Thursday, February 12, 2009

When microfinance is impossible, and charity is the only solution

Governments and NGOs alike are selling microfinance as if it can cure all the ails in the developing world.  I have some real concern about this.  First off, economically there are some microfinance just cannot help.   Very few microfinance models can help those who do not already have access to capital to start a business, since the most successful models manage risk in such a way that prevents those who do not have businesses.

Local NGOs like some of the ones we worked with during our time in Tanzania do not have the skills in risk management, financial administration and ability to provide business training.  Yet, they seem microfinance as a way to help their people and pay their own bills.   Unfortunately, this is a dangerous thought to have.  These organizations like the required ability to run a program and do not have appropriate financing.  Furthermore, these organizations want to help the poorest of the poor.  This includes people with HIV who can work only intermittently, and people in areas where there is simply no local economy to start viable business that will survive the time it takes to pay back a loan.  In order to offer these people a loan from a revolving fund, interest rates would have to be in the hundreds.  Remember, it is not the case that any credit is better than no credit.  Give someone a really high interest loan and you are hurting them.  Local NGOs in Africa are in the strange position in that they have to deal with almost everything.  For instance, working with MAdeA in Dar es Salaam, their focus was women victims of domestic violence and sexual assault.  However, working in this poor area of Dar meant that they also had to deal with AIDS, lack of education, lack of jobs, tuberculosis, malaria and drug/alcohol abuse.  However, these can all be linked to one overarching problem – poverty.  Thus the microfinance thrust.

One of the most exciting things I saw in Tanzania was SEBA.  This was a microloan program (3% per month loans, collateralized with home furniture initially).  The initial stages of the program offered training at a cost of approximately $1 per session.  The skin in the game is important – this means women show up and want to get as much out of the training as possible.  Generally, giving anyone something for free in any country means they will take it for granted.  Africa is really no different.  Those who are reliable about training can get a loan for a capital investment, such as a sewing machine or even a cow.  They must be able to put 20% down on this and get two guarantors of the loan.  The big carrot for them is that at the end of the loan repayment period, they get to keep this asset.  Otherwise, it is treated as a lease.  SEBA can first take back the asset, and if its value doesn’t cover the value of the loan, they can go after the guarantor’s money.  Fortunately, this rarely happens as repayment rates are 99%.  

In short, the developing world is a tough place - those who can scrap and save and have an entreprenuerial spark deserve an opportunity, and can get it through innovative financing and training models.  The rest are charity cases - let's not call them anything else.  The right model for them is to give their children a fighting chance to be upwardly mobile.  

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