Happy Entrepreneurs and Harsh Accusations: Conversations about Microfinance
By Drew Loizeaux, KF11 Uganda
Conversations about microfinance are a near daily occurrence in the life of a Kiva Fellow. Sometimes they are with happy recipients of loans and other times they are with skeptics who question its value or impact. No matter what the topic or tone, I always learn something new and usually leave with an even stronger commitment to microfinance than before. In hopes to relay this experience, I want to share with you a recent sampling of some of the conversations I have found myself in.
Last week, I was in the field doing a borrower verification of HOFOKAM clients, where I met and spoke with 10 of the clients funded on Kiva. Two of them went out of their way to tell me repeatedly that the loan they received was a huge help and that they hoped and prayed that they could continue receiving them in the future. One of the two had recently been robbed of all of her clothes that she sells and said that if she was not able to take out another loan she didn’t know if she could restart her business. It is great, when as a Kiva Fellow, you get the chance to see and hear the real and tangible stories of people working hard and succeeding in spite of extremely difficult circumstances.
Later in the week I had two other conversations about microfinance, one with a Ugandan and one with a foreigner, that were a bit more critical. I was talking to a Belgian who works on water projects in the area and the topic of interest rates was brought up. When I told him that the average interest rate where I worked was about 27% he gave a sharp look of disapproval. He expressed surprise at such high rates and wondered if microfinance was really helping. I agreed that yes, the high interest rates can be troubling and I think there are some MFIs out there who could, and do, take advantage of people that this was not one of them. I explained that after factoring in cost of administering the loans and the high rate of return on such small investments for the borrowers, 27% isn’t nearly as bad as it sounds.
His question did hit on a big issue in microfinance right now though. How can we make sure that people are not charged rates that will hurt, rather than help them? The fact of the matter is that in many places that MFIs operate there often times is very little regulation or consumer protection. What the answer to that is I don’t know. Some people have suggested capping the amount of interest over cost of capital that can be charged, but that creates a problem where rural clients that are expensive to reach will be left out completely. Despite the lack of consensus, I think Kiva, by publishing interest rates of its partners on the site, helps bring this issue to light and pushes the industry as a whole to better serve its clients.
The conversation with Ronnie, the Ugandan, started after I said I involved with microfinance and he replied, half kidding, “So you are one of those guys ripping us all off?” I was very interested why that was his first response to microfinance and asked him why he had said this. He mentioned that some people can use loans poorly and in those cases microfinance can be harmful rather than helpful. I agreed with that point and our conversation went on for a while. We talked extensively on the strengths and weaknesses of microfinance and he had a great understanding of them all. In the end, we agreed on just about everything and I finally asked him the question that I am constantly trying to answer myself: given that we both understand that microfinance, like any financial product, can be used well or poorly and that those who use it poorly can sometimes end up in a real hard situation, do you think microfinance is a good thing? He thought about it for a while and said that given the choice of microfinance existing or not existing, he would choose to keep it as those who do use it wisely would be hurt by its elimination.
It is a tough question, but I think he is right and for me this gets to the heart of why microfinance is a good thing. We all would like there to be some way to make everyone’s life better, but that just isn’t how the world works. Sometimes you succeed and sometimes you fail, but to not have the opportunity to do either is really the worst possible situation.
If you are interested in hearing professionally produced conversations about microfinance and micro-businesses, I recently listened to two fantastic podcasts done by Planet Money on the subject. The first one is about how in Jamaica, access to credit for the poor is directly affected by the borrowing of its government. The second one is about a woman in Haiti, who had all over belongings destroyed in the earthquake but with the help of some donations was able to increase her income by ten fold.