Teaching (and learning) about Microfinance

July 16, 2009

I spent today witnessing and giving two trainings to VEF beneficiaries who were interested in expanding their businesses by taking micro-loans. I did not know much about the microfinance industry aside from a general understanding of the goals of MFIs (Microfinance Institutions) and some of the gaps in microfinance that organizations like VEF focus on filling. I learned much more today about the specifics of how the process works, and I left with a newfound understanding of who microfinance can help and in what ways – and also a realization that there are many more people than I thought that microfinance cannot help.

The first thing I learned about MFIs is that every one of them requires the recipients to be in groups of at least five but usually 15-30 people. That way, if one person or group of people is unable to repay a loan installment, the other members of the larger group will each pay more to cover that defaulting group. Secondly, I learned about interest rates that MFIs charge (usually between 15-20% per year, or 6-10% for 6 months). And, thirdly, I learned about the difference between the loan products that MFIs offer as opposed to those that banks offer (banks require the recipient to have had an account there for some time, they only give loans to individuals, and they require more substantial collateral than MFIs because there is only one recipient of the loan).

The main thing that I and the other presenters stressed in our talks was that taking a loan is risky! It requires long-term planning, good organizational and business skills, and individual responsibility (in the case of MFIs, it also requires trust among group members). Furthermore, we made a point that businesses should seriously consider taking a loan only if that loan could substantially boost profitability. If the benefits of the loan are small or unclear, it is probably not worth the risk. Finally, the whole system of applying for and receiving a loan, either through an MFI or a bank, can be complicated and hard to understand. This is especially true for first time loan recipients. We stressed that you should never be afraid to ask questions and never feel obligated to take a loan even if a loan officer is aggressively trying to get you to take one.

In addition to the process, the other complicated part of taking a loan for a first time recipient is figuring out how to budget accordingly. Deciphering how loans work is not particularly straightforward for someone who is being introduced to the idea of loans for the first time. Even I had some trouble figuring out how exactly it worked in practice – I don’t think I was ever taught in school about how to go about evaluating the costs, benefits, and structure of a business loan. We spent the majority of both presentations working through hypothetical situations in which a business took a loan and had to calculate repayment amounts and how much extra profit the loan would enable them to earn.

I ended the day knowing much more than I did when I started, but I also firmly believe that microfinance is not for everyone and is not the panacea for global poverty that some people claim it is. I will add on an additional post about the group of people that fall in between those that are eligible to benefit from organizations like VEF and those who benefit from microfinance. That middle group is stuck, as far as I can see, without many viable options for expanding or starting businesses – but more on them next post.