How to Choose a Microcredit Organization

Over the past few years an indisputably positive trend has been gaining strength in the United States and other rich nations as more and more people become aware of how powerful microcredit is as a poverty fighting tool. Support for microcredit initiatives carried out in poorer areas of the world through organizations like Kiva and Grameen Foundation has risen dramatically and in general everybody benefits from this.

There are, however, some things potential donors and loaners should consider before choosing the partner organization that will act as an intermediary between you and the direct recipient of the donation or loan.

In his book Creating a World Without Poverty, Professor Yunus feels the need to identify and describe various types of micro-credit programs that have sprung up. This variety has made the word micro-credit to mean a number of things, some of which are at odds with one another. To clear up any confusion caused by this, he states “Microcredit is supposed to describe loans offered with no collateral to support income-generating businesses aimed at lifting the poor out of poverty.” He goes on to describe programs called microcredit that offer loans to different target populations, with different purposes that require collateral and are used for consumption. Some programs even charge interest rates similar to those of the loan sharks, indicating their profit motive.

To provide further clarity, he proposes classifying microcredit programs into two categories which I transcribe here:

Type 1: Poverty-Focused Microcredit Programs

These are poverty-focused, collateral-free, low-interest microcredit programs. Grameen Bank was created to provide this type of microcredit. Type 1 programs charge interest rates that fit into one of two zones: the Green Zone, which equals the cost of funds at the market rate plus up to 10 percent, and the Yellow Zone, which equals the cost of funds at the market rate plus 10 to 15 percent.

Type 2: Profit-Maximizing Microcredit Programs

These are programs that charge an interest rate higher than the Yellow Zone. They operate in the Red Zone, which is moneylender’s territory. Because of the high interest rates they charge, these programs cannot be viewed as poverty-focused but rather are commercial enterprises whose main objective appears to be earning large profits for shareholders or other investors.

There are even microcredit programs here in Ecuador that use bullhorns to publicly shame a defaulting borrower into paying, often requiring her to sacrifice schooling or food for her children to do so. If that doesn’t produce the desired effect, they will take the roof off of her house, which is their collateral as they financed it. They then audaciously pronounce their payback rate to be over 98%!

Professor Yunus suggests that the Microcredit Summit Campaign, which maintains a database of all microcredit programs, should “include only Type 1 programs, since only these contribute to the campaign’s goal of using microcredit to help eliminate poverty.” Type 2 programs have their proper place targeting the lower middle class and above as they can provide effective capital-building support so important for this segment of the population. His message to these programs is clear: “Make all the profit you want from your middle-class customers! Feel free to take advantage of your financial position, if you can! But don’t apply the same thinking to the poor. If you lend to the poor, do it without concern for profit, so that they can have the maximum help in climbing out of poverty. Once they’ve completed the climb, then treat them like every other customer – but not till then.”

I work with a savings and loan Cooperative. We at the Cooperativa Detodas find this analysis quite enlightening and encouraging. We would like our borrowers, supporters, readers and friends to know that we clearly fit into the Type 1 category for the following reasons:

• We charge Green Zone interest rates on all of our loans
• We do not require collateral
• We target the poorest segments of the population
• The only objective for the program is to support our borrowers in their drive towards prosperity

We do not coerce our borrowers to pay back their loans. Rather, we support them by seeing that the group they belong to comes to their aid to help resolve the problem that caused the borrower to fall behind, and by renegotiating their loan in comfortable payments if need be.

All of this leads me to suggest to those of you who support microcredit organizations or are considering doing so, to do some digging in order to choose one that satisfies your social concerns. Specifically,

• Find out what the cost of funds at market rate are in the country where the microcredit organization functions, and what interest rates it charges.
• Ask if it requires collateral for loans.
• Ask for a description of its target population. People who earn less than $1 a day are the primary target for microcredit organizations, although $2 is also common. Many organizations also consider living conditions, credit history and land ownership as indicators.
• Inquire into its methodology just enough to understand how loans are disbursed and paid back.
• Ask for basic health indicators such as number of borrowers and growth rates.
• Finally, read its mission. If the mission is written clearly and truthfully, it should reflect the answers to the above questions. The degree to which the mission differs from the answers to the above questions should indicate if the organization focuses on a profit motive or works towards building capacity and prosperity.