Microfinance

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One of ElectricAid’s funding priorities is microfinance. Microfinance (or microcredit more specifically) involves the loaning of small amounts (usually about 25 – 100 Euro) to the most impoverished people, enabling them to start their own humble businesses. When the loans are paid back (most community organisations boast a 98% payback rate) the money is loaned out again. With these loans, people around the world create themselves as fruit and vegetable vendors, simple fishermen and farmers, animal breeders, tailors, hairdressers and grocers. The small loan gives them the chance to earn an income. Something as simple as buying a net or a sewing machine provides them with the opportunity to start lifting themselves out of poverty. Even more realistically (and crucially) it provides them with the ability to save money, feed their family and send their children to school. By allowing for continuous self sufficiency a single microfinance loan embodies the spirit of ElectricAid.

In their most basic form, microloans work quite simply. In the humid jungles of South America and on the scorching planes of Africa locally based organisations offer loans to people in exchange for little or no collateral. The loans are made on the value of trust and peer pressure. Small groups of people go forward for loans. The loans are given one at a time; the next person in the group can’t get their loan until the first
person has paid theirs back and so on. The microfinance paradigm is accredited to Muhammad Yunus. In 1976 Yunus launched a project to examine the possibility of designing a credit delivery system to provide banking services targeted at the rural poor in Bangladesh. Upon its success, Yunus founded The Grameen Bank (Grameen means “rural” or “village” in Bangla language) with the following objectives: to provide banking facilities to the poor; to eliminate the exploitation of the poor by money lenders; to introduce the disadvantaged (mainly women) to an organisational format that they can understand and manage by themselves; and to reverse the hindering cycle of “low income, low saving & low investment” with the injection of credit. The Grameen Bank is universally cited as the inspiration and model for the global microcredit movement.
The idea of microfinance has spread across the globe, saturating Africa, Asia, and South America. Currently it is estimated that anywhere from 1,000 to 2,500 microfinance institutions (MFIs) serve some 67.6 million clients in over 100 different countries. These MFIs vary in complexity. There are organisations as basic as previously described, ones created by the world’s more fortunate do-gooders and others backed by international banks. Online middlemen (such as Kiva) have been established to make it easier for these loans to be given; one can go on to the Kiva
website, pick the recipient and lend them 50 dollars in less than five minutes. Microfinance has also grown to be more accommodating. In many of the poorest countries, the people adhere to the Islamic tradition. However, in these Muslim countries Islamic law (the Sharia) forbids providing or receiving any fixed, predetermined rate of return on financial transactions. Adaptations have developed where the loan is treated as a service, thus complying with the law. ElectricAid’s involvement with microfinance has been through local community based organisations. ElectricAid has funded projects in Uganda, Guatemala, Nigeria, Bangladesh, Nepal, Tanzania, Ethiopia and Kenya. The range of support has varied
from funds for loans, establishment of basic offices for the local organisations and the provision of relevant supplies.
One example of ElectricAid’s involvement in the microfinance movement is a development project in Uganda with EDF Microfinance. ElectricAid gave a grant of 8,000 Euro (27,024,880 Ugandan Shillings at the time) enabling access to loans for
271 people. These loans financed entrepreneurial activities in piggery, poultry and crop farming. In the first lending round, 97 loans were distributed averaging 83 Euro. The grant also covered vital training for the entrepreneurs. Realistically, one can’t
run a business without any business knowledge. Thus the partnering organisation offers basic business management training in: business plan making, costing and cost analysis and basic record keeping. The project was overall very successful and there
was just one issue raised; there was not enough funding to meet the demands for microfinance loans.

EDF Microfinance Case Studies

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Another microfinance project ElectricAid has funded was the small Irish agency A-Z Children’s Charity (now called Nurture Africa), concerned with children infected with HIV and AIDS. The organization took a practical approach to helping children by helping their providers. Disheartened HIV/AIDS infected families were rehabilitated and offered medical and nutritional assistance. Microfinance loans were offered to
the families, most of which were left with one parent. With the loans, the parents were able to earn money and afford proper food and medicine and effectively improve their children’s health.

