By “microfinance companies” I’m thinking of the ones that’ll lend $100 to a group of 5 women in a poor village in Malawi, at an interest rate usually around 1-3% a month, to help them buy equipment for their cooking business, because they’re considered too risky an investment to get that credit from a local bank at a reasonable rate. Or $200 to a farmer in India, or whatever it may be. I’ve seen a number of these companies - Five Talents and Kiva for instance - that tout the fact they have very high repayments rates: Five Talents says 85-100% of its loans are repaid, Kiva says 99%.
How do they get so many people to repay their loans? The websites don’t explain what the enforcement mechanism is. In places like Dubai there’s a debtors’ prison for anyone who defaults on a loan, but I can’t imagine these companies are getting their beneficiaries sent to prison. Here in the west the main enforcement mechanisms are: annoying people with phone calls and letters; damaging their credit rating; and taking legal action, for instance for bankruptcy. But again I can’t imagine those things would work in places where telephones, postal services, credit ratings and civil court systems either aren’t prevalent or don’t exist at all.
They do say they they require the beneficiaries of the loans to post quite a high cash deposit as collateral, often 30% of the loan, and that they’re regularly visited by members of the organisations to check up on their business and how it’s doing. They also say they perform due diligence in advance, getting the beneficiaries to pitch their business idea and limiting the size of the loans for first-timers.
But I can’t see how that would be enough. So what else do they do? Are they sending big guys round to confiscate oxen? Breaking fingers? Or are those measures I just mentioned (deposits, personal oversight, due diligence) really enough to ensure repayment rates of 90%+?
My understanding is that they don’t really have to enforce repayment very much. This is a combination of a few things: they only give loans in amounts that the borrower is reasonably likely to be able to repay, and, perhaps more importantly, in many of the regions where these micro-loans are most often issued, the local culture places an extremely high premium on repayment of debts.
So, for many of the borrowers, failing to repay a debt despite being able to would be almost unthinkable.
The Wikipedia article on Grameen Bank says that each borrower is a member of a group of five borrowers. Each borrower is individually responsible for her own debt, but the bank won’t extend further credit to the group if one member defaults. So the rest of the group either uses peer pressure to get the defaulter to pay up, or the other members of the group cover the shortfall.
you don’t have to look at third-world banking. in cases wherein one cannot obtain some form of security, one has to ascertain three things: identity, capacity to pay, and location. identity is easy in a developed country. capacity to pay may be verified through one’s payslip, regular deposits, or employment contract. location is verified through one’s valid ID, billing addresses, employment certificate, known affiliations.
for loans that have some form of security/guaranty, it’s easier. in the case of a salary loan, you collect directly form the borrower’s regular salary. your only risk is if the borrower resigns and his separation benefits cannot cover the balance. that’s why with salary loans, borrowing limits are important.
That’s a good point, I noted that they often lend to “co-operatives” like that and utilize the peer pressure to encourage repayments, but I hadn’t considered that the organisation can then refuse to make further loans to any member of a co-operative that has defaulted on a previous loan. That effectively establishes a sort of mini ‘credit rating’ for all the members of the group.
But is that really enough? I’m presuming that ‘credit rating’ wouldn’t be a universal black mark on a widely-accessible database like it is here in the west, it would be limited to one microfinance company. If a group gets $500 off a microfinance company, then defaults on it and can’t get another loan with that company, it’s not exactly the end of the world. They get to keep the money and they’re basically in the same position credit-wise as they were before they took out the loan. Is that really enough to produce 99% repayment rates?
It just strikes me that the “guys on the ground” for the microfinance company must be doing more than simply “checking up” on people who are late with their repayments.
You seem to be asking, “What kinds of enforcement actions could possibly be feasible in such a culture?”
But when I saw the thread title, my question was, “What kinds of enforcement actions could possibly be profitable when the whole loan is just $200 to begin with?”
In other words, If the loan is so small, just about any sort of action would wipe out most or all of the profit on the loan. Therefore, I conclude that there is something about the loan and/or the culture which causes enforcement to be mostly unnecessary.
The loan is small because dollars generally go a lot further in third world countries. $200 could buy a significant amount of equipment, and by the same token you can give a local guy $1 to go and confiscate some cattle for you.
I also don’t buy this idea that it’s “built in” to these cultures that they should always repay loans. I’m guessing you don’t even know what cultures we’re talking about. We’re actually talking about almost every culture. Those two organisations I mentioned above alone, Kiva and Five Talents, are active in hundreds of places. South America, Africa, Asia, Caribbean, southeast asia, the Middle East. Does Mexico have a culture of 100% loan repayments in a way the US does not? Haiti? Peru? Guatemala? I don’t think so. And aside from anything else, humans are humans. If you’re giving loans to thousands of high-risk people across the world, with no real enforcement mechanism, what’s the chances that 99% of them are going to repay?
