Adventures in Microfinance

October 27th, 2007

As I type this I see that MS Word doesn’t recognize the word microfinance – something which will change very shortly the way things are going.  I’m sure it won’t be long before everyone is at least familiar with the concept of Microfinance and the complexities of micro-lending. 

I just spent three days in Microfinance immersion – 2 solid days visiting rural towns to see the impact that small scale lending to the traditionally “credit un-worthy” has had on the livelihoods and quality of living of thousands of people to date.

Microfinancing is the process of lending money to people with no collateral.  I was first introduced to this fascinating concept from Nobel Prize winner Mohammad Yunnus’ book – Banker to the Poor.  He started the Grameen banking movement in Bangladesh as a solution to poverty.  Of course it is not in itself a full solution, but it is pretty damn impressive.  I’ve been obsessed with this business model ever since I read the book, and I finally got to see a small sliver of the work with my own eyes.  I’m know I have barely seen anything yet, but I am so impressed with what I did see.

Over the past few decades several organizations have been puzzling with the issues of poverty eradication.  There are over 250 million working poor in India.  Because they have no collateral- a home, a vehicle, jewelry, etc. that they can use as collateral, they are unable to access any of the benefits that those of us in middle class sectors completely take for granted.  Forget about swiping a credit card and paying for something in installments.  Daily wage earners face a problem of being unable to amass a large sum of money at once to purchase their daily household goods.  This means that rice, oil, dhals – the daily commodities, need to be purchased frequently in small commodities.  Anyone who has ever shopped at Costco or has bought a 10kg bag of rice  knows that as you buy more, the overall cost per unit goes down.  Because daily consumption goods and livelihood maintenance drains most of their capital, the working poor rarely have savings to draw on in case of sickness or holiday needs or a wedding.  The problem of poverty in India seems so huge and overwhelming it seems impossible to tackle.

            Basix is an organization based in Hyderabad that has certainly made remarkable strides in addressing some of these issues.  They have found that extending credit to the poor at a higher interest rate than regular banks (24% is the going rate) they are able to provide capital at a lower rate than village moneylenders- who are often extortionists that trap people into life-long debt at rates as high as 430% or 360%.  Mobilizing a fleet of field workers placed in rural areas throughout the country they provide banking services at peoples’ doorsteps – from educating people about what they can do with credit and the automatic life and health insurance benefits, informing them about reasonably priced insurance policies to protect their livestock and against crop failure, agricultural business development services to improve their crop production or learn new skills and developments in their trade, these people form the pillar of the Basix outreach programs.        

            In my field visit I saw many people utilizing small scale loans to drastically change their lives. Basix customers are able to start a business selling flowers, fruits, or slippers.  Some open small stores close to their homes or learn skills to embroider saris and use their loans to buy beads and raw materials.  Some take loans to buy buffaloes, whose milk they sell for about rs. 75-80 per day.  These are the people who we hear about surviving on less than $2.00 per day.  Life is definitely hard for them, but Basix is working to alleviate some of the strain and uncertainty of their daily livelihoods. 

            One of the strategies is to encourage people to create a savings account.  Even depositing a small amount each day – 10 to 20 ruppees (25-50 cents) can make a huge impact over time.  Once these customers have maintained 100 consecutive days of deposits they are eligible to take out a loan of 1.3 times their savings.  As many of us know, it is hard to get into the habit of saving regularly, especially when the daily needs are always so high.  So to encourage people to get into this habit street bankers go from door to door, vendor to vendor every single day to collect a small deposit amount from their customers.  Using a hand-held input device they access each customers’ account and note the deposit amount, and issue a receipt.  Each customer also maintains a meticulous passbook- another motivational tool to help them see how their savings grow.  We met people with 6000-8000 ruppess in their accounts, the product of months and months of 20 ruppee deposits.  Yet another innovative service is the mobile bank- a van that roams about deeper rural areas where walking to a local bank would be impossible for those interested in banking.  The mobile bank makes 14 stops across several villages and is promoting the ability of rural villagers to empower their own lives.

            I’m used to seeing dysfunction and chaos amidst the workings of NGOs providing a service to the poor.  In sharp contrast, Basix workers balance a social consciousness about the difficulty for the poor to access finances with a strong business sense about the importance of turning a profit.  Every one of the Basix business sectors aims to operate on a profit basis, enabling their organization to function largely independently, giving them the opportunity to strive for innovative financial products, services, and delivery mechanisms.

            I was shocked at the power of cooperation in some of the projects I saw.  Basix also works to create market linkages- enabling their customers to secure a fair price for their goods without being extorted by those in power.  One such example we saw was in the village of Atmakoor.  Buffalo owners typically make rs.7 per liter of milk they pour, which they must take to market and find buyers for.  An average farmer with 4 buffalos might get 10 liters of milk per day, meaning they would make 70 ruppees.  Basix created a link with Reliance milk factories – a Reliance worker now goes to the Buffalo owner’s house and collects their milk.  A device is used to measure the quantity and fat quality of the milk.  They are paid about 20 rupees per liter of milk.  The milk is then taken to a Reliance chilling center in the main town, and collected late each night by truck, to be taken to a factory for processing and packaging.  In this way these dairy farmers almost tripled their income.  Using new learnings from the Basix Ag-BDS services they are further enabled to improve the feed and fertility of their cattle, further securing them.  Basix makes a small amount of money from each transaction, but not much.  But as the value of the buffalos grow and customers find themselves with more cash on hand, they can borrow more money to purchase more buffaloes,  or diversify their income generating activities, or even make capital improvements on their homes.

            In one village we asked what the social indicators of the groups’ financial success was. 

“Well,” they said, “everyone in this village has a color tv, a two wheeler, all of our children have been moved from government schools to private schools… we have health insurance and life insurance.  We no longer have to pray each day that we will have enough food.”

I am sure they have their own internal struggles and growing pains.  But the work of this organization is truly remarkable and touching.  This will be a trip I won’t forget for a long time to come.

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