Microfinance and Poverty III – Credits for the ultra-poor
In the last blog “Microfinance and Poverty II – Changing Consumption Patterns” I summarized the findings of a group of researchers on the impact Microfinance has on poverty. According to the paper discussed, Microfinance only slightly increases income for borrowers with a preexisting business. Other borrowers repay their debt by decreasing day-to-day consumption. But what happens to those extremely poor, whose income isn’t even sufficient to pay back the credit? I now want to show one example of how credits can be made accessible to the very bottom of the income pyramid.
Microfinance today ceased to be directed at the poorest members of the communities it’s operating in. This has many reasons:
- The extremely poor are usually not willing to take up a credit, since they don’t see any opportunities for paying them back.
- The very small credits they would need are not worth the administrative costs, even for Microfinance institutions.
- The extremely poor have strong incentives to use the credits given to them for consumption instead of making productive investments, since they lack many basic necessities like food or medicine.
- Even when Microcredits lead to an increase in income, this income is needed for basic necessities the extremely poor couldn’t afford before, making it hard for them to repay their debt.
So what are the options for the extremely poor, if they desperately need money for medicine, food or education?
Either they take out a credit and repay it by yet another credit, leading to the much feared debt spiral mentioned in the former blogs. Or they have to starve, can’t cure their injury or illness or have to take their kids out of school, obviously leading to much higher costs down the road.
To give the extremely poor an opportunity to get cheap credits when urgently needed, the Swiss Catholic Lenten Fund (Fastenopfer), together with it’s local partners, has developed a program in the Senegal called “Calebasse de la solidarité” (Calabash of Solidarity). This summer I had the opportunity to work with AgriBio, one of the Fastenopfer’s local partners in the Senegal, to get a first hand look at this project.
Together with its partners, the Fastenopfer is encouraging communities to build “little banks” on their own. This is how it works: A group of people from a community gets together once a week. Every member of the group puts anonymously a certain amount of money into a covered “Calabash” (bucket). The money is then counted publically and entrusted to a member of the group. If somebody needs a credit for absolute necessities like food, health or education, they can ask for a credit from the group. An elected committee of three people makes the decision. In case a credit is granted, it has to be paid back in due time – without any interest! This way the total amount available for credits is never decreasing (only temporarily).
Since all the people within the group know each other, fraud is very rare. Credits are actually used for what they are intended for. If it’s your neighbor, who is responsible for granting you a credit to send your daughter to school, he will notice if you use the credit to buy cigarettes while your daughter stays at home every day.
Many people are very skeptical of the model, since there is no apparent incentive to put any money into the Calabash. Every member of the group is eligible to take out a credit, independent of his or her contribution. In fact, if implemented in small communities, experience shows that there is enough solidarity between the members of the group for the project to work. There are enough contributions, even without any individual incentive except for the well being of the other group members and the functioning of the Calabash.
Until today, the different partner organizations of the Fastenopfer in the Senegal have helped with the implementation of more than 700 “Calebasses de la Solidarité” in various regions of the country, with a total of more than 36’000 members. The amounts managed by each Calebasse are modest, but so are the credit demands. And according to Vreni Jean-Richard, responsible for Fastenopfer operations in West Africa, the biggest success is not the resilience created by the credits granted, but by the strengthening of the communities through those groups. By showing what they can achieve by sticking together, they can be encouraged to participate more actively in the political process and to stand up for their rights when they are threatened.
Information on the Fastenopfer projects in the Senegal on fastenopfer.ch
Dr. Vreni Jean-Richard is holding a workshop on the Fastenopfer projects in West Africa at the University of Zürich on the 3rd of May (workshop held in German). Dr. Jean-Richard has spend many years in Chad, working on her PhD in Epidemiology, before doing her Masters in Cooperation on Development at ETH Zürich. Today, she is responsible for the Fastenopfer’s operations in West Africa. (facebook)