OFFERING MICRO-FINANCE
If ever you’ve felt that the needs of the country are too overwhelming for your pocket, micro-financing or micro-credit gives an alternative that can work with the small amounts you are likely to be able to spare.
It’s an increasingly common strategy for poverty reduction with reports of micro-financing practice spanning from Senegal to Zanzibar. Amongst the list of options for poverty alleviation, micro-financing is within the reach of people who want to do good but don’t have expansive budgets to donate to aid organisations.
An amount of R100, which for one individual is the price of a fast food wrap and smoothie, can mean a few days of meals for a family, or the ability to buy medicine for a sickly loved one or the capital to buy stock to resell.
Micro-financing can be a viable way to give generously because you can start with whatever is affordable for your budget; whether it’s R100 or R1 000.
In an ideal case, this giving is consistent and regular but if this is not possible or you start off planning to make a monthly contribution and then are no longer able to continue, ad hoc amounts are still a helpful way to give what you can, when you can.
There are many different methodologies of micro-financing, so let’s start with an overview.
BASICS OF MICRO-FINANCING
How it started: Micro-financing is a financial service that assists impoverished individuals who are not serviced by conventional banking institutions. Excluded from formal financial means to respond to emergencies or borrow money for educational needs, it becomes harder to get out of poverty. Not having enough money and then being deemed too poor to qualify for a bank loan makes it easier to sink still further into destitution. Pioneered by economist Muhammad Yunus in a small village in Bangladesh, micro-financing acknowledges the realities of capitalism but blends it with the need for social responsibility.
In his autobiography, Banker to the Poor: Microlending and the Battle Against World Poverty, Yunus details how the micro-credit movement has been a global phenomenon.
Since it started as a research project in 1976, Yunus’ organisation, Grameen Bank, has grown to provide collateral-free loans to 7.5 million clients in more than 82 072 villages in Bangladesh, 97 per cent of whom are women. In varying iterations of the practice, micro-financing has also reached millions of poor women from rural South Africa to inner city Chicago. Yunus’ work and contribution to poverty alleviation, in both his native Bangladesh and worldwide, saw him recognised with the 2006 Nobel Peace Prize.
How it works: Micro-financing is most often given to fund self-employment. Some programmes however give the loan amount, and the recipient determines which needs it should meet. With reference to entrepreneurial financing, the Theory of Change for Micro-credit that is postulated by development practitioners maps out the ideal case scenario.
In this, inputs (the micro-credit product) combine with outputs (a business) to create outcomes (such as increased sales and increased profits). This positive business activity can then bring increased household income which can lead to an improved standard of living.
Recipients are not only able to move out of poverty, but being able to spend money on health and education can foster satisfaction and social empowerment which improve general well-being.
Does it work?: Over the last two decades, Grameen Bank has loaned over $6.5 billion, and recorded a repayment rate that has been consistently above 98 per cent. In South Africa, the Small Enterprise Foundation (SEF) uses investments from donors and lenders to provide poverty alleviation services to rural South African women. These include the actual financial loan, but also savings mobilisation and financial and business education. Women whose lives have been changed for the better through micro-financing include Zukiswa Hobongwana from the Eastern Cape who joined SEF in 2014. She took out a loan of R2 000 which she paid back within four months. Her entrepreneurial ventures consist of selling chickens, and scarves, jerseys and caps that she knits herself. Through micro-financing, Hobongwana has been able to generate income and, amongst her achievements, she lists being able to extend her two-roomed house.
Limitations: Despite the awards Muhammad Yunus and the Grameen Foundation have received, Bangladesh is still one of the poorest countries in the world.
Despite the billions of rupees exchanged, the ideal case scenario in the Theory of Change for Micro-credit has not played out in a linear and measurable way. Additionally, micro-financing institutions have become more capitalistic than Yunus’ approach advocates. By setting interest rates that make repayments difficult they’ve kept poverty-stricken debtors trapped.
Called Has Microfinancing Lost Its Moral Compass?, a report by the University of Manchester Brooks World Poverty Institute reveals some concerns over micro-finance in Bangladesh that are applicable to other countries, too.
