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Micro-Finance: Lessons from the Field 2


Micro-Finance: Lessons from the Field 2

Loans can pose problems without inside information.

In an earlier post, I wrote about unintended consequences that emerged from a bank’s well-meaning efforts to provide micro-loans to help people succeed in starting small businesses. “Outsider-ness” is a problem on many levels — and often right from the start.

Consider the case of Trom, Ghana, when a loan officer visited to explore the level of interest in micro-loans. A meeting with village elders identified the need for training and education, and regular Friday meetings were held. The traditional way to spread such news is for a designated “messenger” to go through the village with a drum or a bell, calling people to a meeting. In this case, word spread well beyond the village that a micro-loan program was beginning in Trom; lots of people showed up from other areas. This posed several problems.

A first order of business was to put people in groups using the Grameen Bank model of “social networks” as an alternative form of collateral. Prospective loan recipients were not risking any money, but rather their reputation within their social network. All would have to pay before anyone in the group could get a second-round loan. 

As the bank put popcorn sellers in one group and all the palm oil sellers in another, it turned out that people in the same group didn’t necessarily know each other. But the bank assumed they did. After all, wasn’t everyone from this same small village — population 350? A full year passed before bank officials learned (from me) that the messenger had gone to several surrounding villages to announce the meeting. The problem: Reaching outside the village meant that no social collateral was at stake. Normally, if people from the same village fail to repay their loan, they risk their reputation. But among perfect strangers, loan recipients did not mind taking the risk.

Outsider-ness creates problems for the outsider, too. The money for the micro-loans came from a Ghanaian lawyer who lives outside Trom but wanted to invest in the economic health of her own country. However, for all kinds of reasons, people in the village perceived the lawyer as an outsider and labeled the loans as “white man’s money.” That is, a perceived “gift” from the outside that did not have to be repaid.

In small villages such as Trom, the loss of face is a serious matter that outsiders often don’t understand. Mary — a popcorn maker — was not able to repay her loan. She was pressured by her partners, who attempted to shame her into repayment. One weekend, Mary and her two daughters left the village “to visit family,” and were never heard from again. To this day, no one in the village knows where Mary went. But they do know that she left in shame, unable to repay her debt. And honor matters in Ghanaian culture.

I knew Mary. I knew her children. I bought popcorn from her, just as it was coming off the fire. It was heart-breaking to realize that the small micro-loan program intended to help her had instead led to uprooting her family. I was part of bringing the micro-loan bank to Trom and feel some personal responsibility for the unintended consequences. Each time I go to Trom, I ask about Mary. But no one has heard from her.

The lesson learned: The more you can involve insiders in setting up the loan program, the better. It’s common practice that “he who pays the piper calls the tune” and so understandable that banks want some say in the loan program’s structure. But outsiders are not positioned to make the best decisions about the best use of their money.  

Leave it to the village to set up its own micro-loan program. We are working on that right now in one new community. More later on our progress in creating this micro-loan program with the Solid Rock Association and the people it serves.

Diane Kellogg is associate professor of management at Bentley University.


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