I just find it hard to believe there’s not some incentive for repayment beyond “our company won’t lend to you again if you don’t”.
our bank president visited japan once. he said some of the small lenders there are very profitable and also experience close to 100% with non-doc, non-col loans. some of them are/were fronts for tatooed gentlemen and though they’re perfectly legal, retain some of the old flavor. defaulted borrowers are humiliated, threatened, exposed to their neighborhoods and even to their kids’ schools. those with no assets are advised to sell a kidney.
I’ve read Yunus book about the Grameen bank, and he explains the system (I don’t know how Kiva and other companies follow that principle, but I assume they use similar because it was sucessful).
First, the bank doesn’t come to the people, the people come to the bank: they see that a bank circle in the neighbouring village has made people more sucessful, or their relatives tell them about it. So the curious go and talk to an established circle of members, and learn the requirements: go out and get 5 interested members and form your own circle. Then you contact the bank, and an employee comes along to your circle, explains all the rules (Grameen requires courses for health, contraception, no bride price, literacy etc.). Once everybody agrees to the rules and signs the contract, the classes start and bookkeeping.
The first credit will not be 500$, more like 5$ *. The circle decides on who needs it most and what to to with it - so a business idea must exist, and it must look reasonable.
The circle meets every week for strategy, classes, bookkeeping and also savings and repayments. (The bank can put in a clause that the members have to save up a certain amount first before gettin a loan to show dedication and financial responsibility).
If you look at it negativly, it’s peer pressure; positivly, it’s feedback and social networking.
Also, most members of a circle are women; many experiences in 3rd world countries show that women think of their hungry children at home and save the money, where men tend to give in to despair and spend the money on alcohol or drugs or gambling. So this also contributes to higher rates of payback and savings.
Another point is that in these villages, everyones survival depends on the community. If you are outcast because you default and damage the society, you have no chance, except leaving the village, which is in itself a drastic step.
The people don’t think of defaulting because usually Grameen gives them the chance to become productive and self-sustaining, with a steady business income or improved future for their children. They know they will never get a chance like this again elsewhere.
And the above mentioned entrance barriers - that people have to form the circle first, and agree to a contract, instead of the bank going around handing out loans to anybody vertical and breathing - means that the few poor people who don’t have the motivation or power to run a business don’t apply.
It’s not true that most poor people are lazy or bad with money; most poor people are kept down through a combination of circumstances outside their power to change. The few people who conform to the stereotype of lazy or wastes money on frivioulous stuff just get all the headlines to confirm the clichees and for reasons of political agenda.
And the reason for the high default rates in the West is greed of the banks, not the creditors. Banks can do very thorough background checks for credits, or give a loan to anybody upright and breathing (as was the case during the
Oh, and yes, the Grameen bank has very high costs because the employees have to visit all these villages every week to collect payments, do the bookkeeping until the women have caught up with their literacy classes, etc. It requires more effort than sitting in a AC controlled office waiting for your customers to come to you; but Yunus only hires people who are willing to go to their customers. Still, the rates are about 20 to 30 %, which would otherwise be cut-throat, but covers the services provided. Since these loans are investments in the future, and not new car type of loans, they are still a better choice than the usual cutthroat credit of 100% and more, and one default, and the only cow is gone, destroying all income.
(Some microfinance is run by Churches, like Brot für die Welt, which do the service stuff for free to help; an existing group structure makes things easier.)
Microfinance is so sucessful that scammers are starting to take advantage of this, pressing loans to people without the preparation and thus ruining them. So Grameen warns people to only use serious groups.
5$ may not sound much, but the example that started Yunus on his ideas was that of a woman weaving baskets or hats and renting the tools and buying the material each morning from the supplier, and getting the difference at the rest of the day was far too low despite working all day. When Yunus asked her how much she would need to break this cycle, she replied “5$” to buy the tools once and for all, and buy a small supply of material as start.
That got Yunus thinking, on how many more people he could help with small loans.
… as was the case during the mortgage bubble. At first, banks required a down payment, a security and a steady income; as the pressure to approve loans increased, the requirements were relaxed until people with shaky income got loans, or the loans were bigger than the security.
In “Moneychangers”, Haileys novel about the banking industry in the 70s, he talks about loan approval officers, and how the computer system sends up a red flag for an officer with too many loans defaulting, but also for an officer with too few defaults - this means that be being too cautions, the officer is letting opportunities slip through.
