Wednesday, August 12, 2009
Microcredit: No magic solution
Over the last several years the term microcredit has become a real buzzword. What is it? Microcredit gives small loans (usually less than $1,000) to poor people, those lacking collateral and without verifiable credit histories. The idea is that with access to sources of capital, self-employment then rises and quality of life improves as people break free from the cycle of low income, low savings, and low investment.
The concept of microcredit is now standard in development and for many it has become a magic formula to be applied uniformly around the world. And, as in the case with so much that looks attractive, upon a closer look, everything is not so rosy. You’ve probably heard about Kiva.org, a website where individuals can loan small amounts of money to microcredit programs. They’ve had immense success, and are doing a great job of getting the haves to give a little bit to the have nots. But how are the “end users” faring – the poor people receiving the loans? According to their website, Kiva doesn’t charge its partner agencies interest. But the average interest rate that a Kiva field partner charges the poor borrower is 21%. How can a poor person afford to pay 21% annual interest on a loan? Another NGO working in Nicaragua charges its partner agencies 10% interest and their partner agencies charge interest rates that average 36%. These rates are justified by the higher cost of administering many small loans, and giving free trainings to their clients, but in reality any institution that charges those interest rates is taking advantage of the poor. The poor can’t get a loan at a bank, so the field partners will charge higher interest rates than even a bank charges (18-25% in Nicaragua). That’s called usury.
In our own experience with microcredit projects in Nicaragua, not all is perfect either. After 15 years of work in this area, we have concluded that small loans to poor individuals at truly low interest rates (0-6% annual interest) are necessary, but ultimately insufficient. Those we’ve worked with have improved their living conditions for themselves and their families, but they are still poor. While microcredit can move people within the scope of poverty, but in order to really lift themselves out of poverty, the poor need a more serious investment under a different model.
So what is the solution? The reality is that there are many. But what we have found is that together, we can do more: groups of people working together in democratically-run cooperatives provide more and more sustainable employment than either self-employment or traditionally run businesses. Yet they fall into a financing gap: too large for microcredit and too risky for banks. We are trying to fill that gap with our Vida Fund. The Vida Fund is a shared risk investment fund that partners with the poor to build lives through livelihood. Currently the Vida Fund is helping the Genesis cooperative start up their spinning plant with over $140,000 in loans so far for their building construction alone.
Now we are looking for people to invest in the Vida Fund so that the folks at Genesis can finish their building and so that other similar projects can get started. Investment loans receive up to 5% interest. We encourage a minimum investment of $5,000 and longer time periods (5-10 years) for these loans, so that they can be used most effectively. Since launching the Vida Fund this spring, we have received $27,000 in loans! Currently Genesis needs about $40,000 to finish their building, or just eight people who can loan $5,000. We accept donations of any size to the Vida Fund, all of which are tax deductible. If you know anybody who might be able to invest, please have them email us at email@example.com and look at our website at www.jhc-cdca.org/microent.html and http://jhc-cdca.org/Vida%20Fund%20web.pdf for more information on the Vida Fund. To donate online go to www.jhc-cdca.org/credit.html