Microcredit is not just for Bangladesh anymore. Nobel Laureate Mohammed Yunus started the ball rolling in the mid ’70s with his Grameen Bank, but now an estimated 7,000 microfinancing institutions are making microloans to micro-entrepreneurs worldwide. One of the things that has Westerners so excited about micro-investing is the industry has the tradition of investing almost exclusively in women, thereby giving them more status and power. Another is the idea that micro-financing builds the businesses, including banking institutions, which will sustain communities, in contrast to donations that leave them dependent on foreign aid.
On the other hand, microfinance’s critics question whether high rates of loan repayment necessarily prove that people are being lifted out of poverty or merely caught in cycles of debt, some arguing that developing world people would be better served by macro-investment in jobs, health, and education. Either way, microfinancing is hugely popular and many Santa Barbarans are involved.
Kiva.org is the best known micro-lending Web site. Launched in late 2005, it allows anyone-not just banks-to select the entrepreneur to whom they wish to extend a loan. This platform is so popular that Kiva investors were recently limited to making loans no larger than $25 to any particular entrepreneur so that more wannabe lenders would be able to participate. To date, Kiva reports it has loaned $12 million to small entrepreneurs in 36 countries.
Kiva lenders almost always get their principal back; the repayment rate hovers at 98.8 percent, according to the site. The borrowers pay interest, typically at an annual percentage rate of 30 to 50 percent, which sounds usurious, but is justified by the cost of servicing numerous tiny loans and their profitability to the borrowers. However, the online lenders don’t see any of the interest. The interest is absorbed by the nonprofit Kiva and its field partners, which are most commonly other nonprofit groups that arrange the loans and may provide education or other services. The Kiva Web site not only provides photographs and a description of the entrepreneur’s business, but also information about the field partner, including the number of Kiva businesses it handles, its delinquency and default rates, and its Kiva-assigned risk-rating.
Another online microloan platform, MicroPlace.com, a subsidiary of eBay, allows lenders to earn interest on securities, typically at the rate of 3 percent annually. Instead of choosing the entrepreneur, MicroPlace.com users select the field organization they want to invest in.
Fonkoze: To Haiti, with Love
Many microfinancers are dedicated to promulgating macro-change. One of these is Fonkoze, based in Port au Prince, Haiti, which has a fan base calling itself Fonkoze Santa Barbara. The Santa Barbara group, which started less than a year ago, is already halfway to its goal of raising $55,000 to found Haiti’s 33rd Fonkoze branch bank, plus another $50,000 for literacy training for 1,000 Haitian women.
The nonprofit Fonkoze banks become largely self-sustaining once they get started, each hiring about 40 field agents to drum up clientele, especially among rural women. Fonkoze loans work on the solidarity model begun by Yunus’s Grameen Bank, in which a group of five women is collectively responsible for the loans given to each individually. Along with the loans, Fonkoze provides instruction in literacy, finance, health, and the environment. Begun by retired educator Maureen Earls, Fonkoze Santa Barbara also boasts among its core group Fonkoze U.S.A. president Mary Becker; Congresswoman Lois Capps’ former assistant, Emily Reed; and Marsha Bailey, the founder of Women’s Economic Ventures, which for almost two decades has been making microloans to Santa Barbara entrepreneurs. Group members plan to travel to Haiti in March to see with their own eyes the work Fonkoze is doing.
Women’s Economic Ventures in Santa Barbara
Microfinancing is not just for people in impoverished nations. The founders of Women’s Economic Ventures (WEV) began in the late 1980s making microloans to Santa Barbarans, using the solidarity model. In the intervening decades, WEV has morphed to better fit the circumstances.
First of all, WEV’s founders soon realized the U.S. economy differed from the economy of Bangladesh in that even the poor in Santa Barbara often had access to small amounts of capital via savings, family, or credit cards. True, the loans that WEV makes are a safer bet than credit cards-whose seductively low introductory rates can blow up in the borrower’s face like a ballooning mortgage payment-but the loans are only part of the story. People starting out in business in Santa Barbara face a complex environment for which they need training, ongoing coaching, and moral support. In fact, WEV has trained at least 10 times more entrepreneurs than it has loaned money to.
Nevertheless, WEV has also loaned $1.9 million to 106 borrowers who could not qualify for regular bank loans, and claims a default rate on those loans of only 1.18 percent. The 24 businesses to whom WEV made loans in 2007 include an acupuncture clinic, a daycare center, a children’s self-defense studio, a Pilates studio, a medical transcriptionist, an aromatherapy business, a taco stand, an assisted-living home, a student loans collection agency, artists, clothiers, publishers, and others.
The way the loan process works is the client comes into WEV’s offices to meet with WEV’s loan officer/business counselor, Andria Martinez. The client must either have graduated from WEV’s 14-week Self-Employment Training program or have demonstrated business experience. If the loan is for less than $5,000, the client presents a summary of their business plan and budget. If it is for more, they need to present the full written business plan, cash flow projections, repayment plan, and all of the other information WEV’s loan review committee needs-this is similar to the process a would-be borrower would go through at a bank, so it’s a learning experience, Martinez pointed out. The loan review committee consists of eight to 10 banking and finance professionals who assess the plan to decide if they can safely make the loan. WEV can provide as much as $25,000 for brand-new businesses and as much as $50,000 for those that have been operating for more than 18 months. WEV’s average loan size has been increasing, and is now about $14,000. The interest on WEV loans is roughly 10 percent depending on the amount being borrowed and the client’s risk factors.
Since 1995, the loan fund has been provided primarily by area banks. Based on a percentage of their profits, banks must extend credit to the traditionally underserved-for example, people of low or moderate income-as per the requirements of community reinvestment laws. They do so at interest rates low enough for WEV to loan at a slightly higher rate of interest, which, when combined with federal Housing and Urban Development funds, pays for the loan servicing and the training. WEV still gets significant funding from private donors.
WEV’s default rate is so low because “we’re not interested in loaning to people likely to default,” said Executive Director Judy Hawkins. Then, too, there is the support: “We ask borrowers to tell us if their cash receipts are not what they expected,” Hawkins added, “so we can work on them.” If necessary, WEV will help the client restructure her debt, even hold her hand through bankruptcy proceedings to do so. WEV also employs a strategy similar to the honor system referred to by Yunus in his interview with Richard Appelbaum: guilt. WEV appeals to the borrower’s conscience and community spirit by emphasizing that the money that is not repaid becomes lost to the WEV fund which has been revolving for 12 years. Last but not least, WEV clients almost always repay their loans because their credit is at stake, “and they may want to try again,” said Hawkins.
During the past year, WEV has been conducting a series of Think Big seminars focused on helping businesspeople sustain their enterprises and grow them beyond the mom-and-pop-or just mom-stage.
For more information, visit wevonline.org or call 965-6073.