The Pros and Cons of Microfinance – A View From The Field (Part 3)
By Nick Hamilton, KF13 Haiti and Dominican Republic, KF14 Colombia
This is the final installment of a three-part article on ‘The Pros and Cons of Microfinance – A View From The Field.’ The first concentrated on the pros of microfinance and the second on the cons. This third part will describe what I deem to be the optimum conditions for successful microfinance.
The cons described in Part 2 of this article may come across as quite negative, but at Interactuar (in Antioquia, Colombia – my second Kiva Fellowship) I saw many being countered and microfinance working particularly effectively. If any microfinance critic says that microfinance does not work across the board I would challenge them to look at this MFI. Interactuar proves that it does, and with great success. However, in my opinion, it’s only able to achieve this because (compared to, say, Haiti) the environment in which it works is relatively developed.
Interactuar works on the assumption that the microloan by itself is often not enough (in terms of starting a new business). Loans need to be complimented by training and, if necessary later down the line, consultancy. Entrepreneurs looking to set up a new business may also need guidance on how to get their venture off the ground. If clients are only interested in securing a loan (and not in the range of support services) they need to prove that their business is or will be sustainable. The level of due diligence is high and, importantly, not everyone who applies for a loan will have their wish granted.
Loan officers can afford to take their time assessing a business because loan amounts are higher and getting to the client is easy. While loans start as low as $150 Interactuar also provides loans of up to $20,000 and is not afraid to offer its clients larger loans if they have demonstrated that they pay back well and that their business is running successfully. Medellín (the capital of the state of Antioquia, where Interactuar works) has both an efficient bus system and a high-end metro service. As a result, loan officers do not need to ride into the sticks on a motorbike for 2 hours in order to meet potential clients. Loan officers at Interactuar don’t even need to attend repayment meetings. The client can walk into any local bank and repays the money by transfer. It’s incredibly efficient and means that Interactuar only needs to loan to individuals as opposed to groups.
The training services really are exceptional. Interactuar has its own kitchens for cooking courses, its own hair salons for beauty courses, its own bar for coffee and cocktail courses, a mock hotel room for hospitality courses and mannequins and materials for teaching tailoring. Consultancy services are exceptionally thorough and specialised consultants (mostly external) travel to the clients’ businesses to provide hours of assistance at a very affordable price. Interactuar even has its own brand design centre and a laboratory where it analyses clients’ products to ensure that they meet legal standards and are ready to go to market.
What does this add up to? Well, Interactuar’s clients boast an enormous variety of businesses, many of which are growing and many of which now employ other people in the community. A few weeks ago I visited Interactuar’s office in Yarumal, a hilly town 2 hours north of Medellín. In a single day I visited clients (only in Yarumal) that ran; an astroturf football centre; a graphic design business; an ice cream shop; an equestrian business; a hair salon; a recycling plant; a small coffee factory; a plastic bag manufacturing business; an electronics repair store and an ‘arepa’ (Colombian speciality) cafeteria. Yarumal is only a small town and Interactuar’s influence there has been profound. Not surprisingly, they’re not short of business. What this also shows is that there’s a lot to be said for concentrating your efforts as an MFI to a small(ish) area. Interactuar employs almost 300 people yet only currently operates in the state of Antioquia. It has not tried to cast its net on a national level.
Interactuar’s example shows me three things. First, don’t just loan to anyone. Second, training and ongoing assistance are essential. Third, the best breeding ground for successful microfinance is not in the third world but in areas where the economy and infrastructure are at least relatively stable.
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So will I keep lending to borrowers on kiva.org? Absolutely. I do think microfinance works much better in some conditions than others. I’ll also take greater care in choosing who I lend to. But I also believe it’s still worth making a loan to borrowers in third world countries, if only for the positive reasons that I outlined in Part 1 of this article. Here, microfinance may have its flaws, but it often allows borrowers to manage their situations better, even if it won’t offer them or their communities a permanent solution to poverty relief.
Finally, I’d like to thank Kiva for giving me this fantastic opportunity to view microfinance in the field. It’s been fascinating.
Nick has now come to the end of his final placement as a Kiva Fellow. He’s enjoyed it thoroughly and now has to find his way back into ‘normal life’.
Want to see what a Kiva Fellow gets up to on a daily basis? Watch this video.