Reading through David Roodman’s book conjured up more memories of the Way it Was back in the 80’s and 90’s while we were running around the globe starting up microfinance programs on a shoestring.
My fellow pioneers will remember when it was an article of faith that “clients are indifferent to interest rates”. Impossible to believe now, when clients shop from one MFI to another for the best rate, but back then the important thing for the clients was to find a provider who could get them the funds they needed quickly and with minimal red tape. MFIs in those days were essentially competing with money lenders in the local markets who charged high rates (10% per DAY), but didn’t ask you to fill out forms or provide real guarantees. These guys walked through the markets with a “Mochilla” full of greenbacks slung over one shoulder and a .45 over the other. Banks today (or used to, anyway) talk about “instant approval” of loans, but the “chulqueras” of Ecuador and Peru counted out your $50 loan the second you asked for it, if you were a repeat customer.
At FINCA, we learned the “real” cost of money when, upon the suggestion of the members of one of our village banks on the border of Mexico, we created “the internal account”. This was a euphemism for the 20% (of the FINCA loan) forced savings we required of our clients, which back then was kept by the Treasurer of the Village Bank. After a few 4-month loan cycles, this money really began to pile up, and one of our enterprising Mexican VBs asked John Hatch if, rather than risk having it lying around the Treasurer’s house, they couldn’t lend it to the more successful microentreneurs in their VB who had need of it. The women who borrowed money from this internal account would pay interest on it, which would be the property of the VB, to be used however they decided. How much would they charge? John wanted to know. The answer: 10% a month, or more than 3 times the 3% charged by FINCA.
It worked brilliantly. The more dynamic groups actually made enough money on the “internal account” to pay all the interest on the FINCA loans, making it essentially “free” money to the VB members. The women who borrowed from it were happy because they had more working capital at a lower cost than from the loan sharks.
Sadly, over time, many of the Treasurers began to abuse the trust of the members and embezzle their savings. We at FINCA were unable to place adequate controls over the myriad internal accounts, and eventually had to abandon this part of the model. A word of caution to the “new” trend of community savings groups gaining popularity as an alternative to microfinance. This will become a problem, if it hasn’t already.