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#2342: A Step Toward the Eradication of Poverty in Haiti (fwd)




From: Guy Antoine <GuyAntoine@windowsonhaiti.com>

>From Windows on Haiti - http://windowsonhaiti.com

Microcredit for The Developing World:
A Step Toward the Eradication of Poverty
(and its implementation in Haiti - First of a series)

Antonia Malone
February 2000

One of the sad truths about a great deal of the aid sent to developing
nations is that it impedes actual development. When we send food or allow
cheap subsidized food to evade their tariff barriers, we undercut the
business of the local farmers and discourage them from improving their
farming production. When we send clothes we discourage local initiatives to
manufacture clothes for local consumption. When we initiate complicated
technological projects, local people abandon them, because too often the
projects are foreign to their culture and mindset. Now while some direct aid
may be necessary temporarily, in the absence of any local initiatives, it
should be as rare as possible and only be considered a stop gap measure. It
would be better to help a young woman buy a sewing machine, material and
thread, or to enable a farmer to buy tools and seed cheaply from a seed and
tool bank. More complicated projects will have to wait until people can meet
their basic human needs of food, clothing, shelter and health care and have
the education to move on to more technologically complicated endeavors.

The poor for the most part are not lazy. Most of them have always worked,
but because they lack a source of credit or capital, they are never able to
free themselves of those predators such as the loan sharks and the sweat
shops that enslave them. A microcredit program gives small loans to the poor
at low interest rates, so that they can procure whatever they need to start
a small local business of their choice, for themselves. An initial
investment in the form of a microloan of $40-$100, at 1% per month interest,
can empower people to buy a loom or a pig; an old sewing machine or some
rattan; some beans or some seed or whatever materials they need to start
their small business.

Poverty is not a given; poverty exists because of the misplaced priorities
of the institutions we have built to govern our social and economic lives,
and because, out of ignorance, we have accepted these priorities as
immutable.

In the early 1970's Muhammad Yunus, an American trained Bangladeshi
economist, with a new Ph.D. in hand, returned to his country hoping to help
his people. While teaching economics at Chittagong University, he began to
be aware that nothing he had learned in his economic classes at Vanderbilt
University even began to address the problems of the poor villages
surrounding the university where "people were just moving toward death
because there wasn't enough food to eat."

He decided he had to try to understand what was going on. Why were people
starving despite all the humanitarian aid that was flooding Bangladesh?
Walking from village to village, he noticed that often people suffer because
they lack just very tiny amounts of money which might enable them to better
their situation, and he came to the conclusion that the lack of access to
credit was one of the major reasons that the poor were unable to work their
way out of poverty.

So with the assistance of some of his students he began to make small loans
to a handful of people. His first loan was for $6 to a woman to buy material
to make woven reed baskets and stools. Formerly, she had been forced to sell
her products at a very cheap rate to the man who sold her the reeds, who
then resold the finished products and walked off with the profit. Her income
was 6 cents a day. With Yunus' loan she was free to buy and sell to whomever
she wanted, and her profits soared to $1.47 a day. Today that woman has a
thriving basket business, can feed her children and has been able to build a
house with a tin roof for her family.

>From these inauspicious beginnings grew the Grameen Bank, a microlending
institution, which, in the last twenty years, under Yunus' leadership, has
loaned over two billion dollars to over 3.5 million of the poorest people.

How does it work?

A microcredit program gives small loans to the poor so that they can procure
whatever they need to start a small local business of their choice. A
microloan of $40-$100, at 1 or 2% interest per month, can empower people to
buy a loom, a pig or a cow; an old sewing machine or some rattan; some beans
or some seed or whatever materials they need to start their small
businesses.

In the absence of collateral, the Grameen Bank loans are made to groups of
five, mostly women, who guarantee each others' loans. It works like this. If
a woman wants to receive a loan and if her idea for a business is accepted,
she is encouraged to find four other women and form a group. Then, the first
two women are given loans and the others are encouraged to help them make
their enterprise a success. After about 6 weeks, if the first two are making
their payments on time, the next two women get their loans and six weeks
later the last one. All persons who have paid back a first loan, are
automatically eligible for a second loan and eventually a third so their
businesses can grow. At the same time from the interest, the loan fund is
growing, though slowly, and loans are available to more persons. In some
places people pool their loans and later their profit and open a cooperative
for growing pigs or corn or chickens. All members of a group are responsible
for each other. If one does not pay back one's loan, no one in the group
will receive a second loan.

