March 3, 2009

Micro-Credit in South Africa, the Land of Grants

About six months ago, I wrote about how I had launched a small micro-credit program in Itipini for nine borrowers. I haven’t written much about it since then so it is time to give a bit of an update.

The short answer is that progress is mixed. There are some borrowers who have are current with their repayments and are earning money for themselves. They seem to have “got it” and understood the purpose of the program - start a business with a loan, pay back the loan, and then keep the remainder of the profit for themselves.

There are another group of borrowers who aren’t quite regular with their payments but do make a sporadic effort to repay. For instance, a person who is supposed to make a repayment every two weeks might only pay money every month.

The final group, encompassing a small plurality of borrowers, hasn’t “got it” at all and for one reason or another is no longer making repayments. Their business idea appears to have sputtered. It is this group that I want to focus on in this post.

Why haven’t they “got it”? Why aren’t they making repayments? Micro-credit is a fairly straightforward proposition and I made sure before we made any loans that all the borrowers understood some basic business concepts relevant to their particular business. (“You’re selling chickens? OK, for each chicken you sell, how much do you need to set aside to buy another chicken and how much do you need to set aside to repay me and how much do you get to keep for yourself?”) All the borrowers had to come a series of meetings and classes where I thought I presented a fairly coherent set of ideas and checked to make sure people understood them.

One thing that got in the way was the unexpected. One borrower got pregnant (actually was pregnant, unbeknownst to us, when we made the loan) and then gave birth, which took up most of her time. The infant son of another borrower died and, because there are such high expectations around here for funerals, she had to spend all her money on the funeral, including the loan. Another borrower just up and moved back to the rural villages for about four months, a place where her business idea was not viable and so she spent her capital on herself, I presume. (I don’t know how she slipped through our screening process.) Another borrower was doing really well selling chickens for a few months and we gave her money to expand the business so she could get better economies of scale. It was exciting and she was showing a real entrepreneurial spirit until she was robbed and completely cleaned out. She lost any enthusiasm for the idea and basically gave up. Another woman, who has HIV, saw her health deteriorate remarkably quickly and she lost the energy to work. She has since recovered somewhat but not before spending the principle of the loan on herself while she was sick. I didn’t foresee any of these contingencies, perhaps an oversight on my part, but even if I had I don’t know how I would have planned for them.

When you read about micro-credit programs around the world, there is a lot of emphasis on group-based borrowing, where five (or so) women form a group and only one of them can get a loan at any given time and the other women are her support to repay the loan. For a number of reasons I didn’t think that would work in Itipini but reasoned that we had existing relationships with the borrowers we could use to check in on them and I made everyone have a business support partner. Neither idea seemed to work very well. In a few instances, the business support partner began to think it was his or her right to a cut of the profits (not the idea at all) or generally just fought with the borrower. When I repeatedly asked our borrowers about the progress of their business I would often just get bland replies, like, “I’m selling fine” when it was clear they weren’t. But it is hard to help someone when they won’t talk about the problems they are having.

The other inducement to repay money was the lengthy waiting list we have. The first borrowers know that no one else can get money until they have repaid a substantial percentage of their initial loan. This appears to have no effect at all, as the initial borrowers don’t seem to mind they are affecting others and those on the waiting list seem pretty philosophic about the whole situation.

The final set of obstacles I did foresee when I first thought about the idea last year but hoped I would be wrong. Many people in Itipini get grants from the government, whether for old age, having AIDS, or being an unemployed mother. The latter grant is the smallest (about $25/month/child) but also the most common among our borrowers, who are generally young women. In a very clear way, I am seeing how these grants take away the will to work among the recipients. Here’s an example.

One common business idea (that I will never fund again) is to sell airtime in town. Most cell phones in Africa (and around the world) are pay-as-you-go where you buy airtime in advance and when it runs out you can’t make any calls. The major cell carriers sell airtime in bulk at a discount to individuals who then sell it at face value and make a small profit. I see these people all the time, wandering around town wearing special jerseys and looking for customers. It is an easy business to get into as you only need a cell phone, which most people have, and the initial money to purchase the airtime. If done right, it can result in a profit of $6-$10/day, which is substantial.

What you also need, however, is the will to get up every morning, walk into town, and spend the entire day wandering around looking for business. I don’t know how to accurately gauge someone’s enthusiasm for hard work but I did my best to explain to all of our prospective borrowers the kind of commitment they were making when they took the money, to get up each morning and spend the entire day in town. (I also made sure they had a childcare plan.) Everyone said it would be no problem and they were excited to at last have an opportunity to work.

Well, it didn’t quite work out that way. In fact, it barely worked out at all. Soon after making the loans, I saw one or two of our airtime sellers in Itipini. I asked what they were doing and they said they were selling airtime in Itipini that day rather than in town. This might work occasionally but there isn’t a sufficient market in Itipini to support this business and they really had to get to town. Gradually, I saw these airtime sellers more and more in Itipini, sitting in front of their shacks, and less and less in town.

And yet when the time came to make a repayment, they were good at making them. And when they missed one and I asked where the money was, they could produce it. But they clearly weren’t going into town. What I eventually realized is that they were paying me back out of their grants, actually the grants they received on behalf of their children. The loan was no longer a loan but a low-interest cash advance.

The crucial idea in micro-credit is that the money has to be given in the form of a loan and it has to be repaid. This not only gives the lending organization capital to make future loans but critically it gives borrowers incentive to earn money so they can repay the loan. But having a supply of money each month as grant recipients do takes away that incentive in a very clear and direct way.

(We also contribute to this. Since many of our borrowers have HIV, they qualify for the free distribution of bread and corn meal in the morning. If a person has a grant and food every morning, where’s the incentive to wander around town selling airtime every day? One of the most gratifying things about our successful borrowers is that I hardly ever see them coming for food anymore.)

When I first wrote about this program, I said I did not want to become a loan shark. I haven’t been hounding our borrowers for their repayments. I only want to take repayments that come from profits, not grants. If that means the borrower defaults, then that’s the way the cookie crumbles.

I am probably too close to the end of my time in Itipini to lend more money to another set of borrowers. Even if I had more time, I’m not sure I’d be eager to lend more money. There are some people who have surmounted the grant barrier and are doing well but I don’t know how to identify those people and help them. And I don’t know how to work with people who would get caught in a grant trap.