Two aspects: outfits like Brot für die Welt and Kiva do this to help people, not to make money. It’s part of an overall strategy: first, you teach classes on how to sew or handicraft or whatever as small income (very often working from home so to watch the children and face less resistance from the men) to women. Then, once they are all proficient, a small loan lets the women buy a sewing machine or the contents of a small store or whatever. This then serves to generate income for the whole family, and 10 or more people aren’t starving anymore, and don’t depend on handouts. (There’s also a psychological part there: by loaning the money to buy the tools, the people feel they own this and responsible, whereas when some mighty whitey hands them stuff without asking them first they might be careless about it. Also, the repayment can be used to repeat things in the next village, as Kiva does).
Outfits like Grameen are run for profit*, and thus charge 20 to 30% interest; but they compete with the cut-throats who charge 100% and more and cheat illiterate people. The cutthroats lend to people either with a security - a cow, which is then gone - or by selling a child into slavery (yes, this still happens). People without security don’t get loans from them; but from Grameen if they show they are trustworthy.
There is more work to managing 100 debtors with small sums than one normal customer with a big sum, as the normal banks are doing, but Grameen covers this with dedicated employees and their interest rate, and a lot of voluntary work. The bank employee riding around on his bicycle collecting the payments = paid for; the circle members teaching each other writing and book-keeping = not paid for.
Their motivation is to help people without suffering a loss. Profit is not the first motivation, but not neglected, either.
So you’re also saying the enforcement mechanisms are due diligence (only lending to people in certain situations and who meet certain requirements) and the fact that the local cultures put a high value on repaying debts. And if it’s true that those factors alone are enough to bring repayments rates up to 85-100% that would be good to hear.
I’m just a bit sceptical. You mention that “employees have to visit all these villages every week to collect payments”. What’s their manner when someone can’t make the payment? “Oh don’t worry, just see if you can get it together next time, have a good day”? I just have a feeling they must be a little sterner than that to produce such high repayment rates. For instance I’ve seen reports that Grameen Bank has trapped unsuccessful entrepreneurs into cycles of debt and interest repayments, and put such pressure on them to repay that some have committed suicide.
No, I didn’t say that “the local culture puts a high value on repaying debts” at all. As pointed out by yourself, microfinance works in many different cultures in different countries.
It’s that the circles guarantee for each other, and have a time of bonding and learning financial management, plus the fact that despite what some political agendas tell you, poor people are not a bad credit risk in general.
Well what more do you want than reports of “It’s working” from at least three different organisations (Grameen, Kiva, Brot für die Welt) and several smaller outfits? Do you think all those groups are lying and inflating their figures, or do you think in reality, they go around breaking legs?
You could read Yunus book yourself, or read a report from Kiva. Or you can wait for one of those “investigative reporters” working for a sub-par media outfit that believes that every charity has a dark secret that must be exposed and goes looking until he finds something that can be blown out of proportion to smear the charity, and then be confirmed in your sceptiscm. *
The bank employees who collect the repayments will ask why the circle doesn’t pay: was there a problem with collecting the dues? A larger problem outside the scope of the circle? When there was a severe drought with famine or a pest that killed the livestock on the farms, the Grameen bank decided to waive the loans, because once the cows were dead, the families could no longer sell their milk or lend them for farming work (ploughing) so they had no way to generate income to pay back the loans. That’s one of the reasons that they don’t have a 100% rate, but a 90% rate.
In some cases, the husband takes the money from the woman and squanders it, but then usually the whole circle visits the husband and harasses them until they give in.
When a woman falls ill, she obviously can’t work and thus can’t produce income. When one of the family members falls ill, the money is often diverted to pay the doctor (3rd world countries don’t have UHC). In these cases, the loan is extended or re-written.
Are you sure that was about Grameen bank and not scamsters declaring themselves microfinance, but being loan sharks? Because I’ve heard several reports of Indian farmers being heavily in debt (because of GM grain that was pushed onto them, but is too expensive and problems) and committing suicide over that; as well as loansharks being pissed off that their business was going down because of successful microfinance becoming scamers.
*I’m not against good investigative reporting. But some individuals and certain media are out to smear anything that looks charitable for reasons of their own; they believe that the true mark of a good investigative journalist is pissing off everybody, which is of course wrong; good investigative journalism means thoroughness to facts and backgrounds and fairness to all sides. We certainly need watchdogs; and all big organisations will have problem spots, which need to be uncovered and addressed - but the existence of a few problem spots doesn’t invalidate the rest of the good work done.
