Does microcredit work for the poor?
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.”
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.
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,
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.