Taking out a loan in the UK is difficult at present and talking to my
friend yesterday who has set up his own tree-surgery business just typifies
this. He is working seven days a week to make ends meet and on the suggestion
that he should take out a loan he just responds, 'What's the point in buying
expensive machinery if the next week there are no jobs? I'll survive that week
but what if there is no work the next week and the next?' He has a point.
Nonetheless, if he did take out a loan, grew his business and then paid it back with the higher income then he might be left with a more recession-proof business. Well that is the logic anyway. It is a complex game of determination, experience and fortune.
So what have loans got to do with aid?
Well, microfinance (money on a smaller scale) is a relatively new addition to the arsenal of aid. Since the introduction of microfinance in Bangladesh by Nobel Peace Prize winner Muhammad Yunus it has been one of strongest financial tools used to create sustainable projects, raise incomes and resolve conflict in communities. Alongside the realisation that women are better clients because they generally put the money towards development. Rather, the men often look towards the short-term, alcohol and themselves. A tad sexist but it’s a correlation that is shown in most aid programmes… sorry guys.
So what makes microfinance in the developing world different to the loans we get in the UK?
Within the UK we can be tracked due to the large amount of information we each output or is necessary to operate in the developed world. The government, banks and police know where we live, where we go and apparently now what we say in private (we all knew they did) so we cannot just simply default on a payment and slip away as we would be stopped at the border, frog-marched back and be forced to deal with the consequences. This traceability lessens the risk of the loan for the loaner which is reflected in the rates. Also, if the payments are matched to our incomes then we will be able to meet them unless we lose our job or overspend on other goods and services.
However, in the developing world the government, banks and police often have imperfect knowledge. Houses are not all aligned in pretty streets but rather everywhere and anywhere. Just imagine trying to find someone in the middle of a slum! Furthermore, unemployment is rife and even those with jobs have little security. The risk of loaning makes the loan’s interest rates higher and those with limited savings or income it is almost impossible to secure a loan.
That obvious theory aside, microfinance gets around these issues by tying a whole community into the loan and appeals to peer pressure to enforce repayments. A perfect solution.
Yet, I have been reading an essay entitled ‘What is the evidence of the impact of microfinance on the well-being of poor people?’ by Duvendack et al. which argues that micro-finance does not guarantee an improvement in the reduction of conflict. For instance, it states ‘access to credit for cash crop production controlled by men may result in reallocation of resources away from food crop production controlled by women, with adverse effects on their children's nutrition’ (pg. 10).
Nonetheless, I've heard and seen project statistics where communal loan schemes have been successively instrumental in securing the sustainability of a project. The need to repay keeps the beneficiaries focused and enables those without skills, particularly the youth, to learn, graduate and begin business. The argument that schemes which benefit one portion of the community over another does not dissuade me. An increase in income in Africa is directly coupled with a growth in that group’s rights and inequality is not solely sourced from microfinance schemes as a range of factors affect it including cultural norms, exploitation and livelihood choices.
This video is a testimony to the success of microfinance (if not a bit cheesy).
Microfinance unmistakably works. But, limitations occur in rural areas with poor infrastructure due to basic geography - they may be days away from the local(?) bank. Ergo, the microfinance schemes work more efficiently in semi-urban or urban settings as banking officials can cost-effectively monitor schemes.
So what schemes are available for those distant rural communities?
A trend in savings rather than credit is identified in a Care report on ‘Village Savings and Loan Programmes in Africa’ as common practice in rural communities. A range of saving programmes exist under the Village Savings and Loan (VS&L) family including Rotating Savings and Credit Associations (ROSCAs) and Accumulating Savings and Credit Associations (ASCAs). ROSCAs operate by drawing together small contributions from all members and giving the total to one individual. ASCAs are similar but the total is not given to one individual but is applied to any project that the group chooses These saving schemes enable those with a small income to gain access to a greater lump sum of money and further draws the community together due to regular meetings.
