Let’s Buy a Micro Finance Institute

I’d like to get 10 people who are all interested in investing $11,000 each to buy a partial interest in a Micro Finance Institution. $100,000 to actually invest and $10,000 for administration and any operating costs. Anybody interested?

The Operational Side of Micro Finance

I thought this was interesting. This individual helps to run a community in Uganda that engages in small manufacturing and Micro Finance. It gives a feel for what types of cultural issues must be over come to make Micro Loans work.

Interview with Grace from LiA

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.

https://www.cia.gov/cia/publications/factbook/geos/bl.html

http://www.mixmarket.org/

http://www.bigstep.com/company/small_business_facts.jhtml

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.

History of Micro Finance – Grameen Bank

Mohammed Yunis, the 2006 winner of the Nobel Peace Prize, as a young economics professor in the mid 70s was the Head of the Rural Economics Program at the University of Chittagong in Bangladesh. During that time the country was going through a famine. He found this quite frustrating as after all of his education he had no tools that enabled him to help solve the situation.

He went out and made a list of all the very poor people he knew. He had 42 people on his list and after talking to them he determined that for all of them put together they needed a total of $27 to improve their situation. So he loaned them each the money they needed out of his own pocket. They each paid the money back and improved their life.

One person was a lady who made bamboo chairs. She did not have the few cents needed to buy the materials to make her chairs each day. So she borrowed the money from a money lender who required that she sell her chairs to him at a drastic discount to the market. This kept her in a poverty trap of never being able earn enough money to buy her own materials and sell her chairs at market price and thus earn a much more livable wage. Dr. Yunis loaned her the money to buy the materials herself and from the profits she made by selling her chairs at the market price she was able to pay back her loan and break out of the poverty trap.

This was the beginning of GRAMEEN BANK which was founded by Dr. Yunis.

Based on the information I have the bank has had a total of 6.61 million borrowers 97 per cent of which are women. The bank has 2,226 branches. It works in 71,371 villages with a total staff of 18,795. The amount of loans disbursed by Grameen Bank, since inception, is US$ 5.72 billion. $ 5.07 billion has been repaid. Currently they have outstanding loans of $ 457.52 million

You can get more information about Grameen Bank at http://www.grameen-info.org/

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.

www.accion.org

How Micro Finance Works

In my previous post I introduced the concept of Micro Credit or lending. I'd like to expand on that here.

There are many models for Micro Lending around the world. However, probably the most common is group lending. Poor entrepreneurs in developing countries don’t have collateral to put against a loan. So, instead Micro Finance Institutions organize their borrowers into small groups of 5 or ten borrowers. The borrowers in the group help to guarantee each others loans. If one of the borrowers does not pay back their part of the loan, the entire group will not be able to get another loan even if the rest pay theirs back. This puts peer pressure on the entire group to be responsible for paying back their loan.

Typically Micro Finance organizations do not set up an office where people come and talk to the loan officer about getting loans. The loan officers go out into the field and meet the borrowers in group meetings in their homes. They may have weekly or biweekly meetings with each group where they discuss business plans and collect payments or savings deposits. As this would indicate, payments are made regularly and often. Not monthly as is typical in the US.

Many Micro Finance Institutions offer business training, savings as indicated above, as well as money transfer products, and some offer insurance products.

All these products are great but the product that fuels the development opportunity is access to credit for the poor. These loans give small entrepreneurs the opportunity to buy a cow or goat to provide milk which they can sell in the market. Or to provide materials for making a product like belts or furniture. Or to purchase inventory for their small shops.

More on Systemic Need

I believe that all peoples and societies everywhere have the capacity to excel and thrive when it comes to generating economic value. Stated negatively I don’t believe that there are some groups of people who lack individuals with the innate talents needed to generate wealth as society as a whole. That is, under developed countries have just as many people per capita with the talents and aptitudes needed do drive economic success as developed countries.

For example some of the human aptitudes for affecting economic growth are leadership, the ability to organize, analyzing, working well with people, and being competitive. There are of course many others. If you took a random selection of say 1,000 people from the U. S., another set of 1,000 from Laos, another from Nigeria, and another from El Salvador you would find that roughly the same percentage of people in each group has strong leadership aptitude, and roughly the same percentage of people in each group has an aptitude for organizational skills, and so forth.

This thought just reiterates that for most people in underdeveloped countries the problem is not with the individuals in the society but rather how the society is organized. It is not set up to leverage the talents innate in the given society. If we want to help people in these situations we don’t need to send them aid (the solution for acute aid). Rather, it makes more sense to assist in fixing the system. So, the society does a better job of leveraging the innate aggregate talents of its society.

One might propose many approaches to changing the system from military coups and interventions to install new governments to various macro economic policy changes. I would like to suggest one a little less radical but empowering. In developed countries most people have easy access to credit for things like home mortgages, school loans, and the financing of business ventures. Traditionally in most developing countries poor people have do not have this same access to credit and when they do it is at exorbitant interest rates from loan sharks. Micro Credit is a means to provide very poor people with small loans they can use to expand their small business ventures and improve their lives.

Human Economic Need

Human economic need (by which I mean the lack of the ability to successfully feed, house, and clothe oneself and those one loves and is responsible for and to advance their wealth) can be categorized into three types. These categories are acute need, personal need, and systemic need.

Acute Need:

This is human need that is born out of some type of catastrophe. A flood has wiped away a person or family’s or community’s home(s) and their means of producing food. Under normal circumstances they get along just fine but something has happened that in the short term puts them at a distinct disadvantage. People in this situation need help. They need to have others come to their aid on a temporary basis to provide them with food, water, shelter and clothing until they can get back on their feet.

Personal Need:

Not put too delicately, this is need that arises because of a gap in individual competency. An individual may be blind or have a mental handicap which inhibits their ability to generate economic value and provide for their needs. As an example, in America many homeless have mental illness which is the main reason for their poverty. This need is best addressed by family support and special accommodations and programs supported by their society.

Systemic need:

This need occurs when the way in which a society organizes itself does not promote but rather discourages economic prosperity. Examples of this may be a land ruled by an extreme communist regime or a corrupt dictator or government that siphons off resources for the elite. People can not provide for their own needs or improve their lot because their societal system prevents them from doing so. There is nothing wrong with the individuals that prevent their success. There is no calamity that has wrecked their system of commerce. They are just stuck in a system that makes it difficult if not impossible to escape poverty.