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Micro-Finance: Lessons from the Field 1
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Mohammed Yunis came up with a good idea: Give small loans to people who don’t have access to capital. A high percentage of the world’s population lives at a subsistence level. They spend all they make on food, and have none left for an “investment” that might make their microbusiness more profitable. If you could buy more bananas in the first place, your profit would be higher. If you could buy a cart, you could bring more bananas back to your village to sell than you’ve been able to carry yourself. The Grameen Bank proved Yunis’ concept: the poor paid back their loans.
The idea of giving micro-loans was embraced by both well-meaning individuals and banks. However, because the costs of training and collection proved to be so high, the interest rates were high. Interest rates in Ghana (where I manage Bentley’s partnerships with several NGOs) ) are rarely less than 24 percent. I’ve seen them as high as 36 percent. However, the creditors use smaller numbers when offering loans to inexperienced people: A 24 percent loan is described as 2 percent, meaning 2 percent per month. Even a 36 percent loan is “only 3 percent.” To me this fiscal sleight-of-hand is outrageous — but given that the faster you pay back a loan, the less interest you actually pay, maybe there’s a good reason for quoting rates by the month instead of per annum. Unfortunately, these would-be entrepreneurs have no alternatives .
Even more problematic than language games is the issue of “outsider-ness” that is inevitable when you have bankers who don’t know the first thing about village life, but they do know “business.”
Mabel’s story makes the point. Mabel had a successful business, selling charcoal in the Ghanaian village of Trom. She used the wood from pruned or fallen trees and made the charcoal herself, right in the village. I takes a lot of skill to burn in stages and at just the right temperature so you end up with charcoal and not just ashes. She had the time and energy to make more charcoal, but she could only sell so much in Trom, so her profitability was limited.
A micro-loan program came to her village and offered loans at 25 percent to people who would attend a training session. Mabel happily attended, and she had a solid plan for growing her business. She wanted to buy a cart to allow her to transport her charcoal to other nearby villages, thus increasing her customer base.
She was the first in the village to repay her loan. Mabel’s friends in the village sold palm oil and popcorn. They had more difficulty paying back their loans, though they eventually did.
However, when the time came for a second round of loans, the bank announced that it was going to be funding only charcoal businesses. Mabel’s friends made the obvious choice: they decided to sell charcoal. They “sort of knew” how to make it, as they had been helping Mabel for years. What happens next should have been predicted.
The price of charcoal went down. Now there were several sellers in the village of Trom. Mabel was forced to travel farther and farther to sell her charcoal, but (no surprise) the price went down in those villages, too. More sellers equalled lower prices. This consequence brought to us by the bankers who think they “know business.”
Mabel accepted the next loan, intended for charcoal sellers only and she did the intelligent thing: she changed businesses entirely and started selling kenke (a fermented corn dish) from a stand just outside her front door. She knew the families in the village loved kenke, but it takes a long time to make. If she made it for them, they would buy it from her. After all, they needed the time to figure out how to make charcoal.
I am constantly in awe of Mabel’s inventiveness. Necessity does foster invention, and perhaps it also foils intervention from outside.
The story goes on. Stay tuned for the sequel.
Diane Kellogg is associate professor of management at Bentley University