Tag Archives: microcredit

Does microcredit work for the poor?

photo of disbursement

DHF's program partner Multicredit keeps track of every new loan disbursement by taking a photo of the actual handover of the money. This helps promote transparency.

Does microcredit work for the poor?

Sometimes.

During my summer internship with DiscoverHope Fund (DHF) in Peru, I have learned a lot about what makes the difference between a microcredit model that works for the poor and one that doesn’t.

First, the mission of the microfinance institution matters. Whether it is for-profit or non-profit, the ultimate objective of the organization must be to help the poor. For example, at DHF, the mission is to “provide an opportunity for women in poverty to create their own prosperity through microcredit, entrepreneurship and training.”

teaching bookkeeping

The village bank promoter teaches the leadership board of a village bank how to keep track of their loan repayments.

Furthermore, the methods the organization employs to meet its goals must match its mission. For example, setting interest rates requires striking a delicate balance between achieving financial sustainability for the loaning institution and keeping interest rates low enough so as not to burden the poor. Our program partner Multicredit offers a monthly interest rate of 2.25%, which is much higher than rates you would find in the U.S., yet much lower than rates in Peru and easily manageable for our loan recipients to repay.

A new loan recipient examines her personalized booklet from Multicredit which she will use to kee track of her loan repayments.

A new loan recipient examines her personalized booklet from Multicredit which she will use to kee track of her loan repayments.

Second, you need an effective screening process for potential loan recipients. At DHF, we make sure women have a clear business plan for how they will use their loan before giving them money. We also try to give women the amount of women they need to expand their business, not the amount they want. For example, during the screening process for one of our new village banks, we interviewed a candidate who couldn’t even calculate her business costs. She told us she sold blankets for $10, but then a moment later told us she spent $12 buying yarn. Giving a loan to a woman who doesn’t understand her own business would be a disservice and an added burden for the poor.

Third, transparency is crucial. Our program partner Multicredit gives us detailed reports of all their monthly activities, and has effective bookkeeping methods for tracking loan disbursement and repayment. We meet on a regular basis to keep lines of communication open. Multicredit even teaches the women how to keep track of their loan repayment themselves with personalized booklets.

Finally, microloans should be complemented with training and other support. This is what DHF calls the “microcredit plus” model. Not only do we provide women with loans, but we also encourage them to have savings accounts, we provide them with business assessment services, and we coordinate classes like sewing,

DHF's newest village bank, Las Azucenas, celebrates their loan disbursement.

DHF's newest village bank, Las Azucenas, celebrates their loan disbursement.

knitting, cooking, and computer literacy that will expand their marketable skills.

This is by no means an in-depth analysis of the subject (if you’re interested, you can find plenty of articles online that analyze whether microcredit really helps the poor). This is just a reflection on some of the features of DHF’s approach to microcredit that I think make it an effective model for truly serving the poor.

Who wants to develop?

The president, secretary and treasurer of one of the village banks as they collect the final quota to repay their group loan

The president, secretary and treasurer of one of the village banks as they collect the final quota to repay their group loan

This past week two of our village banks completed their first loan cycle (a five-month loan cycle in which they repay about $140 per person with 2.25% monthly interest). After each cycle, the women decide whether they want to continue being a part of a village bank and whether they want to proceed to the next loan cycle, when they can receive a larger loan.

If the women want to continue, we evaluate them individually and as a bank to see if they qualify to move on to the next cycle. We not only evaluate them based on whether they have repaid their loan (we have had 100% repayment so far, so that is not an issue), but also whether they are fully participating in the mission of our project. They need to comply with monthly savings quotas (the women themselves decide how much they should save each month); they need to demonstrate their commitment to our business assessment program by completing homework assignments (practical tasks like naming their business and improving their customer service); and they need to participate in our community classes to show they are interested in furthering their personal development.

It’s hard to decide how much we should expect from each woman. After all, they are balancing a lot of responsibilities like running their own small business and caring for their families.

