Consider Microfinance Ancillary Effects

January 17, 2010

By: ALEX

By Alex Duong, KF9, Vietnam

Before continuing, please take time to read colleague Victoria Kabak’s post on Nicaragua. I’d like her courageous efforts to be recognized. And if you are out to make a loan today, rather than Vietnam, please consider funding someone in Nicaragua here, particularly a borrower with AFODENIC.

Victoria, I don’t have an answer either. Perhaps build a regression model? But that is probably skewed by my swimming in a quantitative pool these last few days with friends cash flow and NPV.
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Ok, on to this post about ancillary effects. A recent trend in microfinance (MF) has been to incorporate social performance indicators. The concept involves measuring poverty alleviation actually induced through loans and other MF efforts. Metrics or not, what I can tell you is that Madame Lien would put those statistics to shame. Check out her preschool students below.

Madame Lien has been receiving loans from TYM Fund for over ten years. Her latest and most successful endeavor is opening, owning, and operating Bông Sen (translated White Lotus) preschool in her hometown Phúc Yên. Madame Lien employs four teachers who both educate and provide meals to approximately 50 students while parents are off working.

Prior to opening the preschool, Madame Linh had been a teacher herself for 14 years. In 2002, she retired from teaching and took to selling children’s clothes at the local market for income. At first business was healthy but eventually it became saturated with numerous vendors. It was at this point she realized her town had no preschool. Determined this was, in her words, the “right thing to do for my country,” she set out to charter a school. TYM Fund was there from the beginning to provide funding.

According to Madame Linh, the hardest part was putting together appropriate lesson plans and finding qualified teachers. Once up and running, however, it didn’t take long for the children to show up. Her most recent loans were used to purchase toys and supplies for the children. TYM Fund has helped Madame Linh’s operations grow to the point where traditional banks have started serving her. This implies that she has graduated above the socioeconomic poverty line!

Madame Linh proud and joyful thanks to MF

So why is Madame Linh’s story important? The business is sustainable and should help her maintain the newfound socioeconomic status. More importantly, however, she has created local teaching jobs, developed a safe learning environment for young children, and provided for her family. The creation of good jobs and providing solid educational foundations are valuable assets in a developing nation. However, Madame Linh is one of the few borrowers whose life was immediately impacted by her endeavor. Since arriving in Vietnam, what I have noticed is that MF needs time to take effect. At the very least, it gives the next generation (borrowers’ children) a better fighting chance to escape the cruel hands of poverty.

Based on general field observations, current studies on the impact of MF seem to leave out ancillary effects such as those described above. In addition, they have too short of a time span. Consider that the concept of people’s banks and credit/savings cooperatives have been around since the 1800s. The 1950s saw a wave of governments and donors providing agricultural credit to rural farmers. What we know as a MF institution today began appearing in the mid 1970s (including well known ACCION and Grameen Bank). It wasn’t until the 1990s, however, that MF institutions began transforming themselves into solvent, sustainable operations. It took Muhammad Yunus of Grameen Bank 30 years to get recognized and receive the Nobel Peace Prize. That means there are perhaps 20 years worth of comprehensive data and only 10 years worth if we start measuring from the point of self-sustainable MF. Now consider my statement above about MF needing time (and perhaps generations) to take effect. I don’t doubt the scholars but am merely suggesting academic results at this time may be preliminary.

Even if one is a quant-minded person (like me), consider that MF is about lending with our hearts and not our minds. I recently donated to Haiti which just experienced a 7.0 magnitude earthquake. It would be rash to now go and measure the impact donor money had on alleviating suffering. As long as Save The Children Foundation doesn’t commit fraud, I trust the funds have been put to good use. And such is the case with MF. For some borrowers, Kiva and other MF lenders serve as the only avenue for improving socioeconomic status. Is it not enough to know one is helping, regardless of incremental value?

Here is another example for perspective. For every college graduate, how many become billionaires while the rest still live comfortably but classified as ‘middle class?’ Regardless, each individual is better off thanks to having the ACCESS and ABILITY to complete higher education. Similarly, it is not fair to demand every borrower become a ‘billionaire’ or have a success story. However, access to loans and the ability to invest in their business should make them better off. And yes there will always be some who fall into a cycle of debt. But then again, every town has a prison.