1 – Microfinance
Microfinance is a common term for providing: credit, savings, insurance and other financial services to the poorest people in developing countries who have no access to the formal financial system or guarantees.
Microcredits provided by microfinancial institutions are usually credit lines, used for productive activities, not for consumption.
This type of investment is suitable for stabilization and supplement of portfolios as it is an alternative asset with attractive interest and at the same time with demonstrable advantage for healthy development of world economy. The benefit is in stability coming from the independency of the local economies on the fluctuation of global economy.
It is all about entrepreneur loans, not consumer loan. The result: The borrower is highly motivated to pay off, otherwise his business will stay without working capital inflows and he/she will never receive another microloan.
The repayment of a loan is guaranteed by all members of village bank/solidarity, which is a group of debtors, who democratically elect their leadership. These leaders collect the installments and deal with banks, etc. In particular, the leaders maintain the discipline within the group.
The Credit Officer usually lives in the area where loan groups are based. This gives him/her a chance to effectively supervise these groups and thus he/she is often employed full time by the microfinance institutions. Credit Officer must know well the local environment, the local language that may vary from the official one and must have a local authority.
The lending discipline consists of, for example, regular meetings of the loan group, controls of the Credit Officer, fines for late arrivals in meetings, etc. Borrowers are strongly motivated to regularity not only by these mention sanctions, but also by awards: the main award is to obtain the next loan, usually higher and with advantageous conditions. Some MFIs reward good payers by returning them part of the interest.
The client always pays interest that must cover at least all the costs associated with the loan. Also in the case of microloans funded by the government or non-profit organizations the interest rate does not have only symbolic meaning.
To start, small amounts are lent out. If the entrepreneur makes a good progress he/she is entitled to obtain a higher amount. Successful clients may obtain a loan of hundreds or thousands of dollars. The most successful clients have level of loyalty close to 100 %. In majority, however, microfinance is about credit lines, long term financing, not necessarily about loans that are demanded time to time.
One of the reasons why microfinance is so popular is an aspect of the creation of socio-economic structures. These structures are a great alternative to usually poorly functioning state or commercial organizations. Members of the groups are sharing their knowledge, experience and are helping each other in their businesses. Clients are willing to pay for this "membership" high interest rates, not only because they profit from the financial services, but also because they can be part of an information flow. Further, many of the loan receivers produce very interesting goods, but they are not familiar with business or marketing principles. Microfinancial institutions can have also a commercial sector which helps to place products of borrowers in the market or assists in procuring of long-term contracts.
The main marketing and commercial instrument of the MFIs is a direct presence of their employees in terrain. When "a bank on wheels" arrives in a village, no advertisement is needed; everyone knows it in a few minutes.
Extorters build up client's loyalty by applying the method of the "snow ball" - one loan covers another loan and so on. Microfinancial institutions intend to reach clients' loyalty by supporting the economic growth of a borrower. When is the client successful he/she can demand constantly higher loans with better conditions. Contrary to consumer lending where there is no need for loyalty, microfinancial lending creates a strong loyalty: the institution knows the client, trusts him/her and, therefore, next time may offer a better condition.
Microloans are provided to democratically created communities whose members warrant the loan with the principle "one for all – all for one." The repayment of the loans is not enforced by an anonymous bank, but through local village authorities. The most popular methods of microcredit distribution include Village Banks and less numerous Solidarity Groups.
Village Bank is a group of 15–35 members, which are provided small loans with a weekly repayment period and a relatively short credit cycle – usually several months. Solidarity Groups members, on the contrary, reach slightly higher amounts with longer credit cycle, e.g. one year. Solidarity groups are very small, typically involving from 4 to 8 individuals.
Microcredit programs are slowly improving its original methodology with the support of various security mechanisms, which are not applicable for standard loans: for example, obligatory savings, unpaid loans covered by joint funds or blocking of loan availability to a group if one member cannot pay an installment.
Poor entrepreneurs, especially women, are proving great ability to pay off loans and interest, the rate of unpaid loans provided by this methodology is thus usually surprisingly lower than the one of commercial loans.
In the case of payment failure, the loan is usually restructured and paid in smaller amounts during a longer period. There are also credit lines and possible long term relationships between clients that need the capital to grow and the MFI, the only source of capital available. The correct repayment of the loan is underlined by the sustention of the borrower's family. Intimidation of dishonor and future of the individual within the village community also plays an important role in repayment therefore a good will to reach an agreement exists on the both sides.
