Here is an input from Johannes Seian Manzanilla, based in Switzerland, as response to Microfinance Blues:
I read your Blog Entry about Microfinance and the people who do not pay back. And it made me think and wonder. This must be a very difficult situation for you and the foundation. What are your strategies to deal with this?
It saddens and disappoints me that those people you were trying to help, now refuse to pay back. But then can we really blame them? As you noted, is it a shift in our social values and culture? As I made my short research I see there are indeed organizations who successfully provide micro financing and I wonder how they do it.
In a forum I found an interesting comment on the Grameen bank System:
"I've read Yunus book about the Grameen bank, and he explains the system (I don't know how Kiva and other companies follow that principle, but I assume they use similar because it was sucessful).
First, the bank doesn't come to the people, the people come to the bank: they see that a bank circle in the neighbouring village has made people more sucessful, or their relatives tell them about it. So the curious go and talk to an established circle of members, and learn the requirements: go out and get 5 interested members and form your own circle.
Then you contact the bank, and an employee comes along to your circle, explains all the rules (Grameen requires courses for health, contraception, no bride price, literacy etc.). Once everybody agrees to the rules and signs the contract, the classes start and bookkeeping.
The first credit will not be 500$, more like 5$ *. The circle decides on who needs it most and what to to with it - so a business idea must exist, and it must look reasonable.
The circle meets every week for strategy, classes, bookkeeping and also savings and repayments. (The bank can put in a clause that the members have to save up a certain amount first before gettin a loan to show dedication and financial responsibility).
If you look at it negatively, it's peer pressure; positively, it's feedback and social networking.
Also, most members of a circle are women; many experiences in 3rd world countries show that women think of their hungry children at home and save the money, where men tend to give in to despair and spend the money on alcohol or drugs or gambling. So this also contributes to higher rates of payback and savings.
Another point is that in these villages, everyones survival depends on the community. If you are outcast because you default and damage the society, you have no chance, except leaving the village, which is in itself a drastic step.
The people don't think of defaulting because usually Grameen gives them the chance to become productive and self-sustaining, with a steady business income or improved future for their children. They know they will never get a chance like this again elsewhere.
And the above mentioned entrance barriers - that people have to form the circle first, and agree to a contract, instead of the bank going around handing out loans to anybody vertical and breathing - means that the few poor people who don't have the motivation or power to run a business don't apply.
It's not true that most poor people are lazy or bad with money; most poor people are kept down through a combination of circumstances outside their power to change. The few people who conform to the stereotype of lazy or wastes money on frivioulous stuff just get all the headlines to confirm the clichees and for reasons of political agenda.
And the reason for the high default rates in the West is greed of the banks, not the creditors. Banks can do very thorough background checks for credits, or give a loan to anybody upright and breathing ...
Oh, and yes, the Grameen bank has very high costs because the employees have to visit all these villages every week to collect payments, do the bookkeeping until the women have caught up with their literacy classes, etc. It requires more effort than sitting in a AC controlled office waiting for your customers to come to you; but Yunus only hires people who are willing to go to their customers. Still, the rates are about 20 to 30 %, which would otherwise be cut-throat, but covers the services provided. Since these loans are investments in the future, and not new car type of loans, they are still a better choice than the usual cutthroat credit of 100% and more, and one default, and the only cow is gone, destroying all income.
(Some microfinance is run by Churches, like Brot für die Welt, which do the service stuff for free to help; an existing group structure makes things easier.)
Microfinance is so sucessful that scammers are starting to take advantage of this, pressing loans to people without the preparation and thus ruining them. So Grameen warns people to only use serious groups.
* 5$ may not sound much, but the example that started Yunus on his ideas was that of a woman weaving baskets or hats and renting the tools and buying the material each morning from the supplier, and getting the difference at the rest of the day was far too low despite working all day. When Yunus asked her how much she would need to break this cycle, she replied "5$" to buy the tools once and for all, and buy a small supply of material as start.
That got Yunus thinking, on how many more people he could help with small loans. " ###
Here is my reply:
Much thanks for your input and the research. We must really go to the basics. I think along the way we were misled or were not too strict about the process to be followed. Client selection is important. We were too kind and charitable and failed to do proper character investigation. Also there are factors we cannot control. For instance, those affecting the enterprises that the people put up are subject to risks from the climate, competition from others, lack of marketing connection, etc. Anyway, we will get out of this messy situation. learn our lessons as an NGO and move on.