Regardless of their repayment capacity, poor and vulnerable women are commonly persuaded to take small loans that often grow into larger debts taking an increasing share of household income. Once the loan papers are signed then, after a grace period of around two weeks, borrowers are required to make weekly repayments. Two particular problems make paying kisti [weekly instalment] difficult for many women. First, a high proportion of rural households in Bangladesh do not have a regular income: income varies with time of year, demand for casual labour, the weather and a set of factors outside of household control. Second, households have high levels of exposure to shocks and hazards which affect their repayment capacity. Clients commonly report that on receipt of a loan they use the cash to solve pressing needs (food for the next week, urgent medical care, house repairs, a daughter’s dowry).
It is not a fool- or failure proof solution, but if micro-financing seems like a viable option for you to pursue, here are a few models to consider.
GIVING VIA A COMPANY
Organisations like Grameen Bank don’t just give loans to a market ignored by most other banks, they’re also different because their interest rates are not set to maximise their own profits. This, however, is not true for all micro-finance companies. So, if you’re opting to donate or invest towards micro-financing, be clear whether you’re partnering with a for-profit or a non-profit. Some organisations don’t state their business model upfront, so use the following guidelines from The Institute for Micro-finance Research to help determine which type of company would be the right match:
Investing in the For-Profit Micro-finance Industry
For-profit, commercial micro-finance institutions tend to offer only financial services. Sometimes an individual needs only a small loan, but those who can properly manage and benefit from a high interest micro-loan are typically already living above the poverty line. With this option, borrowers utilise loans to invest in their small business. They purchase land and supplies needed to continue their already profitable business.
Since it’s a strictly profit based industry, the recipient’s best interests are not necessarily a top priority. For example, countries like Mexico and South Africa that can legally authorise micro-loans with alarmingly high interest rates (think 60 per cent to 100 per cent) lead to more cases of default on loans.
Investing with a commercial micro-financier, your money could go into such a market with high interest loans. Be aware that typically repayment of loans with higher rates aren’t as successful as those with lower rates.
Investing in the Non-Profit Micro-finance Industry
Not for profit micro-credit organisations that are owned by investors or customers are more focused on the economic development of the underprivileged than they are with return on investment.
Not only do these micro-credit non-profits offer their customers money, they also provide health care, training, and education. When micro-finance businesses are committed to providing their clients with financial services for economic and social development, the micro-loan model can prove to be more successful in lifting the poor out of poverty.
While they conventionally extend credit at lower rates than the commercial sector, companies that finance the poor’s businesses or expenses with affordable rates often experience low default. This could be because once they are given an opportunity to dig themselves out of a financial hole, people who are accustomed to being denied financing take pride in repaying their loan on time.
GIVING DIRECTLY
If you prefer to give as an individual and not via an organisation, it’s best to give to someone with whom you already have regular contact. An established relationship makes it easier to explain and define roles, and to communicate during the loan period.
When both parties have an existing understanding, it’s also more likely that they will each honestly communicate expectations and frustrations and needs. If you are able to, set an interest rate that is really low (2 to 10 per cent) but then consider shortening the repayment terms to days or weeks.
Alternatively, if you won’t need the money back quickly, set a slightly higher rate (15 to 20 per cent) and a longer repayment term.
Another option that could be really impactful is to invest the repayments you get back from the borrower. You could allocate this money into a savings account for them. In this approach, the intention is to make little to zero profit from the loan but to assist by being an interest-free, charge free, bank.
It’s your call whether you declare this from the beginning or accept the ‘repayments’ to then return that money as an investment, and not a loan.
If you decide to give directly, the following two models for micro-financing adapted from the Development Micro-finance Association of South Africa, work just as well for individuals as they do for organisations.
Group Lending: The group lending model for micro-enterprise development is the most common approach in South Africa. It is not as widespread as in other countries but this model has a firm toehold here, with much experience from which to draw.
In this model, a group of between three to five people are given money to disburse amongst themselves. They guarantee each other’s loans and a group support system is developed. Loans range from about R500 to R15 000 over a period of at least four months, depending on a person’s history and experience. Group micro-enterprise lending helps reduce risk and keeps admin low but potential impact high for the lender.
Individual Micro-lending: Individual micro-loans are usually more appropriate for larger loans (R10 000 to R50 000), such as for housing or for entrepreneurs with bigger plans and more experience. Providing micro-loans to unbanked individuals can be more costly, however, in terms of risk assessment and collection.