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.

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