To guard against emergencies, such as one's cow dying and not being able to
repay the loan, an emergency fund is set up at the time of the first loan.
This simply means that a few coins, perhaps an additional

1% of the loan, are put into an emergency fund. This emergency fund is
available on a group vote to bail out the person who had the emergency so
that she can repay her loan and not destroy the credit of the group.

Today there are microcredit institutions providing microcredit loans to the
poorest of the poor all over the world. In Latin America they are often
under the umbrella of ACCION; in India of SEWA. In the United States, the
South Shore Bank of Chicago is pioneering a microcredit program. At a recent
microcredit summit, it was estimated that these programs are now reaching
about 7% of the poor in the world and making a substantial difference in
their lives.

In addition, institutions are finding that the poor are a good credit risk.
Repayment rates are steadily 90%-97%; substantially better than the best of
banks. Where formerly, if the poor wanted a loan, they had to go to a loan
shark and pay exorbitant daily interest rates which continually compounded
and kept them impoverished, these microcredit loans are made for anywhere
from 6% to 18% simple interest yearly. In most rural situations a local
person hired as "a banker" collects the money owed on the loans on a monthly
basis, or the loans are administered by a credit union, or some sort of
local parochial caritas.

Starting a Microcredit Program

To start a small scale microcredit program in a poor or developing area, one
needs a local contact who understands the process and has some training in
the microcredit concept. A local council needs to be organized to administer
the loans, collect the interest, interview those applying for loans. Local
leadership and education ensure a broad buy-in at the local level, and a
truly caring and efficient administrator can forestall problems that might
arise such as favoring family members and friends when it comes to the
distribution of loan money. There are always more people looking for loans,
than money available.

Yunus' policy when he went into a village was to look for the poorest
person, the one who was too afraid even to come and ask for a loan, and
suggest to them that they apply for a loan.

In Haiti where our Haiti Committee has established a small microcredit loan
project with five $10,000 grants, there are four criteria for receiving a
loan.

1. That there is a good chance that a loan would improve the person's
economic situation.

2. That the person be honest. (The decision of who receives a loan is best
made locally because everyone in a village knows who is honest and who is
not.)

3. That the person seeking the loan have a plan as to what they will do with
the money.

4. That the person is part of a group of at least 5 who have agreed to help
each other.

The primary idea behind a microcredit program is to enable the borrower or
the cooperative to become independent of an anonymous market system that
keeps them at the bottom where only the dregs trickle down. The poor are
constantly preyed on by loan sharks and middlemen. For instance,
transportation of goods is a big problem in Haiti where our program is,
because the poor have no consistently dependable means of transportation. If
the resources they need for their "ti kms" is 25 miles away, they may
either have to pay a middle man to procure it for them or pay dearly for
their own transportation.

For this reason local and regional self-sufficiency must be encouraged
wherever possible, before imports or exports. If goods need to be
transported from a distance, as often happens in the cities, some sort of
cooperative transportation efforts need to evolve. The success of a small
business depends on a continuous turnover of goods(so that it is not
destroyed by inflation) and a dependable market. This is usually not an
export market where credit, slow payments, and irregular orders are most
often the rule. It is extremely important that we don't raise false hopes by
making promises of markets that we can't follow through on, on a regular
basis.

And another caution - a microcredit program may not work among some of the
most deprived persons in the cities if the following conditions are present:

- an inability to understand and follow through on the program as a result
of malnutrition having effected a person's intellect.
- total lack of community support because of the extreme misery surrounding
a particular area.
-poverty so severe and needs so immediate, that the participant will be
tempted to buy food for their children rather than use the loan money as
intended.
-poverty so severe that people are unable to look past the present moment -
people have been known to spend the loan money on a funeral or loan it to a
starving neighbor where there is obviously no hope for repayment.

In conditions of such abject misery, a certain level of hope in the future
has to develop before a microcredit project may be appropriate.

The number one priority in most developing nations is that people develop
the ability to feed themselves. As former President Aristide of Haiti once
said to a group of us, "the best medicine is food."

Since it looks like there will be no return to protective tariffs on food
imported into the third world, the only alternative is an influx of capital
to build up local production and technology which can eventually compete
with the low cost of certain imported items. Microcredit loans and
educational and technological assistance are the best vehicles for
strengthening local economies, especially when they have a personal and
relational component which builds up trust between neighbors and enables and
empowers people to hope in their own abilities and talents.

Antonia Malone
for Windows on Haiti

Please send us your thoughts.

Guy S. Antoine
Look thru & Imagine!
http://windowsonhaiti.com