Local Connection to a Global Phenomenon

Through the support of local churches and organizations, micro-credit is having a powerful, transforming effect in the Developing World.

LENDING HOPE

TO THE POOREST OF THE POOR

By Stephanie Tombari

Change your life with only $50. It even sounds like some ‘get rich quick’ scheme. But in poor and developing countries around the world, a $50 investment can mean a start toward a new house, good food, and sending the kids to school - all paid for with profits and dividends from a microcredit business loan.

“Microcredit is really a simple thing. It is the lending of a small, but meaningful amount of money to the poorest of the poor, so they can start a business that sustains them and their family,” explains Cal Schultz, a local insurance broker and member of Empower Microcredit Enterprise Development (MED), a Burlington/Hamilton area program of OMS Canada involved in microcredit programming in Bangladesh.

Cal Schultz visits with a woman in Bangladesh who uses her microcredit loan to operate a small sewing business

“Their economies are micro economies,” continues Schultz, who has been to Bangladesh and testifies to the life-changing capabilities of microcredit. “We in the West make the mistake of pouring dollars into countries thinking we can translate our structures.”

Microcredit has received a lot of attention in recent years. Muhammad Yunus, a Bangladeshi banker and economist earned the Nobel Peace Prize in 2007 for his groundbreaking success with microcredit in improving the lives of the poorest of the poor in his country. It’s a success that Bangladesh desperately needs; more than 100 million Bangladeshis live on $2 or less a day.

“Microcredit allows them to make $3-5 a day,” says Schultz. “They don’t have to sell their sons or daughters into bonded slavery to take out a loan.”

Not surprisingly traditional banks have no interest in lending small amounts of money at reasonable interest rates to poor people with no collateral. The “hand up, not a hand out” approach of organizations such as the Christian Reformed World Relief Committee (CRWRC) in Burlington, recognizes the life-changing effects a small loan can have for those too poor to pay big bank rates.

CRWRC's Ida Mutoigo

“In Uganda the going rate is 23% for a regular bank loan,” says Ida Mutoigo, CRWRC director. “The microcredit lending rate would be about half that.”

COMMUNITY MAKES DECISIONS

Microcredit groups form with as few as five people who are each in need of financing to start a small business. Mutoigo explains that group sets its own interest rate, based on the members’ ability to repay and the group’s desire to achieve a small profit margin.

Training is also an important part of the process; participants in well-designed microcredit programs are given basic education in bookkeeping, and other small business skills prior to being considered for a loan.  A typical loan from Empower MED for example is $100, and loans are for six months to a year, and payments are made weekly. Loans through microcredit groups supported by CRWRC are generally in the $200-$500 range, and the repayment period is normally 3-6 months.

“Many of the producer groups which Ten Thousand Villages buys from were initially made possible because of micro-loans,” says Ingrid Heinrichs Pauls, who oversees Public Relations and Education for Ten Thousand Villages.

Ingrid Heinrichs Pauls

“One example of how micro-credit brings transformation to many aspects of a community is HEED (Artisans with Health, Education & Economic Development).   HEED works with refugees, widows, the poor and illiterate, as well as indigenous tribal groups in northeast Bangladesh. The organization supports new initiatives through micro-credit loans, deals with community health issues and provides family gender education programs.”

Penny Palmer operates the Global Village Market in Hamilton’s Westdale Village, which also carries various items produced through micro-credit financing. “The return on investment from a micro-credit loan is quite remarkable,” she says. “There is no social safety net, so people work very hard to make sure their business is successful.”

Cal Schultz has personally witnessed how microcredit participants can be overwhelmed with joy when their loan is approved. “They respond with unbelief,” says Schultz. “In most cultures in the developing world, one layer within society will often try to keep the next layer under them. Generosity, charity and extending opportunity is virtually non-existent.”

Another local Christian volunteer group that has seen the amazing impact of microcredit financing is The Carpenteros and Friends. Working in partnership with CRWRC, The Carpenteros have been stimulating microcredit in nearly 60 communities in Honduras and El Salvador. Through their annual Spirit and Sport Christian Celebrity Dinner, held in Hamilton each September, the Carpenteros provide seed capital and training for microcredit groups.

