Tuesday, April 10, 2007

Tiny loans can make a big difference.

Here are some interesting facts and conclusions regarding Micro Finance as it operates in Bolivia.

Bolivia has a population of a little less than 9 million. In 2005 around 480,000 Bolivians received micro loans. That means that about 5% of the population is taking advantage of micro credit.

It is interesting to note that there are 25.5 million small businesses in America. That would imply that 8.5% of Americans own their own business. Given the nature of a developing economy the potential for small businesses in Bolivia would be at least 10%. Perhaps higher. That means the Bolivia has the potential to at least double its current Micro Credit focused on small business. Not to mention opportunities for mortgages etc.

Total Micro Loan values in Bolivia for 2005 were $550 million. Total estimate Gross Domestic Product was $9.9 billion. That is, Micro loans make up 5.56% of Bolivia GDP. 12.4% of the GDP is made up of investment. (Compare this to the US which is 16.6%.) Assuming that the Micro Loans constitute a form of business investment, almost half of Bolivia’s investment is made up of micro loans.

Between 2004 and 2005 the growth of Micro Finance loans in Bolivia equated to 1.7% of GDP. With an estimated growth total rate of 3.3% Micro Loans are driving half of Bolivia’s economic growth.

Additionally, this is growth that benefits the average person on the street. Unlike growth that comes from things like price increases of natural resources which typically benefit a few people in the society who control those resources.

The statistics for these notes come from the following Web Sites.





Aaron said...

Ode magazine, which I subscribe to, talks about this in just about every month.

This last month they had a little blurb about Dannon/Danone partnering up with Yunus. They have made the decision to build a yogurt factory in Bangladesh and will buy their milk from local farmers that will get micro-credit loans to pay for cows and the yogurt will be sold in a 20 mile radius by salespeople who take out these loans to pay for the yogurt. The income should cover 1600 people, theoretically. If this works Danone will build 50 more plants.

Is this a good thing do you think? Big businesses getting involved like this?

John said...

Hi Aaron. I think it is great. In fact, I think it is the goal. Those things that are scalable are most sustainable. And ultimately if Microfinace is to reach the 2 billion + people who live on $2s a day there will need to be operations of large scale to support this.

Almost everyone in the US has a car because a smart guy figured out how to take an ad hoc process for building cars and turn it into a repeatable process that could scale and be repeated cheaply.

The same thing has and needs to continue to happen in micro finance. So, lots of people can get access to credit. I don’t know whether this will happen as a result of small organizations starting microfinance operations and growing into large ones like Grameen bank or whether it will be existing big companies getting into the business in a big way. Either way I think for Micro Finance to work it will need to scale into something big. And that means either big business or big government. I favor business because if a business goes bad it is easier for the clients to throw them over and go to a competitor. If a government goes bad and you want to get rid of it there are usually guns involved unless of course it is a democracy.

Visa and Walmart are both getting into this. For Visa I think it is more a charity/foundation thing. Walmart wants to make money off of this. Which is fine I think. If a company can consistently make money off of micro loans year over year it probably means that the people they are lending money to are using those loans to fuel efficient, effective, and beneficial growth for themselves and their community.



Whether Dannon’s program will work I don’t know. I think it is always dicey when Westerners come in and try to engineer an economy in a developing area. They may or may not understand the culture and economic drivers. I think programs where the locals decide where to invest have a better chance because they understand the local economy better than anyone and should have a better feel for what will work and won’t work. That being said I think it would be great if Dannon succeeded.

I think Dannon’s model is interesting because it is very similar to what Jon is doing with SALT. They might be able to learn from each other.

Does any of this make sense? What do you think? Do you think it is good or bad?

Ultimately I see organizations loaning money to the very poor growing with there clients. As the clients continue to improve their lives and economic well being their banking needs will grow. As the MFIs grow with their clients growing needs they will likely begin to look more and more like a traditional bank.