they too would learn the same skills and values?
Frankly, and I apologize for the personal interjection, I feel if you expect and accept bad behavior you actual encourage that bad behavior. Allow the bad behavior and except that result and you are actually feeding into the problem. Expect good behavior and enforce it. If you hold everyone up to equally high standards you encourage equality of behavior, equality of freedoms and equality of genders.
The ultimate goal is to encourage small business owners and empower people, and we cannot as a world encourage and group only one group of businesspersons. If women are at a disadvantage seeking or being awarded a loan in the business world then there will be more women seeking and being awarded micro loans. Let the need determine the target group rather than arbitrarily placing restrictions on the group dynamics.
This happens in other instances too where micro loans are targeted towards another segments of the population for example displaced workers or fishermen who are encouraged to pursue a new career due to new restrictions on fishing rights. It is perfectly fine to advertise to these persons, to encourage growth in these areas, however it is best done without excluding others.
- Argument 2: Women only is the way micro lending was designed-
Do not focus on only women simply because the Grameen model did. Remember your mom saying, “If everyone jumped off a bridge would you jump off a bridge?” Just following the exact model is not a good business practice.
Look at your particular socio economic dynamics and make a decision based on the needs of your users. Keep in mind that Dr. Yunus’s original work was in Bangladesh where the man woman dynamic is far different then in many other parts of the world.
In India and Bangladesh women were formerly banned from owning businesses. This is not the case in other parts of the world. Unmarried women are still to this day prohibited or morally discouraged from talking to men- any man not related to her by blood. Again, this is not the case in many other parts of the world.
If one group of lenders wishes to remain women-only for a legitimate reason (religious, moral code of the community, etc) then allow the group to remain so, but open the micro lending operation as a whole to anyone who can meet the rules set forth by the micro lender.
In many cases it is a family containing both men and women who want to start a business, or a woman wishes to start a business with the help of a man in her community. Encourage partnerships instead of breaking them apart arbitrarily. If you are worried about the re-payment rate of men versus women then try it and track the balance! If it is working keep going, if you have a strong leaning after 1 year then at least you can announce WHY you are only giving loans to one segment of the population based on fact instead of fiction.
I would also recommend keeping the requirements for admission as inclusive as possible to encourage many people to take advantage of the system. For example if you state that ONLY cancer patients or ONLY single mothers are eligible you are not only limiting your user base you are actually further separating these people from society and the business structure. The idea of business is to become integrated and interdependent on each other, to be equals in a free market economy.
- Argument 3: Women are at a disadvantage in the workplace and must be encouraged towards participation-
The need will determine the user base. I have to stress this again if a segment of the population NEEDS the service more than others then they will use the service more and develop as the primary user base.
- Answer: How to encourage appropriately-
Advertise and Encourage
If you are trying to encourage one social group in particular advertise to them. Let’s say you want more women business owners in your community go to social functions geared towards women and advertise.
Instead of being exclusive by forbidding a certain group be inclusive and still reach your target audience by appealing to them. Go to the places where you want to encourage the social growth and advertise your services in the community.
However keep in mind you do NOT want to encourage someone to take a loan that is not interested!
You can assist, you can empower, and you can encourage but you cannot force someone to use a service they are not ready, willing, or able to use. In fact forcing a user base leads to problems. The group will not take as much personal ownership or investment in the service. I would argue that is it impossible to successfully force a group to form, or to use a service, or become empowered. The social group needs to seek the service, to be active in its success.
As the micro lending organization you are there to facilitate and assist in the success. Instead of seeking out these individuals let them come to you. The more people come to you instead of the other way around the more motivated they will be to receive and pay back the loan. If you are the one convincing them there is very little incentive and impetus for the individual to be proactively involved in the loan process. Not everyone wants to own or start a business. Micro loans are targeted towards entrepreneurs or persons with existing businesses that wish to expand.
- Argument 4: Only certain types of business are appropriate for the loans, particularly those involving cell phones-
This issue again stems from the belief that you must model a successful micro lending operation after Grameen bank. This belief in itself is a fallacy. Like any successful idea the strength of Dr. Yunus’s system is that is adaptable. You can adapt micro lending to work in a variety of circumstances and this is proven by the evidence that you have many diverse models running concurrently worldwide.
From the core research I have found in 100% of the cases that the more diverse the businesses are the more successful the micro lender is in keeping a full coffer of funds available. It is the same methodology employed by personal and corporate investment strategies- diversity your portfolio. The meaning of this statement can be summed up in the idiom “Don’t keep all your eggs in one basket.”
