Community Loans: Part I

Microfinance is a term to describe the broad umbrella of financial services to people without access to a traditional banking system.  Microfinance institutions (MFIs) provide these types of services, which include microcredit, insurance (health, life, crop), savings accounts, remittances, and others.  Most MFIs rely on social collateral for repayment, which, in turn, is dependent on the strength of the community.  The community is at the center of the mission of microfinance, and some of the most interesting services offered by MFIs are aimed at making the community better as a whole.

Villages served by NWTF frequently support a single industry.  A community on the water might derive its livelihood from fishing or oyster farming.  Similarly, a community in the middle of a rice field s likely to revolve around rice farming.  The NWTF members in the community either have businesses in the industry (i.e. operating a fishing boat or renting crab nets) or supporting the industry (sari-sari store, buy-and-sell, used clothing).  In these cases, the health of the community is directly tied to the strength of the industry.  This is where community-based loans are useful.

In a partnership with the Asian Development Bank (ADB), NWTF began offering community loans in a few branches.  The members in that branch are part of a cooperative, contributing a certain amount of money that can be invested in something that benefits the common good.  The cooperative chooses an investment, which NWTF will fund through a community loan.  The coop then repays the loan through its communal fund.  So far, NWTF has funded several of these projects, all of which are success stories.

A small rice mill.

In one community, the major industry is rice farming.  Many of the clients are Agrarian Reform Beneficiaries (ARBs), meaning they received one hectare of land each when most of the farmland was redistributed during the 70’s and 80’s.  The problem is that one hectare of land does not produce enough to justify investing in a rice mill.  So, the members harvest the rice and transport it to a middleman, who mills the rice and sells it wholesale.  But when the community collectively owns several hundred hectares, it begins to make sense to build a mill.  No one member can individually afford to finance a rice mill, but as part of cooperative, they can all contribute.  Using a community loan from NWTF and the ADB, they built a rice mill.  By milling the rice themselves, the members of the community save on transportation costs (you can ship twice the amount of milled rice without the husk for the same amount of money) and cut out the middleman.  Collectively, they increase their profit margins.  The extra income is more than enough to cover the additional repayments for the community loan.  As an added benefit, the community has now become a middleman itself, as the surrounding communities are now sending their rice to the new mill.

Another community had no electricity.  It is too rural and remote to be connected to the electric grid, and no utility would invest in the infrastructure to reach them.  The solution to the problem of rural electrification is distributed energy – a generator, solar lanterns, wind power, etc.  It refers to any type of electric generation that does not rely on a grid.  This is an interesting and complex issue, but it is for another post.  The NWTF member cooperative in this community chose to invest in a micro-hydro facility and a home connection for each household.  In a partnership with an international NGO focused on rural energy delivery, NWTF distributed a loan to create a small dam in a river near the community and establish a full connection for each home.  The loan covered the cost of the wiring through the village and within each home – even the light bulbs were included.  Now, the entire community is electrified.  In fact, the cooperative is now functioning as a genuine electric utility, distributing energy to homes in the surrounding area for a per-kilowatt fee.

These are a few examples of how community loans have improved the income-generating capacity of several villages.  Tomorrow I will discuss how one barangay I visited might be able to benefit in the future.

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