They were village women in braids, highland hats and tiny pumps. Some even had babies slung to their backs. But they all made their way about the makeshift soccer pitch at pace, kicking around a half-deflated ball. We — of hiking shoes, branded outdoor clothing and little to weigh us down – were getting our butts kicked.
We had just come from a mountaintop meeting between borrowers and loan officers from Espoir, an Ecuadoran microfinance field partner of Kiva. The borrowers' homes were tucked in the hills of southern Ecuador in a little village, the road to which was often washed out and impassable.
But this day was a dry one and the women invited us all – the loan officers, a Kiva Fellow and us, the photographers – to see their village. What we didn’t expect was that they would beat the breath out of us on a makeshift soccer pitch perched along rolling fields at over 10,000 feet.
For us, this was another glimpse of the human side of the developing world – and into a growing practice called microfinance.
Note: We field a lot of questions about microfinance and what it's all about. Although we do not consider ourselves experts, we have spent a considerable amount of time in the field working with local microfinance institutions (MFIs), photographing borrowers and listening to their stories. This article is an attempt to answer some of those questions.
Microfinance: An FAQ from our Experience in the Field
What Is Microfinance?
Our hand-crafted definition: microfinance (or microcredit) refers to the practice of lending small amounts of money – usually for small business development — to moderate or low income individuals in developing countries who otherwise do not have access to capital.
In many countries, people who are not already wealthy or have collateral find capital very difficult to obtain through the formal banking sector. Traditionally, poorer people had to rely on loan sharks if they needed credit; many of these loan sharks charged exceptionally high interest rates and often resorted to violence to recover their money. We met families in rural West Bengal, India stripped of their land because of predatory loan sharks who took advantage of their desperate circumstances.
Who gets the money? What do they do with it?
Microloans can go to some rather clever people who otherwise would have a very difficult time starting or growing their small businesses because of their lack of access to capital. Sometimes, it’s a case of not having enough inventory to run a business, for others, it’s not having the proper equipment to start the business at all.
From India to Bolivia and a few places in between, we’ve met recipients who run from mothers-of-9 making homemade ice cream in the Peruvian highlands to Nicaraguan grandmothers running corner stores, to a young man running a weaving loom from his one-room house to a woman making cakes in the slums of Guatemala City to a group of Indian women growing starter seedlings in the hills of Northern West Bengal.
Why encourage people to have a small businesses? Why don’t they just get a job?
The more we travel, the more we realize that having a 9-to-5 job is something that many people in the developing world do not have the luxury of embracing or rejecting. The only option for many people to support their family is a small business.
Microfinance provides capital — and sometimes training — to help people grow these businesses from something more than a subsistence living.
Why is microfinance saturated with stories of women borrowers? Where are the men?
Sorry guys, but statistics show that women are more likely to pay back their loans and more likely to use the additional income they receive on their children (school, food, etc.).
Additionally, we’ve seen some pretty incredible “knock on” effects from microfinance programs that have increased women’s role in society because they are earning as much money as their husbands — and they have a support network of other women.
How much money are we talking about here?
As the name suggests, the amount of capital involved is anywhere from small to micro. In more traditional models, we’ve seen loans ranging from $66 every 4 months to as much as $1200 every 6 months and more. Loan amounts depend on the local circumstances and needs of borrowers.
Is microfinance better than traditional aid?
Certain circumstances – natural disaster relief in developing countries – call almost exclusively for traditional aid.
However, if we had a nickel for every artifact of failed large-scale aid we’ve encountered on our travels, we’d be rich. Empty buildings, chairs emblazoned with branded stickers, marketing materials collecting dust, and signs long since blown over and ignored litter the “we-hoped-to-do-good” landscape of the developing world we’ve seen.
And we haven’t even visited Africa yet where we hear this is even more evident.
Perhaps the director of CIDRE, a Kiva partner in Bolivia, said it best. When we asked Alvarro why CIDRE had changed from being a grants based organization to microfinance in the last decade, he explained:
We used to give money as grants, but the communities never were invested in the projects and nothing really happened. Once we began loaning the money, the communities organized themselves, took ownership and the projects were really successful.
Why are the interest rates on microloans so high?
It is not unusual to see interest rates on microloans run as high as 20-30% and even higher. Microloans carry high interest rates to cover the costs associated with their administration (imagine loan officers spending hours each week on foot or in a vehicle to reach their clients). Also, MFIs incur additional expenses when they offer personal and professional skill-building classes and seminars to loan recipients.
Can microfinance solve all the world’s poverty problems?
There’s no more effective way to kill a good idea than to view it as a panacea, be-all end-all solution to the world’s problems. This is the panacea trap. And microfinance – with the help of its most ardent supporters and detractors – sometimes falls into it.
If you do some reading on microfinance, you’ll find that the jury is very much still out as to its effectiveness in alleviating poverty. But alleviating poverty is a lot to ask of one tool.
Microfinance’s biggest challenge is to be properly understood as a tool, rather than as a solution to all the plagues of the developing world and the dispossessed. It’s about loans rather than grants, the amounts are small – but when they are applied in groups, they can be pooled to allow small communities to satisfy their needs on a larger scale.
But perhaps most importantly, microfinance is literally about investing in people. Borrowers understand this. Successfully repaid loans help build and reinforce self-esteem, independence, pride and entrepreneurship in borrowers and communities.
Do you have other questions about microfinance? Do you support microfinance?