Targeting only one type of business is just as risky. For example a number of groups target only farmers or agriculture. However when there was a severe drought in Kenya many of the farmers defaulted on their loans because there was simply nothing to harvest to re-pay the loan. The more diverse the businesses your organization can fund the more diverse the risk is as well.
There are also micro lenders who shy away from anyone who is considered a potential risk or prohibit certain uses for loans. Examples, no one who has been in business less than 3 years or a prohibition on using the loan to pay for education.
I would encourage micro lenders to instead diversity their investments so you can bear a percentage of higher risk ventures. Instead of prohibition use the safety net, the cushion, of low risk businesses to allow the higher risk loans as well. The reason for this is that there is a strong need to new business growth, and there is a strong need to invest and enable children to go to school or adults to pursue advanced education degrees. These are the building blocks of society and by cutting them out of the system you are curtailing the growth of a society.
South America Case Study-
Offering micro lending to your core constituents- Artis84 in Guayaquil Ecuador-
Artis84 focuses on informing the Afro Ecuadorian community of their constitutional rights. Afro Ecuadorians are not always aware of their constitutional rights and of services that are legally guaranteed by their government. Artis84 recently added micro loans to its offerings and decided to keep the options as open and inclusive as possible. This is a unique idea in that a non-profit who was not focused solely on micro lending decided to add the service to their offerings for their core constituents.
Their tactic is to wait until groups come to them requesting a loan, in their experience it’s much better to be proactively approached by a group or individual seeking a loan rather than advertising in the community. This way the group or individual is personally invested in the success of the micro lending program.
Hans Vassel, head of Artis84, also advises those interested in adding micro loans to their organizations offerings to start with a group you know and have worked closely with. Starting with a known entity increases your chance of success and you can learn what works in your community with your specific constituents.
For example Mr. Vassel and his group learned that often Afro Ecuadorians are not made aware of public services and government programs that already exist. Just informing the local community of the resources available to them and to assure them that it is their right as a citizen, safeguarded in the constitution, to have those services available to them.
In light of this Artis84 is sure to act as a consultant group or confidant advising members of the Ecuadorian community, but also to point the individuals in the right direction. By making folks aware of the services and forcing the local government to provide those services you can actually make a larger impact. It also prevents forming parallel services. If the government is legally bound to providing a service there’s no reason for a non-profit or a third party to also provide that same service. In fact it’s detrimental because holding the government accountable to provide for all the citizens is extremely important in bringing about equality and fighting racism.
Starting with a group the non-profit has an established relationship with adds a level of security. The borrowers are a known entity and their needs and roadblocks to success are known quantities.
BEST PRACTICE TARGET AUDIENCE
1) Talk to community leaders find out where the needs are, advertise there.
2) Let the participants come to you do not convince anyone to get involved, let them request assistance from your non-profit organization.
Sustainable success for micro lending
The biggest strongest lesson to be learned, educational training and regular frequent in-person follow-up meetings are key. There were absolutely no successful micro lending ventures that did not included a large investment of time and money in educating and training the persons receiving the loans and investing in staff to follow-through with the lenders.
In fact I would suggest a chart could be made showing an exponential increase in success rates of repayment, recycling of the loans, length of time the participants were proactively involved in the process, and amount of capitol available directly proportionate to the investment of the micro lender in training programs and educated/well-trained personnel to work directly with the lenders.
Loan officers need to be trained in the following:
1) Group dynamics and how to foster communities and cooperation in mixed groups
2) Non violent conflict resolution
3) Basic business practices and bookkeeping
Technical advisors are necessary and fulfill the following needs:
Specialists in an area of business (e.g. farming a particular crop in a particular geographic area)
1) Versed in the local social, economic and environment factors that contribute or bar success in a particular geographic area
2) Able to evaluate the success of a business venture in their geographic area, and suggest costs associated with starting or supporting new businesses in this area
Technical advisors should be versed in:
1) The methodology of the micro lender or NGO they are working with.
2) The local culture and social/economic/environmental factors facing the core constituency.
I know people are reading this part thinking, “how will I pay for technical advisors and where do I find them?” It is not as hard as you think. Here are some creative ways to find qualified technical advisors:
Employee local business owners part-time to act as advisors.