The price of the capital
The interest rates of microloans are usually between 15–20% in Asia (where this sector is well developed and usually endowed by the government) and up to 30 % and more in Mexico and other countries in Latin America. The higher level of interest rate is caused mainly by high operative and administrative cost which often forms around 30 % of the total interest.
The interest cycle is usually shorter than commercial loans: 6 up to 12 months with weekly or bi-weekly repayments. Small intervals between repayments and, payments in small amounts do not burden clients of microfinance, yet are more demanding for the institution that has to administer higher volume of information. Every borrower is regularly visited by the credit officer, even if the borrower is usually located in a place without infrastructure and far from civilization, which increases the cost of the microloan administration.
However, even such a high interest rate level is still more advantageous for clients compared to a loan from local extorters that charge tens of % daily. Lucidity, correctness, speed and regular access to financial services are worth it.
Microfinance in the global scale
Microfinance builds financial markets and civilization structures in isolated, forgotten regions. The number of small businesses without access to financial system is now estimated to be 400-500 million. Potential of the developing world is still left out and millions of hard-working, enterprising people do not have the chance they deserve.
Microfinance enables to lend to the poor under fair conditions while respecting their own business plans and initiative and thus build self-confident individuals independent on external aid.
Microfinance enables the poor to increase their income, build their businesses and reduce their vulnerability. It can also be a powerful instrument for self-empowerment by granting women the possibility to become economic agents of change and win respect in their communities. Microfinance clients often improve their educational level and their social status.
Since 2006, four microfinance institutions were funded in Mexico and distributed the money in the form of microcredit to the poor entrepreneurs. All obligations to the investors who invested through the portal, were fully met.
2 – Membership in cooperatives
Membership in cooperatives implies becoming shareholder of a cooperative with one vote right. It permits to save periodically with the members of the cooperative, or invest one amount according to the decision of the saver. Apart from the guaranteed income, there are shared dividends, in successful years. The members have the right to participate in general meeting where farmers, small producers and villagers gather and democratically decide on the profit sharing and strategy.
The advantage of the cooperatives is the limit of votes per person, which inhibits concentration of power and capital to few individuals. The wealth is thus equally distributed between members. What is also interesting for foreign philanthropists is the opportunity to visit the general meeting of the cooperative. Savings of the savers help many poor families, through transparent and democratic process.
The enabled membership to foreigners through such a channel, is an unseen innovation created by myELEN.com, still not existing anywhere else.
myELEN.com team has a long experience of cooperation with cooperatives in Mexico, where we participated on the implementation of the cooperative law. We are now in the process of launching this innovative product for the public in Europe and we believe that this product has a huge potential thanks to formal participation of the philanthropist and high degree of solidarity and social impact.
3 – Loans to individuals
Together with Mexican NGO Vínculo Comunitario A.C, represented by Noe Mendoza Fuente, myELEN.com presents an opportunity to finance rural farmers and small peasants without financial resources in Mexico. Revenue is high, secured by a promissory note. The project is risky due to absence of a financial intermediary, but with a powerful social impact. Project monitoring is provided by our partner NGO Vínculo Comunitario AC, which gives the farmers the tools to analyze their situation and design their strategies of development.
Recently we have also started to support projects from our neighbourhood in the Czech Republic.
Since 2011 it was possible, in cooperation with Mexican organizations Vínculo Comunitario A.C., to financially support a rural farmer Javier Lopez without financial resources in central Mexico. The loans were used for the purchase of cows of approx. 1,000 EUR/ pc worth. All payments were paid properly and without delay. More products will be coming soon.
In the pilot project in the Czech Republic we helped Martin Rosenbaum from microregion Frydlant in northern Bohemia by finding financial resources that enabled him to start building a cheese factory on his organic farm.
4 – Microguarantees
The lack of capital in microfinance sector is partially caused by lack of trust of supporting public. Within the framework of our project we therefore offer an opportunity to create a private guarantee fund, that will enable physical persons as well as corporates to create a financial cushion, that will serve as a reserve to those who provide loans to MFIs. This unique p2p mechanism multiplies the impact of the support, diversifies risks and widens the accessibility to those, who are willing to help, but are afraid of risk.