Wednesday, March 28, 2007

Cash Flows

Here is an attempt to illustrate how a single loan from a micro finance institution to a micro entrepreneur can have a pervasive and positive impact on a community.

Let’s say that the Good News Micro Finance Institute loans $400 to Oloput who has a business making chairs. Oloput takes $200 and buys wood for making chairs from Akish. Akish takes $50 of this to make a partial loan payment back to Good News, pays his two workers Barok and Kofi $25 each, spends $25 on tuition to the Golden Apples school for his daughters to go to school and pays Oloput $25 for a chair. So he can sit in his house and feel like a big shot because he has 2 workers he can boss around and can send his kids to school and afford a nice chair. Barok and Kofi each use their wages to buy groceries from Marci who runs a small grocery store. Marci take the $50 and makes a loan payment of $25 to Good News. She also spends $25 on tuition to Golden Apples to send her daughters to school. Golden Apples takes the money they receive and pay the teacher Rondi her $25 salary and pay Marci $25 for groceries for school lunches. Marci takes this $25 and deposits it in her savings account at Good News.

Now back to Oloput. He took the other $200 and bought a miter saw from Ray a hardware and tool distributor. Ray pays $100 of this to Black and Decker to restock the miter saw and pays $50 to Good News as a loan payment and $50 as a savings deposit. Black and Decker uses its $100 to pay back a loan from a commercial bank which in turn uses half of that to make a loan to Good News. So they have more money to lend to micro entrepreneurs.

So in a few days the one $400 loan to Oloput generated the following cash inflows:

Oloput: $425 in loan and cash for chair.

Akish: $200 proceeds from sale of wood.

Barok: $25 wages

Kofi: $25 wages

Marci: $75 in grocery sales

Golden Apples: $50 in tuition payments.

Rondi: $25 in teacher salary.

Ray: $200 for sale of miter saw.

Black and Decker: $100 for sale of miter saw.

Comercial Bank: $100 in loan payment.

Good News: $275 in loan payments, commercial loans, and deposits.

For a total of $1,500 in cash inflows off of one loan.

Tuesday, March 6, 2007

Random Thought

I believe some day we will arrive at something call I call economic equilibrium. A time when pretty much every one every where will have an opportunity to participate in a robust and dynamic economy similar to the U. S. or Japan, or Sweden. A time when there will not be whole countries where just about everyone is dirt poor.

I hope it happens in our life time. But it raises a question. Today us rich folks in the rich countries benefit from the very poor folks who make our clothes for a few dollars a day. What will happen when we are participating in the more advanced and successful economic system? Who will make the clothes? So, everyone can have lots of inexpensive and fashionable clothes?

Here is a wild theory. We will genetically engineer primates. So, they have the dexterity and intelligence to make the clothes and be willing to do it for very little compensation. Bioclothingmachines.