A ‘CRAZY’ IDEA

Ken Vanderlaan, a founder of the Carpenteros, recalls a particular Honduran community that has been totally transformed through micro-financing.  “One member told us that this was a ‘crazy’ idea and how it would be impossible for them to set up a micro-credit union because most of the people were only making a few dollars a day,” says Vanderlaan. “But they agreed to try, and the leaders were given the necessary training. Today that microcredit cooperative is supporting 98 families, they have $18,000 in their capital pool, and they will soon be helping to establish a microcredit group in a neighbouring village.

Ken Vanderlaan (right, blue cap) meets with the directors of a microcredit cooperative in Honduras.

“All microcredit groups aim to generate a small surplus, part of which is paid out in a dividend and part which stays in the fund to grow the pool of money available for lending,” explains Vanderlaan.  “What we also try to do, through the Carpenteros, is to provide some matching funds to their savings, so the capital pool grows more quickly, they can see the progress that is being made, and within 4-5 years the group becomes self-sufficient.”

Since all the participants living in the same community, loan defaults are extremely rare. CRWRC also requires each group to set aside a small amount in a ‘mercy fund’ in the event of crop failure, serious illness or a death in the family. When defaults do happen it is most often because the family has experienced tragedy. While some money lenders might make a borrower pay back at any cost, Christian-based microcredit programs try to show the compassion that Jesus expects.

“We bring the values of ‘What Would Jesus Do?’” says Schultz. “Are we loan sharks? No – we say feed your children. We use compassion. It’s a tremendous opportunity for meeting the practical needs of people, and showing the love of Christ.”

BUILDING ON EXISTING SKILLS

Loan defaults can also be the result of poor set-up – not on the part of the community, but by the organization that is helping to set up programming.

Kurt Frers (right) with Muhammad Yunis, winner of the 2006 Nobel Peace Prize for his work with microfinancing

“Microcredit failures are very high when they aren’t based on what people are already doing,” explains Mutoigo. “CRWRC’s approach taps into what people are already doing, and then helps build it up. That’s where CRWRC helps – by providing the skills necessary to be successful.”

“Microcredit perfectly matches the skills that are already there,” agrees Schultz. “It takes what someone already knows, and then by providing a little bit of financing it allows these people to do enough to sustain their family."

Women most often receive the loans, a fact that has return on investment far beyond the financial.  “Women get the loans because when you’re dealing at $1 a day, it is the women that are usually taking the responsibility to care for the home,” says Kurt Frers, of Empower MED/OMS Canada.

Frers explains that, with the exception of farming, men tend to have business ideas that are more difficult to implement, while women think in terms of how to earn money to best meet the family’s needs. When women are in a position of controlling money and a business, they achieve greater equality within their own homes, and among the members of their community, he says.

POOR FACE MANY OBSTACLES

While microcredit has shown its ability to improve peoples’ lives, Mutoigo is cautious to not suggest that microcredit – like any community development initiative – is the be-all-and-end-all solution for the world’s poor.

Marina (red shirt), a woman in the Honduran village of Islitas, used a micro-credit loan to buy a hand-operated grinding mill where, for a few cents, she grinds flour for others in her village.

“Microcredit is not the salvation for poverty,” explains Mutoigo, who worked for CRWRC in East Africa for more than a decade. “There are macro level issues that must be addressed alongside the micro levels.” Macro level issues such as protectionist tariffs, says Mutoigo, which restrict economic growth for the world’s poorest nations.

“Community development will not solve those problems; it calls us as organizations to do both (development, and advocacy for policy change).”

“When you are constantly in a mode of poverty, you don’t see the possibilities,” says Mutoigo. “What microcredit helps these groups do is open up these possibilities in the support of a group. With that mutual support, people venture out and start to explore possibilities they may have never considered before.”

Honduran fishermen use micro-credit loans to buy and maintain their boats and nets.