One criticism of microfinance is its inability to produce meaningful poverty movement on a macro level. The belief is that providing credit for micro-entrepreneurs produces some incremental change on an individual basis, but doesn’t produce the substantive change needed to lift a community out of poverty. By substantive change, I mean employment, infrastructure, commerce, and improvements in healthcare and education. In this post I want to focus specifically on the idea of microfinance’s inability to produce businesses of adequate scale.
In theory, microcredit aids people starting or maintaining small businesses to generate extra income for the family. (In reality, recipients of microfinance loans spend the money on expenses unrelated to the business altogether, but this is a different topic). Where microfinance is deficient is in shepherding these small businesses to become something bigger than just a micro-enterprise. For any business to grow, it needs to do two things: reduce the amount it spends and increase the amount it brings in. But micro-entrepreneurs can get stuck in a trap created by a lack of resources. For many of the poor communities served by microfinance, the cards are stacked against them. Let me explain with an example.
The other day I went to a village of 140 families in the town of Valladolid. NWTF is considering piloting a community loan program and we were there to conduct research on the needs of the people. The economy is 80-90% rice farming, with most families owning a small piece of land through the land redistribution enacted through the Comprehensive Agrarian Reform Program (CARP). In this journal I discussed the challenges faced by small landowners. Agrarian reform beneficiaries (ARBs) own plots of land too small for scale farming and lack the financial resources for fertilizer, pesticides, labor, and equipment. So many end up as sharecroppers, agreeing in advance to a financing arrangement with a commercial rice miller who fronts the capital for the harvest at 10% interest per month (120% per year) and, after the harvest, buys the yield at a price set by them. The landowner has no leverage because the miller owns the equipment for converting palay (unmilled rice) into rice for sale. The end result is that the landowners – in this case, the members of this community, barangay Doldol – are stuck in a trap of high interest rates and limited market access.
There is a solution to this problem. The farmers can organize themselves into a co-op, joining forces to buy low-cost inputs and have greater leverage in negotiating a sale price. But no matter how big the co-op, the miller will still have the upper hand at the bargaining table, since they own the equipment required to turn the product into some of value. But, if they were able to cut out the middleman and mill the rice themselves, the community could then sell rice direct to wholesalers. The co-op could take a community loan from NWTF and buy milling equipment. Farmers could get a higher price for the crop and reinvest the profits in buying more land, better fertilizer, or mechanized farming equipment. The co-op manages the equipment, which can be utilized by any of its members. By taking a larger loan for a piece of capital equipment, the community can break the glass ceiling imposed by their circumstances.
As part of the project, we are having clients maintain a daily financial diary. They record all income and expenditures – food, clothing, fertilizer, equipment, etc. – every day for a month. At the end of the month, we can look at these records and determine exactly the amount of money entering and leaving the community. We can figure out a way to maximize the former and minimize the latter, and identify areas where a community loan like the one described will have the greatest financial impact. This is one way of transcending the individualized approach of microcredit and producing sustainable, impactful results at the community level.