A more in-depth discussion of the advantages and disadvantages of these schemes shall be discussed in the next blog.
Any thoughts? Anything captured your interest?
Nonetheless, if he did take out a loan, grew his business and then paid it back with the higher income then he might be left with a more recession-proof business. Well that is the logic anyway. It is a complex game of determination, experience and fortune.
So what have loans got to do with aid?
Well, microfinance (money on a smaller scale) is a relatively new addition to the arsenal of aid. Since the introduction of microfinance in Bangladesh by Nobel Peace Prize winner Muhammad Yunus it has been one of strongest financial tools used to create sustainable projects, raise incomes and resolve conflict in communities. Alongside the realisation that women are better clients because they generally put the money towards development. Rather, the men often look towards the short-term, alcohol and themselves. A tad sexist but it’s a correlation that is shown in most aid programmes… sorry guys.
So what makes microfinance in the developing world different to the loans we get in the UK?
Within the UK we can be tracked due to the large amount of information we each output or is necessary to operate in the developed world. The government, banks and police know where we live, where we go and apparently now what we say in private (we all knew they did) so we cannot just simply default on a payment and slip away as we would be stopped at the border, frog-marched back and be forced to deal with the consequences. This traceability lessens the risk of the loan for the loaner which is reflected in the rates. Also, if the payments are matched to our incomes then we will be able to meet them unless we lose our job or overspend on other goods and services.
However, in the developing world the government, banks and police often have imperfect knowledge. Houses are not all aligned in pretty streets but rather everywhere and anywhere. Just imagine trying to find someone in the middle of a slum! Furthermore, unemployment is rife and even those with jobs have little security. The risk of loaning makes the loan’s interest rates higher and those with limited savings or income it is almost impossible to secure a loan.
That obvious theory aside, microfinance gets around these issues by tying a whole community into the loan and appeals to peer pressure to enforce repayments. A perfect solution.
Yet, I have been reading an essay entitled ‘What is the evidence of the impact of microfinance on the well-being of poor people?’ by Duvendack et al. which argues that micro-finance does not guarantee an improvement in the reduction of conflict. For instance, it states ‘access to credit for cash crop production controlled by men may result in reallocation of resources away from food crop production controlled by women, with adverse effects on their children's nutrition’ (pg. 10).
Nonetheless, I've heard and seen project statistics where communal loan schemes have been successively instrumental in securing the sustainability of a project. The need to repay keeps the beneficiaries focused and enables those without skills, particularly the youth, to learn, graduate and begin business. The argument that schemes which benefit one portion of the community over another does not dissuade me. An increase in income in Africa is directly coupled with a growth in that group’s rights and inequality is not solely sourced from microfinance schemes as a range of factors affect it including cultural norms, exploitation and livelihood choices.
This video is a testimony to the success of microfinance (if not a bit cheesy).
Microfinance unmistakably works. But, limitations occur in rural areas with poor infrastructure due to basic geography - they may be days away from the local(?) bank. Ergo, the microfinance schemes work more efficiently in semi-urban or urban settings as banking officials can cost-effectively monitor schemes.
So what schemes are available for those distant rural communities?
A trend in savings rather than credit is identified in a Care report on ‘Village Savings and Loan Programmes in Africa’ as common practice in rural communities. A range of saving programmes exist under the Village Savings and Loan (VS&L) family including Rotating Savings and Credit Associations (ROSCAs) and Accumulating Savings and Credit Associations (ASCAs). ROSCAs operate by drawing together small contributions from all members and giving the total to one individual. ASCAs are similar but the total is not given to one individual but is applied to any project that the group chooses These saving schemes enable those with a small income to gain access to a greater lump sum of money and further draws the community together due to regular meetings.
A more in-depth discussion of the advantages and disadvantages of these schemes shall be discussed in the next blog.
Any thoughts? Anything captured your interest?
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