Saturday, April 26, 2008

Greg Squires - Dominican Republic Trip Part 5

What follows is a summary of some final thoughts on microfinance after going to the Dominican Republic a few weeks ago. It is the last of our part 5 series on our trip...

One of the main reasons microfinance organizations exist is because capital is not accessible to the world's poor. Banking systems and lending institutions that are common in the developed world are not common in the developing world. Most credit that is available to people carries ridiculous interest rates. The 5/6 rule is one way this plays out - a loan shark gives $5 to someone in the morning, and requires re-payment of $6 by night. Though it doesn't sound ridiculous at first, this works out to 6000% effective annual interest.

3 Key pieces to a MFI
1. Systems/technologies - software to run the program, loan packages, operating procedures
2. People - finding the right people can be a limiting factor for a Christian MFI, if a requirement for employment is a fruitful walk with Jesus. Other 'Christian' MFIs have compromised this by hiring non-Christians to do the work, placing physical needs as a higher priority than the spiritual. This isn't necessarily wrong, but if you are trying to reach people with the Gospel, you have to have people in place who will communicate it. Employing believers is the way to do so. The success of a Christian MFI is very dependent upon the loan advisors' fruitful walk with Jesus. If they are living out their faith and growing in the Lord, there will be spiritual impact of the program. Otherwise, there is only physical transformation.
3. Capital - a large portfolio of funds to be used to give loans

MFI Organizational setup
loan recipient - receives the loan
loan officer/advisor - meets with 45 loan recipients in a bi-monthly bank meeting, conducts training on health, business management, familial issues, etc.... collects repayments from clients, makes sure that the loan is being spent on developing the business and not on frivolous things, can share the Gospel in context of these relationships, this position often filled by a local.
loan supervisor - sometimes a local, sometimes a foreigner, oversees the loan advisers.
branch manager - oversees the branch
country director - leads the country's banking systems and multiple branches.

Loan recipients typically receive $50-$500 for spending on their small business. This is typically paid back in 4-6 months. After performing well on their first loan, clients often take a second or third loan. Interest rates on these loans are given at market rate --1-4 percent per month, or 15-40 percent annual interest rate, which is much better than they could get otherwise. The interest is used to run the program, just as a bank would use it to pay its employees and fund the operation.

MFI Repayment Rates
We've often heard that microfinance repayment rates are upwards of 95-99 percent. This number is a group repayment rate. This means that as clients receive loans and cannot pay them back for some reason, the group pays that money back, which is called "social collateral". This high repayment rate is not an individual repayment rate, which is an important distinction to make.

Local Learning
One thing I realized while on this trip is that local entrepreneurs know their business best. The best person to ask about how to sell wheelbarrows in a small rural town of a third world country is the guy who has been doing it for a living for 20 years! He's the expert. He has to think about marketing his products, hiring sales people, hiring laborers to help build the wheelbarrows, etc. I had sort of an "A-ha" moment when I realized that entrepreneurs like these guys face the same business management issues that we do in our businesses. Many of the principles are the same; they are just in a different culture and economy. Also, before receiving a loan, a client goes through 5 sessions to learn about how to run a small business... (simple accounting principles and price calculations, hiring/managing employees, work ethic, etc.)


CoachZ said...

Hey Greg,
Thanks for the lessons in Microfinance. Very interesting stuff!

So is the Gospel spread by the actual loan officer/advisor that meets with the loan recipients?

How is this done? Through their life, giving spiritual advice when asked for, or actually doing a Bible Study during the session...or all three?

btw - your desk is too clean ;)

Greg Squires said...

The loan officer's job is to interact with the loan recipients, to receive loan payments and to make sure that the clients are using the money correctly - spending it on things to grow their business. They meet with their entire "bank" once every two weeks, where loan payments are made, and there is a short training either on health, cultural, or business management topics. The rest of the time, the loan officer will personally visit the loan recipients' businesses, interact with them, and in the context of that relationship the Gospel can be shared. Make sense?

-- Greg

CoachZ said...

Yep...sounds like the loan officer is the key.