Form associations and coalitions to meet this need (for example there are almost always local, regional and national groups accessing farming development or business growth). Find groups working to better the socio-economic status of your community and combine your efforts!
Hire former lenders. Many groups hire from within, identify and cultivate successful lenders in each group of persons receiving a loan and develop their skills as a technical advisor. Make sure they are successful over time and not just for a year!
1) Training programs for the lenders. Mandatory attendance for core-concept training programs, additionally offer optional training sessions. See sections on “Key Points for Repayment” and “Encouraging Group Dynamics” for topic ideas.
2) Time and money built-in for technical advisors to evaluate the credence of new lenders/proposals, and to suggest the cost of the micro lender to support the business. Cost may include remote offices, long distance travel, or both.
3) Adequate training and education for loan officers, technical advisors and business specialists. This needs to be locally focused the persons need to understand how business operates in the geographical area.
4) Cover the costs of this training by (see BEST PRACTICE MICRO LENDING STRUCTURE)
Form associations (local NGOs, cross culture/country cooperatives, non-partisan government offices etc)
Involve the local community of businesses to volunteer time and personnel for training.
5) Be sure to include enough interest in your loans to cover the expense of trained personnel and if training programs for those receiving the loans.
South America- Case Study
-Keeping Costs Low by Creating Networks and Symbiotic Relationships-
FINCA Peru, a local NGO provides micro loans to farmers in Ayacucho, Peru. The Belgium government currently has a program of farming assistance and development in the same community. Working together the Belgians provide technical advice to the farmers and manpower to check on the farmers progress. FINCA Peru provides the financial support to the farms for supplies, fertilizer, seeds, etc. Working closely together the two organizations co-exist to the mutual benefit of all involved.
Peru based FINCA realized that it was inefficient to develop new monitoring programs or those with parallel goals. A better tactic was to partner with them, forming alliances for mutual benefit.
FINCA Peru partners with international, and regional groups whose mission statements include- technical assistance, physical follow-ups, planning, and resource management assistance to local farmers in Ayacucho, Peru.
Individuals working with these agencies take on the role of on the ground technical advisors for FINCA’s agricultural funding. Alleviating the need for FINCA to hire personnel to do the same or similar job.
These strategic partnerships focus on giving the lenders the experienced hands-on support they need. An added benefit is that the international partnership also receives aid from the micro lender in terms of funding their target audience.
It’s a win-win situation. The micro lender avoids having to monetarily fund the rather expensive people on the ground/ local liaisons. The public or private program has access to loans to support their constituents and most importantly provide ongoing monetary support for the citizens.
India- Case Study
-Keeping Costs Low and Providing Educational Opportunities-
A small micro lender in India focused on forming educational strategic partnerships to increase the learning opportunities without increasing the margin needed to run the micro lending operation.
This is where the group of volunteers looked to find qualified personnel who were ready, able and willing to teach in the community:
- 1) Local schools, colleges and universities
- 2) Online training programs offered by local schools, colleges and universities
Often online course programs are willing to do discounted or free observation level attendance. So as long as the users don’t participate in the discussions you can often work out a deal to use the curriculum or actually listen in to the lectures for free. A local library, university, or community center is a great place to host the event and only requires one Internet connection.
1) Local businesspersons
2) Local business associations
If the micro-loan’s stock is part of a companies 401k portfolio there is an invested interest in seeing those receiving the loans succeed. Pitching the union as both a give and take of money, people, and resources, makes a lot of sense!
Often a local business association will donate time, expertise or resources to a local group working to improve and bolster the local business environment. Especially if there are incentives like tax credits or forming business networks between those receiving micro credit and businesspersons in the community. For example a local banker volunteers 20 hours a week to train the participants in the micro loan program about bookkeeping. In turn this banker receives 2 bolts of wool from the members of the group, or a discounted rate on the purchase price of raw materials.
1) International aid or relief efforts
2) Local and government run programs
In every country there are international aid efforts, programs with foreign governments or foreign NGOs. Seek out which groups are already working in your area and tap into their programs to supplement or provide for the training needs inherent in micro lending.
Frankly there seems to be a hesitancy to join forces with the local, regional or national government on any efforts. However, if it’s possible to look past partisan politics there are some government programs that lend themselves to partnering with micro lenders. In particular those focused on adult education, sustainable agriculture, neighborhood development and human rights.
