Microcredit and trust in the poor

Former PDEA (Philippine Drug Enforcement Agency) undersecretary Clarence Paul Oaminal messaged me on Facebook if there was anything good to propose to the new administration. I have nothing in particular to propose (as there are even more important proposals that need attention by the new administration) except some ideas on organizing a non-profit organization to extend credit to micro-enterprises.

He went back to say that they had this Alternative Development Program (ADP) to provide livelihood assistance through credit extension to former drug offenders but with very little success. I do not know the specifics why the ADP program did not fly but could only surmise why their borrowers flew away with their money.

While microcredit and cooperative programs have been developed to fill the gap which traditional financing cannot provide, massive default or delinquency remains a common and serious challenge to overcome. This may be attributed to the current mindset that microcredit programs must and should operate profitably for it to be sustainable. In addition, microcredit facilities think like banks -- they are very "impersonal" that they think of theirs customers as accounts rather than humans. It is kind only when you return the business and cruel when you're down.

First and foremost, a microcredit facility, while intending to become sustainable, it seeks to exist not for profit. The role of such facility is primarily to help people in poor communities to enable self-employment or provide funds for them to engage in income-earning activities with the goal to alleviate or if not eliminate the poverty they've undergone. One may ask, if it (microcredit) does not operate for profit how can it recover its investment or the least support its operations?  

A quantum change of business philosophy must be made by a financial institution if it wishes to engage itself in microcredit. To extend credit to the poor is not to be taken in light of investment return but of the social and positive returns that come as a result. Thus, whether or not the facility is earning is beside the issue. The greater calling is when it becomes an instrument of change in people's lives.

One may think the idea is tantamount to a dole out or that it encourages people not to pay what they owe. When I said of a quantum change in business philosophy it comes with the idea of responsible borrowing. The reason why many poor people cannot pay back their loans is because they are buying what they owe instead of returning what they borrowed . The fact of life in credit extension is that when you borrow money you return it along with its interest in which the latter is usually high. And if you can’t pay, just pray that they are not out to get your last underwear.   

“One pitfall in microfinance work is to charge high interest rates on loans. High interest rates often sink consumers further into debt and poverty.“ says Social Edge’s website. Again, the interest of microcredit is not for profit but for reasons of social interest. Thus, interest rates, should be a motivating factor for borrowing and returning IOUs.   

For a microcredit program to be effective, creditors should first trust its borrowers. Kiva a successful internet-based microlending believes that "people are by nature generous, and will help others if given the opportunity to do so in a transparent, accountable way." The Kiva model has not only sustained but has grown so well not because it is operating profitably but because kindness begets kindness. The relationship that exists between Kiva creditors and their borrowers is rooted on the belief that the poor knows how to honor its debts. Kiva beneficiaries help sustain the program by encouraging fellow borrowers to work harder while dutifully assists meeting their obligations. To date, Kiva has provided assistance of over US$100 million in the last six years to people in Africa.    

Nobel winner Prof. Muhammad Yunus holds the view that “We have created a society that does not allow opportunities for those people to take care of themselves because we have denied them those opportunities. Today, if you look at financial systems around the globe, more than half the population of the world - out of six billion people, more than three billion - do not qualify to take out a loan from a bank. This is a shame.” 

With that, Prof. Yunus established Grameen Bank in 1976. Since then, it has changed the face of banking in Bangladesh by removing the need for collateral and created a banking system based on “mutual trust, accountability, participation and creativity.” To date it has extended its microlending program to 8.10 million poor borrowers or around US$7 billion.

We too can make a facelift in our financial system if and when we begin to believe that the least of society can bring the best in us.

Send emails to [email protected]