Friday, February 2, 2007

History of Micro Finance – ACCION

Founded in 1961 by Joseph Blatchford, Accion is the oldest Micro Finance organization in the Western Hemisphere. Joseph was a young man who wanted to help Latin American Urban poor by implementing various infrastructure projects. He worked on projects like installing electricity and sewer lines, starting training and nutrition programs, and building schools and community centers.

According to former ACCION director Terry Holcombe, in the 1970s the Accion team made this observation. "We began to sense that a school or a water system didn't necessarily have long-term impact. We were simply reorganizing the resources that a community already had within it, rather than increasing their resources."

They also observed two phenomena: First, Most Urban Poor worked at Micro enterprises making products like belts or selling food items. Second, most credit they obtained came from loan sharks at rates as high as 10% per day.

In 1973 Accion began to experiment in small loans at reasonable interest rates to people in Latin America. This experiment was successful and their program grew In the 1980s they began to tap into commercial credit and established Bancosol in Bolivia. Bancosol was the first commercial bank dedicated to lending to micro enterprises.

Today Accion works in Latin America, Africa, Central Asia and the US. In 2005 Accion partners served more than 1.88 million active borrowers. Since 1996 these partners have loaned $9.4 billion to more than 3.97 million people.

Accion provides excellent opportunities to participate in Micro Finance as a lender/donor. You can make contributions as they are a non-profit. Also, you can make loans to Accion and earn a little interest.

You can learn more about Accion and its history at their web site.


Jon said...

What's being done to connect the small entrepreneurs into a larger "system", of the type that you brought up in another thread?

I am speaking of clearly definable systems, like the "food system" or the "agricultural system."

One could argue that micro loans will only yield their maximum value inasmuch as they enable entrepreneurs to put energy into a larger system, thereby increasing the sustainability of the whole.

Don't get me wrong--I know there is value in enabling a small business owner to generate a small income. But when does a micro loan become part of a larger development strategy, one that addresses systemic issues?

Do micro lending institutions strategically target certain types of loans within a region to jumpstart a larger market. For example, making 1,000 micro loans to 1,000 small farmers to get into cotton production.

Jonathan said...


I don't understand why microloans should be part of a larger "development strategy". I think focusing on umbrella strategies often runs the risk of glossing over problems specific to individual communities.

For this very reason, microfinance has succeeded in aleviating poverty where programs targeting the global systematic issues have failed. By empowering and capitalizing the world's poor, microfinance fosters bottom up change rather than imposing top down reform.

Bill Easterly, a former World Bank economist, discusses problems with "development strategies" at length in his book, "The White Man's Burden". One recurring theme in his work is that often the poor know better than arrogant western donor agencies how to address their plight. I won't misrepresent his conclusions here; I suggest you read his book.


Jon said...


Easterly's book is on my list, but I haven't gone out and bought it yet.

I share the same allergic reaction to macro-economic development strategies. "Global" has very little place in "sustainable development." Hence my use of the words "region" and "local."

When I speak of systems, I am thinking of systems that encompass only whatever can be appropriately defined as "local." Might be one day's walk from a local market. Might be one day's drive behind the iron buffalo to a grain storage facility or coop. Might be one day's truck drive to a grain processing plant.

For example, almost all the beans you find in South Sudanese markets come from Uganda. Meaning, the South Sudanese farmers (who can grow anything) are not connected to those markets--if they were, then their beans could be sold locally, and they would have a new cash crop.

As I said, there's value in helping an individual producer. But I'm wondering what kinds of regional strategies might be used to open up new markets for those individual producers.

John said...

Hi Jon and Jonathan. Sorry I took so long to respond. I’ve been mulling this one over.
I agree with you Jonathan. I believe in the bottom up rather than the top down approach. It think the Easterly book comes out in paperback this month. Haven’t read it yet either.
Jonathan, do you have a blog we can check out?
In response to Jon’s first post first let me distinguish between System and system. When I refer to systemic issues I am thinking big S System. That is the political/economic system in general. The “rules” and limitations for economic interaction in a society. A food or agricultural system is a small s system that is governed by the rules and limitations of the over all System.
Next - there is a food and ag system already in place in societies found in South Sudan and Lao etc. And after a fashion they work. (Although I suspect they work better in Laos than Sudan but you would be a better judge of that.)
The participants in those systems could probably tell you the exact thing you should do to improve their system. That is, if you asked a farmer in Laos, “What would you do to improve your operation?” He would probably have a pretty good idea of what it would be and he would probably be right. That is, a person in the system is probably the best person to figure out how to improve the system.
If an outsider wants to attempt to improve the existing system by introducing a new crop or production method or process, they should try to sell it to the people in the system. If the new crop or process will really provide an immediate improvement to the system the locals are probably in the best position to decide this. And if they decide the product in question, a new crop or process, will improve their system they (or at least some of them) will be willing to buy it and move the system forward. Unless there is something in the System that prevents them. For example collectivism preventing the more intrepid locals from trying something new or lack of land rights so that people don’t feel confident that they will benefit from any improvements to the their land or lack of credit to buy the product or process in question.
There is a guy in Ecuador who runs a fish retail outfit. He knew he needed a cooler to keep his stock fresh longer. He got a micro loan and bought the cooler. He improved his business and made an incremental improvement to the Ecuadorian food delivery system. They didn’t need an outsider to figure that out for them.
From my reading micro finance programs focused on a system change devised by an aid agency have not been successful.
That being said I think the potential exists for “wholesale” micro credit in support of improvement or expansion to the ag system. Something like that had to exist in rural U. S. in the 1850s. I have not done the research on this but I presume the early settlers had access to credit. And they probably had less experience farming than the people in Sudan or Laos.
For it to work the farmers have to believe that the proposed product or process will make a tangible economic benefit and they have to be held accountable. The accountability thing is a big deal. If they know you can’t or won’t hold them accountable they’ll take what ever money you give them and invest it how ever you want. It’s free. Even if they know it’s not an efficient solution its better than nothing. This is where another System problem comes in. If the person you are lending to does not own the land it’s hard to hold them accountable. That is, reposes the land if they don’t pay their loan back. To pull off successful ag loans you must address the accountability issue. That’s the only way that you will know if the locals really believe in the solution.
Another issue is that credit is typically new for folks in the developed world and you have to teach them how it works. This is supported by high contact with the loan officer and frequent payments to reinforce the importance of repayment. This works well with a fish retailer. They get the loan one day. The next day they buy the cooler. The next day they stock it. And the next day they start making payments with the extra cash flow from the sales of the additional stock.
With an ag loan you have to wait 3 or 4 months before you can expect repayment. This has got to be a barrier for reinforcing the way credit works.
I’m sure these are all solvable problems. Perhaps someone has already solved them I just don’t know about it or perhaps we are in need of an innovative breakthrough. I’m going to do some checking around on this.
One thing I am convinced of. If you are trying to introduce a new crop or process the locals should be so convinced it will work they are willing to bet their livelihood on it. That is what American farmers do every time they get a loan to buy seed for the next year. If the locals are not willing to make this bet there is probably a reason for it. They probably know something you don’t.
But to your question about fitting into a development strategy I guess I believe in Adam Smith’s invisible hand and if there are not big System impediments a society will grow its economy organically and evolutionarily.

