SubscribeMicroloans: Providing Sustainability
In economic development, just as with photography, people can do so much with so little: A single face can fill the frame and state so much, so simply. Similarly, a small loan can make a world of difference for an entrepreneur in a developing country.
We’ve heard a lot lately about micro-loans as a method to alleviate poverty. In 2006, Mohammed Yunus and the Grameen Bank won the Nobel Peace Prize. Organizations such as Kiva.org have popularised personal involvement with the movement. So what is it all about?
Anyone involved in micro-credit development will tell you that it really is a simple concept: the poor are credit-worthy. A loan is made to a business owner in a developing country by a local microfinance institution (MFI). These MFIs generally experience exceptionally high repayment rate, somewhere around 97-98 per cent.
What is the secret? It’s simple: a little bit can go a long way in the hands of an entrepreneur, especially when it is someone who has innovation, experience and ingenuity, but just lacks the opportunity. They can use small loans for everything from building up their stock, to purchasing equipment and hiring on more people, creating jobs within their communities. What makes microcredit stand out is that it rests on the belief that the working poor do not need, nor want handouts any more. Instead, if given the opportunities and resources, they have the strength and ability to improve their situation through their own work.
Take Beno Mungura Pacheco for instance. He is a young man who lives in Nicaragua. He spends his time running his barbershop in one of Managua’s street markets. His business currently has four locations, each one run by another member of his family and employing several people to keep their busy list of clients looking good. The last two locations were purchased with loans that Beno received through MiCrédito, a nationally run MFI founded by Mennonite Economic Development Associates, an NGO based in Waterloo, Ontario, Canada.
With four locations, you’d think this young man would need to stop and take a break. But Beno is showing no signs of slowing down. “Thanks to God, we keep going up!” Literally: he has plans to build a second floor on his shop so his wife can do women’s hair care on the new level. She has learned hair styling, and currently does women’s hair dying and styling out of the men’s barbershop.
One of the strengths of the microcredit industry is that it rests on being a community-run initiative. MiCrédito’s local credit officers take to the streets daily to meet with clients, and walk with them, helping them stay on top of their loan payments and business plans. In doing so, they become well acquainted with their clients. Guys like Beno are not only well known by their loan officer and local branch manager, they are also greatly respected by them. What’s more, their neighbours also then have a connection to a source that builds their businesses.
Microcredit has such strength as a development paradigm for several reasons. First, it is community based. Local loan officers spend much of their time out in the community. Microcredit stands on the substantial leg work of the dedicated staff. They are willing to take the time to get to know their community and their members.
Secondly, microcredit is based on making a sustainable contribution to the community. While there is a wealth of needs to be filled in developing countries today, microcredit looks at the particular situation of the working poor, where a simple solution can go a long way.
With the resources and increased income that loans provide, the entrepreneurs can better support their families, send their children to school and afford more basic consumables. They also add to the local community’s economy and well-being by being able to hire others within the community, thus generating more income for those who do not have a way to support themselves.
There is a great need for support in the microcredit sector. The poor are worth the investment. Average people like you and I can now become investors by committing a few dollars to fund loans. Average microcredit loans today range from as little as under $100 to as large as $1500, although the majority are between $150 and $500. These amounts of money are sufficient to give an entrepreneur in a developing economy the kick-start they need for their business.
Another beautifully simple solution is gaining momentum these days — loan sponsorship. There is a direct connection between you and a baker in Managua or a seamstress in Karachi via your computer. Websites such as MEDA Trust (www.medatrust.org) or Kiva (www.kiva.org) connect your dollars to the MFI on the ground overseas so that they can use the money to fund new loans and strengthen the organization for existing clients.
What happens is that an MFI receives your money in the form of loan from the website’s host organisation and then uses it to fund a variety of loans.
Let’s take Beno’s local MFI, MiCrédito, for example. MiCrédito’s parent organisation, MEDA, set up MEDA Trust so donors could have a more personal connection to the people they were supporting.
So when someone signs into www.medatrust.org and chooses an entrepreneur, the money they donate towards that loan goes to the MFI. The money is then directly loaned out to individual people, with real businesses, families, and stories of their own.
When you “lend” through MEDA Trust, it is a donation that is used as a “revolving loan.” What that means is that the money is loaned and/or given to the MFI. You can direct it to particular loans through your portfolio as the money is paid back into your portfolio. After a period of activity, MEDA then uses the money that is paid back to fund the start-up of a new MFI. Your money then has a permanent impact by providing another channel of credit to a new community.
In other organizations, such as Kiva, the process is founded on the same principles with a few differences in method. Your portfolio’s money is then handed over to the local MFI. When the money is repaid to your portfolio you are free to take the money back or re-lend it.
The key to microcredit is that it is a relatively simple way to give the working poor the dignity of rising up on their own two feet. They are not receiving a handout, but rather the resources and the esteem to recognize that they can improve their situation when given the opportunity. Whether it is for a fruit stand owner in Tanzania or a sesame farmer in Nicaragua, a little goes a long way. Interested in becoming involved? Check out www.medatrust.org today.
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