Is it fair to keep working with women who have a perfect repayment rate, but do not demonstrate interest in the other aspects of our mission? Our low interest rate (2.25% monthly) is very appealing; much lower than the interest rate they could get on individual loans here. But our funding is limited, and we want to target our loans at women who don’t have access to conventional credit; who have small businesses and are committed to expanding them; and who are interested in their personal development.

This is a tough decision, as we have to decide in the coming weeks whether one of our banks – who seem to be working with us just to take advantage of our low interest rates, and have rejected the opportunities for development we have given them – deserves to continue. While it would be difficult to let a group of women go, it would also open up space for new women to create a village bank… hopefully ones who are truly interested in challenging themselves to develop as women, businesspeople, mothers, and individuals.

Efficiency isn’t everything

I’ve been at my internship for almost a month now, so a lot has been going on. I attend village bank formation and repayment meetings to learn how the microcredit process works. I work with our program partner, Multicredit, to design business chats for women that are both informative and engaging (and they have to be engaging, especially when many women have a child on their back demanding their attention).

Local women build towers with gum drops and toothpicks in order to practice teamwork and communication

I help with all the little details that go into offering classes to loan recipients, like buying massive amounts of yarn and hauling it through the streets for knitting classes. On Saturdays, I help run leadership workshops (one of my favorite activities was teaching them how to make skyscrapers out of marshmellows, gum drops and toothpicks in order to practice teamwork and communication…and then, bonus, we got to eat them afterward).

One interesting conflict I’ve encountered in my work so far is the clash between efficiency and mission. Coming into the internship with my U.S. mindset, I tend to want to get things done the fastest and most efficient way. But sometimes that is not the best way to support DiscoverHope’s ultimate mission, which is to support the multifaceted development of women in poverty.

For example, following our business chats, we assign women some sort of homework…something practical like giving their business a name to differentiate themselves from their competitors, or designing propaganda materials like flyers or business cards. But because women have so many responsibilities (running their small business, caring for their household, attending community meetings, etc.) it is difficult for them to find the time to complete extra homework on top of everything else.

My coworkers and I have brainstormed two different strategies to encourage women to do their homework. One is to take advantage of the repayment meetings that are already scheduled for their communal banks and spend half an hour going over the homework and completing it as a group. The other is to periodically visit each woman in her house and give her individual support as she completes her assignments. Since there are over 75 loan recipients to date, the first method certainly sounds more efficient.

But that is not all there is to the decision. We also have to consider Cajamarcan culture. Here individual attention and a personalized invitation go a long way (before every leadership workshop we drop off personalized invitations, door-to-door, asking women to attend…and it works). We also learn a lot more about the women and their obstacles in their home and business by taking the time to visit them. Furthermore, experience with healthy household campaigns in the past proved that the campaigns were most successful when accompanied by follow-up visits to individual homes. So we have decided to use the home visit strategy and see how it works out.

I notice this same conflict on a daily level in a less obvious sense. At the Hope House (the community center in Cajamarca) we work looong days. We spend a lot of the day having conversations with women who pop into the office about their thoughts and needs, about how they think classes are going, and in short, taking the time to hear them out…no matter how long that takes.

So, for example, we could have an efficient 15 minute meeting with our literacy teacher to discuss how to better evaluate students’ progress…or…we could have a 1 hour and  15 minute meeting in which we listen to the teacher and learn about her other difficulties: how some students don’t attend class on a regular basis; how an indigenous woman won’t wear her glasses because she’s ashamed; or how the students are getting headaches from working in a dark room in their classmate’s house, but they are afraid to move to a different meeting place because they don’t want to offend their host.

The subleties and intimate knowledge of what women are thinking is very important; more important running a fast-paced, “efficient” operation. Because the core mission of DiscoverHope is to support women’s journey of personal and entrepreneurial development, no matter how long that journey may be.