I don’t think it’s really anything cultural. I think it mostly hinges on the fact that most people, in any culture, are fundamentally decent, and will pay back debts if they can. And these sorts of outfits generally go to some lengths to ensure that their customers will have the ability to pay it back, by teaching them useful skills.
it’s western finance and economic gurus who (after the sub-prime) pronounced that credit culture in protestant and developed countries are far more lax than in catholic or third world countries. financial crashes breed a whole bunch of experts.
I would like to see figures for that, esp. given the “Catholic/Protestant” divide. I’d expect the opposite - protestants with hard work ethics paying back (here, the Swabians are protestant and known for being diligent savers), while Catholics tend to be laxer, of the attitude “If I do bad things, I can still go to confession and get forgiven”.
On the other hand, some strain like Calvinism focus on predetermination and replace good work ethic with “Some people are chosen pets, therefore, God will shower good things on them, which is why it’s okay that the rich are rich, and the poor, well it’s their own fault that God hates them”. I can see why people of this culture would have a worse payback rate.
Under the current circumstances, constanze, being a German, might be reading too much into “culture” when it comes to debt. Culture as an influence is greatly overstated when it comes to finance.
Americans are not capable of comprehending the kind of financial environment that people outside of America live under. In America it is a common sentiment that the availability of credit is somehow a bad thing. It is difficult to overstate how ludicrous this sounds to anyone outside the Anglo-Saxon world.
There’s a much more prosaic explanation for the relative success of micro finance in developing countries. Poor people in India or Bangladesh for all intents and purposes have no access to any credit whatsoever, no matter how good their security or their ability to pay. This is because in virtually all developing countries, the financial system is closed - banks are either owned by the state outright or operate as tools of the state in practice. What credit exists in the economy is channeled through the state owned banks into infrastructure projects, if you are lucky enough to be blessed with an unusually benevolent government, or more commonly, straight into the pockets of the politically connected elite who do not worry about “credit ratings” or other such nonsense. In most poor countries even the infrastructure usually ends up being a boatload of Russian/Chinese weapons, keeping the peace is important and all. Any kind of investment from the outside is obviously a plot by foreign imperialists to usurp the dear leader, so are of course either banned outright, or subject to enough government control as to be effectively banned.
There are no banks from which an entrepreneur can borrow $5 to buy a goat, Warren Buffet himself would not be able to borrow $5 to buy a goat if he had a bound and illuminated business plan straight from the offices of Mckinsey & Co . The financial system in the rest of the world simply doesn’t work that way.
So in a situation where the common person has no access to any credit whatsoever, it is hardly surprising that the entry into the market of a “bank”, which kinda sorta gets in by labeling itself as a “non-profit” instead of a foreign imperialist bank, can reap substantial returns and have a high rate of repayment simply because if you are the only source of credit in a market that previously had no access to any, it’s not so difficult for you to pick out the most creditworthy and viable projects to finance.
The recent news about micro financiers running into trouble is simply the inevitable endgame of a sudden burst of credit growth - as the most viable borrowers and projects are snapped up, later market entrants start picking up borrowers of decreasing quality. The rising tide/all boats effect lasts for a while, until eventually it all falls in on itself. Really, the American homeowner and the Indian goatherd are not so different.
Except that I said it’s not culture several times.
Actually my impression was that using credit for consumer goods and deferring payment until much much later is seen as normal in the US culture, but seen as bad in Germany for example (Germans are much more savers than loaners).
I don’t know where you get this view from, but it sounds extremely exaggerated and one-sided to me, considering that the “non-Anglo-saxon world” is not only all of Europe, but also that even the 3rd world and the emerging countries encompass a very wide and different cultures and way of organizing things. I highly doubt that such a general assessment is true for all or even a majority.
If you read Yunus book, he states clearly that other banks, not-state-owned existed in Bangladesh, but simply didn’t want the effort involved in making small loans.
Except that private loan-sharks exist, simply because people need to borrow money for emergencies, and these usually cause ruin.
And creditworthiness for a goatherder is similar to Warren Buffet because both have assets that can be used against a loan; the difference in microfinance is giving loans to people without assets, based on their skills and with the safety net of the circles.
Also, Grameen did not label itself as non-profit, it was a bank intended to break even from the start, while Kiva and Brot für die Welt didn’t label themselves non-profit in order to break into the market, instead, they are non-profit and as part of a whole umbrella of projects to develop people into self-sustaining, one of the instruments they offer is microfinance. So please don’t misrepresent things here.
Again, that is not the real cause and development you’re portraying here. There is not a bubble in microfinance like the US housing bubble; instead the existing loan sharks see that their business is going elsewhere and that serious microfinance is having a success, so loansharks and scamsters dress up in order to scam of the working business.