East Africa- Case Study
-Cultural Factors Saving as a concept-
The idea of saving money is not well indoctrinated into the populace, the general attitude is that if you have money you should either spread it among family members in need or spend it. Money is not something to be horded or accumulated as insurance against future needs.
The majority of micro lenders had to spend time and devote some local personnel in the communities to discuss HOW to save, WHY to save, and to give each group specific sets of goals to achieve in terms of saving with easy benchmarks to hit to get the group in the habit of storing wealth.
In some areas such as Uganda citizens actually had no secure place to store money. Several confused micro lenders mentioned that they couldn’t figure out why groups were having trouble meeting weekly payments until a group who was defaulting on the loan mentioned that there saving place was known to the entire family and that when someone needed something they took the money they needed.
An easy solution to this was to provide each group with a lock-box created by a local craftsperson. A metal welder made locking boxes for each group; the box was stored either in the NGO office, or in the head of the group’s place of business. The locked box provided the group with a secure centralized area to accumulate their repayment monies.
Strategies for Dealing with Defaulted Loans
Ineffective Strategies
Imprisonment
In several places such as Uganda and parts of Kenya persons could actually be jailed for defaulting on loans. Not only does this leave the person worse off then before, it also negatively effects the balance of funds for the other groups because while in prison there is no way for the individual to earn money to re-pay the loan.
Effective Strategies
The following are effective strategies for eliciting repayment from a group or individual who has defaulted on a loan.
Peer Pressure
The Grameen back tactic of grouping people into 5 or 10 person “teams” where only one person in the group is given a loan at first and only upon 100% on-time payback can the next person receive the loan seems to work quite well.
There seems to be some unfounded fear that this would cause some individuals to inappropriately pressure fellow group members but in all of my research I did not find this to be a reality. Perhaps in part because the vast majority were women with families the reality was more that the women bonded together, sometimes helping out a member who was behind on a payment rather than resorting to threats or violence to scare the group member into paying back a loan.
Immediate Halt of the Loan
If a payment is skipped the loan is halted for the member who defaulted on their payment. This practice seemed pretty standard for micro credit operations and yielded good results to encourage re-payment.
The loans to the entire group were immediately stopped if one group member missed a payment. No one can receive any more loans as long as the individual’s payment continues to be outstanding. While this actually did seem to work, it also caused quite a bit of group stress.
A more gradual calculated approach seemed to yield better results. For example: halting the loan for that individual while allowing the remaining group members to receive their loans for a period of time, and then halting all the loans for the entire group.
Another option under this heading is to remove that member from the group after defaulting for a period of time, and restricting their access to joining other groups.
3 Strikes You Are Out System
This was an interesting idea, that a member could get behind on a payment for a total of 3 times, and still keep the loan, however on the third “strike” they were completely out of the group and the other group members were prohibited from applying again for 3 years. This system was the best for places where the group members were not as “bonded” or close to each other, and did not pool resources as well.
A key feature of this system, and one I believe necessary for it’s success, is to bring in a “mentor” or evaluator from the micro lender on each “strike” to supervise the situation, determine the best course of action to get them back on track, and counsel the business owner through the rough patch.
KEY POINTS FOR REPAYMENT
Training and Check-ups
Absolutely tantamount to having anyone payback the loan is enough training, and continual regular hand-holding to train the persons to be successful business persons.
NO one just happened to know how to run a business, every small group had to be taught basic business and savings practices. As mandatory training I found most groups to include instruction on the following points:
HOW TO SAVE:
An extremely high number of people in virtually every country had no prior concept of saving. It was absolutely key to explain and show why you should save and to give them the practical ways to save such as:
When faced with dire immediate needs such as “I am hungry now” it’s very difficult to engage people in the idea of saving for the future. A significant amount of time and resources must be engaged in instilling this value in the lending population.
HOW TO GROW A BUSINESS
The process of re-investing into the business
This key bullet point needs to be taught or you run the risk of having the business owner spend income from their store or business on non-business essential items only. While it is a real need to provide for the family the individuals need to also set aside some profit to re-stock the store, to make improvements, and to upgrade their business in the future. Setting a savings goal for them to re-invest X amount of money into their own business is key.
One interesting tactic was to try and introduce the store as if it were another family member, so your tailoring shop was your fourth child and required the same amount of money and upkeep as a child would. Just as if you wouldn’t want to use the money to feed a child to buy something non-essential you wouldn’t want to steal from your business funds to buy something non-essential.