Jon said...

Here's in interesting article about grain storage in Uganda. Grain storage is an important step in setting up an agricultural system, as is credit for farmers.

In this story, the grain from the last harvest is used as collateral for the next season's planting. And buyers pay a premium later for grain stored for a few months.

That's the way it's supposed to work.

John said...

Holy Mackerel. I like this idea. I think it is great and innovative and common sense all at once.
Let’s start a business setting these up and once they are profitable sell them to a local coop. That’s what this reminds me of, the coops around here. At least originally they were cooperatively owned by the farmers to among other things store their grain.
At the turn of the previous century a similar problem existed in the US. There are pictures of the streets of Chicago full of wagons full of corn right after harvest. The bottom would fall out of the market. That’s when they came up with futures contracts. So, the farmers could lock in prices.
It would be interesting to know what the Ugandans are paying for the opportunity to store their grain. Are the market price differences such that it covers the cost of both storage and interest on the loan?

So, why do you think the Sudanese are not tapping into the local bean market? What is your theory?

Jon said...

Agreed to all of the above. It's a great idea, with some improvement possible on the execution.

From the picture it looks like the grain is put into bags before going into storage, rather than in a bin. It would be better in bins, probably. Especially if they could manage to dry it before putting it into the bin. It would store for up to a year if the moisture was controlled.

There are places in the U.S. where corn is still stored on the cobb in corn cribs. Corn left on the cobb stores really--it dries by itself with no energy input required, because there's better air circulation. I've wanted to see if that would work in tropical climates to bring the moisture down cost-effectively (free).

There are quite a few post-harvest issues to address wherever subsistence farming is trying to grow up into a larger system. Mainly with transport and storage.

Anyway, I love the idea of introducing a simple "futures" game to them. It motivates them to take good care of their grain (store it well, maintaining the quality), removes the disincentive to produce as much as possible (by flattening out the peaks and valley in the market prices), forces them to plan their annual cash flow, and generally rewards them for being good farmers.

In Sudan, many farming communities haven't returned to their homes. The ones who have simply haven't had time to settle into their farming (only 2 years since the peace agreement was signed) much less diversify their crops. On top of the recent civil war, these seem to be the barriers to growing cash crops:

>poor "feeder roads", making it difficult for farmers to bring crops to the local market
>poor post-harvest tools and methods, resulting in high losses on grains that require careful handling
>difficulty accumulating enough in a single place to take the crops to larger markets
>main roads not open 12 months a year

There are a variety of other factors besides these. The main problem has the inability to connect the farmers to the markets--missing the value added processing step (drying, storing, milling, blending, canning, drying, etc.)


John said...

I noticed the same thing regarding the storage system. Not the most efficient in the world.
I used to work on shelling the corn stored in the corn cribs you described. Back breaking work.
What to do next in Sudan? Yikes. They have a lot of problems. Where do you even begin? It seems like the first thing is to get everybody farming again. After that, I don’t know what the next best action is?
I’ve been thinking about the issues you had in Laos. (Seems like a simpler situation.) It sounds like you have drying and storage problems there as well.
Also, as I recall you donated seed to the farmers who then turned around and sold the harvest to the Chinese. So, you did not have any beans to process in your plant. To avoid this problem perhaps it would work to loan them money to buy the seed. Then before they can buy their next batch of seed they would have to pay back the loan from the original batch. This might function as an incentive to pay back the loan. So they could get another cash crop the next season. Then you wouldn’t have to care as much about who they sold the crop to and you wouldn’t be out the cost of the seed. Of course, it still doesn’t solve the problem of not having grain for your processing plant if they sell to the Chinese.
Doesn’t address the storage and drying issues either.
If you were going to sell the Laotians seed each year, or the Sudanese for that matter. How much are you talking per year? How much would you have to loan them per farmer and in total for a given season to support your Laotian operation?

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