Happy Entrepreneurs and Harsh Accusations: Conversations about Microfinance

8 July 2010 at 04:50 8 comments

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.

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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.

Entry filed under: KF11 (Kiva Fellows 11th Class), Uganda. Tags: , , , , , , .

A letter from Dorice to the Kiva Community Embracing Ignorance: One Fellow’s Struggle to Understand Bolivia

8 Comments

  • […] rates on the fellows blog, some good examples out of many with relevant commentary being here and here). Kiva as a non for profit partner institution does not set or influence that rate, and therefore […]

  • […] rates on the fellows blog, some good examples out of many with relevant commentary being here and here). Kiva as a non for profit partner institution does not set or influence that rate, and therefore […]

  • 3. Magdalena  |  2 August 2010 at 14:43

    Hi Drew, great blog. I have come across the same types of reactions, especially to the interest rate which for my MFI in the DR is at 48.5%. I will check out the podcasts. Thanks and enjoy the rest of your placement.I have two weeks left :(.

  • 4. Fehmeen | Microfinance Hub  |  13 July 2010 at 12:22

    Most of the negative publicity microfinance receives is because one party or the other (MFI or borrower) fails to perform their role in accordance with the traditional/basic microfinance model. For instance, sometimes clients pursue risky activities (moral hazard) and sometimes, MFIs take on too much risk, or let greed guide their actions. In either case, microfinance isn’t to blame, it’s the people who practice it. Thanks for posting this…

  • 5. Audrey  |  8 July 2010 at 10:16

    We’ve worked with a variety of microfinance organizations (including Kiva partners in Latin America) as photographers and have gotten into similar conversations with locals and family/friends back home about microfinance, interest rates and whether it really works to alleviate poverty. I’ve seen some incredible “success” microfinance stories, but I’ve also seen a variety of other stories where perhaps people’s living standard have improved a bit, but nothing drastic. But, there are other knock-on effects of microfinance from the fact that it invests in people and empowers them. I fall into the category that it’s better to have access to microfinance than not.

    When I first heard of some of the interest rates charged by MFIs I was also shocked, but then when I saw the time and resources needed for the loan officers to go out to the borrowers, that some MFIs offer training/capacity building, and also that local bank rates were similarly high, then it seemed a lot more reasonable. But, I’ve also seen high rates charged when an MFI seems to have spent money on fancy buildings and cars (not a Kiva partner) and that frustrates me. It would be useful to have a transparent system to see how the money earned from interest is being used.

  • 6. Alexis  |  8 July 2010 at 08:37

    Great post. I have actually had similar conversations about microfinance here in Bolivia. Many have been somewhat critical. The two criticisms I hear most often are the interest rate and that microfinance encourages poor people to go into debt. These are difficult to address and, like your conversations, I do the best I can to hear their points of view and address their concerns. For both institutions I work with, the interest rate is between 20-25%. Yes, there are valid criticisms of microfinance but I too come away from these conversations even more committed to the idea of microfinance.

  • 7. waywardcats  |  8 July 2010 at 07:42

    Excellent post Drew, thank you for this.

    “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?”

    For me, this is a very key question. Certainly there is a potential for misuse and poor decisions are common. However, empowerment is more important to me. I believe that everyone has a right to a safety net and the right to fail. Giving people more options and more tools makes it more likely that they can find a way to succeed.

  • 8. katimayfield  |  8 July 2010 at 06:23

    Are you working on CERISE at your MFI? There is a question that asks about the understanding the MFI clients have about the interest rates they’re being charged . I am intrigued by this, because it’s not necessarily easy to lay out the logic behind the 27%, but important! Does your MFI have a standardized way to present this to their clients?


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