A very successful tactic was to bring in business owners from the community to teach practical workshops on how they successfully expanded their business with an emphasis on practical positive and negative growth results, for example
“When I bought my first truck so I could expand the selling area for my bananas I found I was competing in a market saturated with other fruit vendors. Instead I should have explored the surrounding areas first to determine if there were other growers selling there already. Now I know to first determine where the need is for my bananas before deciding to expand my market into those areas.”
ACCOUNTING AND BOOKEEPING
Very few individuals receiving the loans have ever balanced accounts before. The micro lender needs to provide basic instructions on:
Balancing accounts input and output:
Explaining how to track costs versus profits. How much they spend on the business versus how much they make from the business. Working with the owner to create a basic structure for what they will sell and how much they will sell it for focusing on low cost high profit items.
How to price goods and services.
An explanation of how to price your goods or service in the particular market to cover expenses and make some profit without pricing yourself out of the market.
Tax or duties on goods.
A simple explanation of what taxes, duties, or other fees (such as utilities) might be accumulated by the business. Most often this is not much but it might include rent, property tax, sales tax, or import/export duty tax. It is key for the businesses to be legitimate and adhere to state and government laws.
B-to-B Mentoring
This educational concept was not only extremely intriguing but also rather effective. Business owners in neighboring states or territories were paired using a “buddy system” whereby a senior businessperson could provide advice and a practical example for a younger or business just starting out. For example two tailors who work 5 km apart from one another. The senior mentor was usually someone who had completed his or her loan cycle successfully and the junior person was either just starting the business, or had an existing business but was receiving his or her first loan. In the example of the tailors, the mentor tailor provided advice and occasional intervention when the new tailor ran into a problem paying back their loan. The senior mentor had valuable information that the micro lender often did NOT have from working in the specific industry. In many cases the buddy system provided a more practical custom advisory role for the new businessperson. This buddy system worked best when there were regularly scheduled meetings by phone or in-person with a member of the microfinance institution available to join the meeting.
One criticism was that a neighbor wouldn’t mentor someone in the same business for fear of the competition. However, in practice a neighboring area some distance away was often not perceived as competition. In the rare case when this did pose a problem similar but not identical mentors were formed. For example a tailor and a cloth salesperson, or a tailor and a leather tooling shop might be grouped as buddies.
PRACTICES TO BE AVOIDED
DIY APPROACH:
Hands down this approach did not work or only worked through sheer luck. The more hands-off the micro lender was regarding in the field on the ground contact and education the less successful the micro lending organization. If the lender does not focus on business education and personal intervention when payments were skipped the default rates skyrocketed. No further evidence was needed then to see the default rates of groups that had simply handed over loans with little to no support to see that this DIY approach does NOT work with micro lending.
There are a few reasons for this; first and foremost as previously mentioned few persons have received a formal education in best business practices. Many a sound business idea resulted in a defaulted loan due only to lack of training and education. With just a small amount of time and effort focused on training the default rates dropped dramatically.
Another reason is a micro lender has a very small margin for defaults; the small amount of interest charged is not enough to cover more than a few defaulted payments at any given time. So the micro lender must be focused on keeping default rates to a minimum. The best way to accomplish this is through regular check-ins, frequent payments, and immediate intervention when a payment is skipped.
HIGH INTEREST RATES:
If you want to operate a micro lending group as a for-profit bank you can! There are micro credit banks that operate for profit without stressing the social benefit. If you disclose the purpose and the high interest rate but offer training, technical advice, and interest on savings accounts to the general public you can run a successful business and still call yourself a micro lender. This discussion of high interest rates revolves around those micro creditors who charge high rates to make a profit for the benefit of their investors and board members.
If you are seeking public or grant funding you should avoid disguising your interest rate. When it comes to the attention of the press or public that you are exploiting the poor you will incur anger and resentment. Nothing angers a charity donor more than finding their name associated with exposes on “bad lending practices” articles.
Currently there are some microfinance institutions accused of unfair banking practices such as Azteca and Compartamos in Mexico. These lenders justify high interest rates by stating that the poor are a high credit risk. Opponents say it’s preying on the weakest socioeconomic class, focusing on lending to those with no other options to qualify for loans. The ability to charge high interest rates and lack of banking regulations, has led to unscrupulous banking practices in micro lending. Micro lenders are accused of taking advantage of poor people by charging exorbitant interest rates, unfair and strict payback agreements, and illegal or immoral threats against lenders who cannot repay their loan.