A-Z Children’s Charity: Zam – a beneficiary of A-Z’s microfinance scheme – with Patrick and Esther, all HIV infected, all healthy

A-Z Children’s Charity: Zam – a beneficiary of A-Z’s microfinance scheme – with
Patrick and Esther, all HIV infected, all healthy

Beneficiaries of the A-Z microfinance scheme; Nalongo, Kato and Waswa, all HIV infected and living positively

Beneficiaries of the A-Z microfinance scheme; Nalongo, Kato and
Waswa, all HIV infected and living positively

One issue that always comes up when discussing microfinance is its effectiveness. Through news mediums we only hear about the two ends of the spectrum; the very good and the very bad. It’s more or less agreed upon by development pundits that in general microfinance is indeed effective in its simplest form and effective in its more complex structure as long as transparency is present and commercialism absent. Unfortunately the last decade has seen some commercialism get the better of good intentions with the introduction of high interest rates – some as high as 125%, introduced by Te Creemos in Mexico. This is not to say that all commercial providers are corrupt or ineffective. The middlemen organisations – despite their size – have a favourable reputation. The San Francisco Chronicle printed an excellent piece about the success of Kiva
(Kiva.org), a synopsis of which has been provided. For years, writer Bob Harris travelled the world as a writer for ForbesTraveler.com. While traveling he noted the inequality of the industry and the people who built the extravagant getaways. He decided he would give back some of his salary and that’s when he discovered Kiva, the site that enables individuals to offer $25 loans to entrepreneurs in the developing world.
In 2011, Harris decided to go meet some of the entrepreneurs and write about his travels, microfinance and Kiva’s impact. That took him to a dozen countries – Bosnia, Nepal, Cambodia, Kenya and more – and resulted in a book. He spoke with us about what he found.

Q: The field of microfinance has faced some criticism, particularly that the interest rates of some lenders are too high. Did you ask the entrepreneurs point blank about this – what did they think of the lending criteria?
A: As a Westerner reading the media, that is the impression you get. But that’s not what I heard. And I would ask people point blank about this, outside the earshot of(lenders’) staff. I didn’t hear complaints about this at all.
I did get feedback on what other changes they wanted. They wanted longer grace
periods; a longer length of time between getting the loan and their first payment so that they could think more about long-term investments; they wanted a version of “revolving credit.” I never once heard about the interest rate. And this may not be characteristic of the industry as a whole. But I went to a dozen countries and I didn’t hear it. The interest rate issue is not contextualized. You can look at a number and say, gosh, that’s really high! But take into account the local inflation rate, or the rates offered by a commercial lender.

Q: Over the course of your travels, which took over a year, did you see any changes in microfinance, developments that illustrate that this field is still growing, experimenting?
A: Mobile. It has to be mobile. Everybody that I talked to was already more involved in mobile transactions, implementing it or planning to add it to their services. Also, I saw that Kiva’s place in the industry has grown. I visited the offices of Juhudi Kilimo in Nairobi. They are a field partner for Kiva. They actually have been able to attract more funding because they work with Kiva. So, it’s helped them in terms of
legitimacy. Microfinance has gone through a whole cycle. It was in vogue when Bangladesh’s Grameen Bank and Muhammad Yunus won the Nobel Peace Prize, then there was a backlash because of the suicides and government crackdown in Andhra Pradesh. These are the only two phases that it seems people have read about when it comes to microfinance. It’s about as drastic as if you knew only two extremes of air travel –
landing on the moon and the Hindenburg disaster. And from that you’re trying to figure out, is that a good thing? But most of the change is gradual, happening at a routine-level that is totally outside the super-good or super-bad headlines people see. It is also important to consider that many companies say the high rates reflect the costs of reaching the poorest, most inaccessible borrowers. It costs more to handle ten loans of €100 than one loan of €1,000. Some industry professionals fear that any criticism against high interest rates will prompt lenders to stop reaching out to the poorest – on paper most risky – customers. However, Damian von Stauffenberg – who founded the rating agency Microrate –
said that local conditions have to be taken into account, but that any firm charging 20% to 30% above the market is “unconscionable” and that profit rates above 30% should be considered high. In ElectricAid’s dealing with microcredit, one of our applicants from a local organisation in Uganda did an excellent job explaining how they set their interest rate of 30%. The parameters they use in setting and adjusting the interest rate
include: inflation (9%), cost of capital (3%), operating costs (11%), loan loss costs (3%) and profit risk factor (4%). They go on to say,
“The interest rate that we are currently charging is sufficient to cover the costs of programme administration and to ensure the continuation of the fund. The concept of sustainability is highly regarded by the organisation and this is the only sure way of ensuring that many more other people can benefit and even those benefitting can continuously do so.” One must bear in mind that these basic loans are operating out of basic, for lack of a
better word “offices.” These physical community organisations need to be sustained in order for their loan schemes to be sustained. Everything must be taken into consideration when discussing microfinance interest rates. These basic loans, formatted to fit the most basic lives, are making significant changes to the world everyday. Families are earning money, sending their children to school and providing for a healthy lifestyle. Business skills are inflicted on these families and developed, renewing the value they place on education. The values ElectricAid was built on are being fulfilled. Money is going directly from our members to impoverished people around the world, equipping them with the means
to create manageable businesses and change their lives.