Q&A | MICROFINANCE
The macro on micro (finance) zzz
Marce prepares her fishing net early one morning on Rote Island, Indonesia.
Microfinance is a complex humanitarian intervention. Mark Daniels, Opportunity International Australia’s Asia Program Director, takes a broad look at microfinance to reveal its fundamental philosophy, how it assists those living in poverty, and the intricate challenges that lie ahead. Q: Why would someone living in poverty want to get a loan and go into debt? A: Like anyone, low income earners still require capital to set up and sustain even a tiny business. Once established, credit can then be used to help them create a more stable financial base for their business, and even expand that business so they can earn more. That process will help them improve their lives by providing the freedom to make economic choices as they negotiate their way out of poverty. Q: What does a person living in poverty look for when choosing a microfinance institution (MFI)? A: People living in poverty deserve products and services that enable them to navigate and manage very complex cash management scenarios.
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Thankfully, microfinance has evolved from a supply-led singular product environment to one that is demand-led; that puts the client first. In the early days, most MFI’s had a ‘one product fits all’ methodology, e.g. a six-month loan term with weekly repayments.
Studies show that on average, someone living in poverty will have up to eight different sources of credit and savings to help manage their poverty, and in many cases can lead to ‘multiple borrowing’.
Through our MFI partners, Opportunity provides a suite of financial products including savings accounts, insurance products, joint group liability loans and individual lending. We also provide non-financial services including training and capacity building programs to help people improve and grow their business. Ultimately the aim is to help our clients buy better, sell better and run better. This can transform their businesses to provide better services to their community and contribute to the growth of their local economy.
A: Multiple borrowing is when a client is forced to borrow from several institutions in order to meet their needs. In many cases lending methodologies are quite rigid so a client is required to complete a loan cycle on a small loan without default before they can be approved for a larger loan. This is one reason why repayment rates are quite high for MFI’s as loan sizes are small and clients are desperate to access larger loan sizes. But in many cases people in poverty are simply forced to borrow from multiple institutions to meet their immediate needs.
Q: What are some of the behavioural practices you’ve seen with people requiring loans? A: When you study the behavioural economics of people living in poverty you quickly understand the ‘need for speed’. We always hear people in poverty live on two dollars a day; that’s nice but they don’t literally get that amount each day. Being poor means that you are constantly juggling cash flow and having to manage irregular and uncertain incomes.
Q: Tell us more about multiple borrowing?
Q: To meet those needs, people often borrow from 5/6 lenders. What are they? A: A 5/6 lender is an informal money lender. They are colloquially called ‘Mumbai’s’ given the practice of money lending in India. The basic premise is that they will lend you five dollars in the morning and you repay six dollars in the