I believe this these behaviors are detrimental to the micro credit idea and undermine the core mission of micro credit. Due to the lack of regulation and certification by a centralized body there is no organization in place to stop these micro lenders. An excerpt from Business Week on the topic, citing example Azteca a Mexican micro lender:
“With no legal limits on interest levels and little government oversight, for-profit banks in Mexico impose annual interest rates on poor borrowers that typically range from 50% to 120%. That compares with a worldwide average of 31% among nonprofit micro-lending institutions, and the 22% to 29% that Americans with bad credit histories incur on credit-card debt. Azteca's business model succeeds not only because it can charge credit-starved clients almost whatever it wants. Equally important is that low-income Mexicans anxious about maintaining their reputation tend to pay back what they owe, regardless of the hardship. Those who slip behind receive frequent visits from motorcycle-riding collection agents. Default rates are infinitesimal. "We lend to them as much as they can borrow," says Azteca Vice-Chairman Luis Niño de Rivera, "and they can borrow as much as they can pay."
Single Biggest Improvement to Microlending
The single biggest improvement that could be made to the microlending system is a governing body to regulate, approve, and police safe and successful lending practices.
For example right now, there is no system no legal recourse for a borrower to complain about unfair and illegal actions by collections agents. For example Grammen bank was just featured in an article where
It is important to introduce some regulation into micro lending to protect the poor from unscrupulous practices. My advice to avoid potential credit disasters would be to start an accreditation program, or other type of certification for micro creditors. A regulatory body could vet and qualify potential micro lenders and provide consumers with a sense of security knowing the lender is being regulated.
This regulatory body would be able to:
Set a range of acceptable interest rates
Set a standard for instructional or educational programs
Develop and enforce standards for fair loan practices
Trademark, register or otherwise regulate key phrases like “Grameen like” “micro credit” or “micro loan.” In time those phrases could be associated with regulated services.
Provide the users with an intermediary body who can arbitrate between the micro credit institution, the press, and the public.
Write policy and legislation for micro lending in local governments and possibly world wide agencies (WTO, IMF, etc)
Current Practices that Should be Regulated ASAP
These are currently practices in microlending which should be stopped, and might only be able to be regulated by a larger governing body:
Taking loans to pay back other loans- needs to stop. Borrowers should only be able to pay back one loan at a time with a ban on having consecutive loans.
Borrowers should be on record for their loan, the state of their loan, and their payback record. Basically a regulated true “Credit Score.”
It’s worth reminding readers that even in regulated banking the credit score is run by credit card companies and is not in any way regulated or administered by a public entity. I am proposing a change to this, actually allowing a credit score to have true meaning by giving the task to a regulated governing body with no direct ties to a particular finance company.
Loan officers need to be more proactive and less reactive
Loan officers need to make sure the business can bear the weight of the loan they are taking on, and actually scale the loan based on the earning power of the business. Being proactive up front about how much of a loan to award, instead of having to bug and badger folks to pay back loans that were beyond their means to begin with.
It should be illegal to jail or imprison someone who defaults on a loan, a more effective penalty should be imposed such as those mentioned in the section “Strategies for Dealing with Defaulted Loans.”
Set Minimum Standards for Oversight, Education, Follow-up
Too many unregulated micro lenders ruins the microfinance system. Setting up some basic standards and then enforcing those standards brings the entire system into balance.
Forcing NGOs and lenders to supervise the borrowers more heavily and provide a standard amount of education to the borrowers benefits the entire system, and will decrease the default rates.
REFERENCES
http://www.businessweek.com/magazine/content/07_52/b4064038915009.htm
In Depth December 13, 2007, 5:00PM EST text size: TT
The Ugly Side of Micro lending
How big Mexican banks profit as many poor borrowers get trapped in a maze of debt
By Keith Epstein and Geri Smith
The Green Skeptic
07 April 2008
Microfinance: How Big Can Micro Get?
http://greenskeptic.blogspot.com/2008/04/microfinance-how-big-can-micro-get.html
Kiva Brings Microlending Home to US Entrepreneurs in Need
Lenna Rao, June 10th 2009. Tech Crunch
http://www.techcrunch.com/2009/06/10/kiva-brings-microlending-home-to-us-entrepreneurs-in-need/?awesm=tcrn.ch_3X9&utm_campaign=techcrunch&utm_content=techcrunch-autopost&utm_medium=tcrn.ch-twitter&utm_source=direct-tcrn.ch