Hannes, much thanks for the concern.
I read your Blog Entry about Microfinance and the people who do not pay back. And it made me think and wonder. This must be a very difficult situation for you and the foundation. What are your strategies to deal with this?
It saddens and disappoints me that those people you were trying to help, now refuse to pay back. But then can we really blame them? As you noted, is it a shift in our social values and culture? As I made my short research I see there are indeed organizations who successfully provide micro financing and I wonder how they do it.
In a forum I found an interesting comment on the Grameen bank System:
"I've read Yunus book about the Grameen bank, and he explains the system (I don't know how Kiva and other companies follow that principle, but I assume they use similar because it was sucessful).
First, the bank doesn't come to the people, the people come to the bank: they see that a bank circle in the neighbouring village has made people more sucessful, or their relatives tell them about it. So the curious go and talk to an established circle of members, and learn the requirements: go out and get 5 interested members and form your own circle.
Then you contact the bank, and an employee comes along to your circle, explains all the rules (Grameen requires courses for health, contraception, no bride price, literacy etc.). Once everybody agrees to the rules and signs the contract, the classes start and bookkeeping.
The first credit will not be 500$, more like 5$ *. The circle decides on who needs it most and what to to with it - so a business idea must exist, and it must look reasonable.
The circle meets every week for strategy, classes, bookkeeping and also savings and repayments. (The bank can put in a clause that the members have to save up a certain amount first before gettin a loan to show dedication and financial responsibility).
If you look at it negatively, it's peer pressure; positively, it's feedback and social networking.
Also, most members of a circle are women; many experiences in 3rd world countries show that women think of their hungry children at home and save the money, where men tend to give in to despair and spend the money on alcohol or drugs or gambling. So this also contributes to higher rates of payback and savings.
Another point is that in these villages, everyones survival depends on the community. If you are outcast because you default and damage the society, you have no chance, except leaving the village, which is in itself a drastic step.
The people don't think of defaulting because usually Grameen gives them the chance to become productive and self-sustaining, with a steady business income or improved future for their children. They know they will never get a chance like this again elsewhere.
And the above mentioned entrance barriers - that people have to form the circle first, and agree to a contract, instead of the bank going around handing out loans to anybody vertical and breathing - means that the few poor people who don't have the motivation or power to run a business don't apply.
It's not true that most poor people are lazy or bad with money; most poor people are kept down through a combination of circumstances outside their power to change. The few people who conform to the stereotype of lazy or wastes money on frivioulous stuff just get all the headlines to confirm the clichees and for reasons of political agenda.
And the reason for the high default rates in the West is greed of the banks, not the creditors. Banks can do very thorough background checks for credits, or give a loan to anybody upright and breathing ...
Oh, and yes, the Grameen bank has very high costs because the employees have to visit all these villages every week to collect payments, do the bookkeeping until the women have caught up with their literacy classes, etc. It requires more effort than sitting in a AC controlled office waiting for your customers to come to you; but Yunus only hires people who are willing to go to their customers. Still, the rates are about 20 to 30 %, which would otherwise be cut-throat, but covers the services provided. Since these loans are investments in the future, and not new car type of loans, they are still a better choice than the usual cutthroat credit of 100% and more, and one default, and the only cow is gone, destroying all income.
(Some microfinance is run by Churches, like Brot für die Welt, which do the service stuff for free to help; an existing group structure makes things easier.)
Microfinance is so sucessful that scammers are starting to take advantage of this, pressing loans to people without the preparation and thus ruining them. So Grameen warns people to only use serious groups.
* 5$ may not sound much, but the example that started Yunus on his ideas was that of a woman weaving baskets or hats and renting the tools and buying the material each morning from the supplier, and getting the difference at the rest of the day was far too low despite working all day. When Yunus asked her how much she would need to break this cycle, she replied "5$" to buy the tools once and for all, and buy a small supply of material as start.
That got Yunus thinking, on how many more people he could help with small loans. " ###
Here is my reply:
Much thanks for your input and the research. We must really go to the basics. I think along the way we were misled or were not too strict about the process to be followed. Client selection is important. We were too kind and charitable and failed to do proper character investigation. Also there are factors we cannot control. For instance, those affecting the enterprises that the people put up are subject to risks from the climate, competition from others, lack of marketing connection, etc. Anyway, we will get out of this messy situation. learn our lessons as an NGO and move on.
Hannes, much thanks for the concern.
