Stories from Inner Mongolia: Can you be too rich for microcredit?

George Scott

 

Today I attended a meeting for an entire village’s microcredit customers. In total there were five groups, 30 people, from a village where one third of the women were long-term microfinance customers. The meeting was held in an office that had been established by the village elders a generation before and passed down. There’s often a very strong sense of community in the villages I’ve visited, almost like a clan or a tribe, which seems to create a strong binds between them. The meeting was the last meeting in this loan cycle, all of the women there were making the last repayment of their 4^th loan, and signing a contract to take out their 5^th consecutive loan.

 

The meeting itself was a good example of how effective microcredit can be effective. Although they were in effect rural borrowers who lived in a small village of about 120 people outside of town, they couldn’t have been more different from some of the other groups I have seen. These women were smart, confident, well-dressed and to all appearances, businesswomen, a thousand miles from some of the other rural groups I’ve visited. As I started to ask questions I also began to notice a difference in their attitude to me. When I asked them how they used their loans, the only response I could seem to get from anyone was “small trade”, trying to get them to expand on exactly what kind of “trade” they were undertaking was like a drawing blood from a small stone. Some gave noncommittal answers about clothing but most really did just do small trade, buying what was cheap and selling it on for a profit. It began to dawn on me that the line of questioning that I’d used with other groups might not be as appropriate here, even seeming silly and rather patronizing to those I was asking questions of. When I asked why they took out a loan, many of them just laughed at me. Of course, it’s obvious to them why they took out a loan, why wouldn’t they? It’s money, it’s easy and convenient money. When I asked the equally patronizing question of how does their life now compare with their life before their loans, many said simply “about the same”. I got the feeling they thought I was perhaps looking for a story of how poor had been and how lucky they were now that they have access to loans, and they certainly weren’t going to give it to me. There was no sob story here that was going to make people reach for their wallets in sympathy, but was there perhaps something more interesting?

 

To me microfinance was created for the purpose of lifting people out of poverty, a leg up to those who had no other way out, a foot on the ladder of development. Whilst this group weren’t diving around in bran new Audi A8’s, they didn’t seem to be suffering the effects of poverty either, in fact they all seemed to be prospering. When I asked why they didn’t take out a loan in a bank, I was told how impractical it was; having to open an account first, and find three people to act as guarantors. I was told that a microloan was far more convenient, and they are. The service is brought to you, you don’t have to tie up any capital by way of a deposit, every two weeks/month when your repayment is due, a loan officer will come round and collect it from you. These women weren’t struggling to survive; they seemed to me like enterprising women who were making good use of the existing system. But in a region where I’ve been told that there is a strong demand for microloans, are these women unnecessarily taking up precious loan capital?

 

CZWSDA do have an upper income limit for customers, above which they won’t offer loans, but this only applies to first time borrowers. Previous customers whose income has risen above this level can continue to borrow year after year. And why not, it provides CZWSDA with a steady clientele, steady income and steady salary to their loan officers, much of whose wage is made up by commission. It would add another element of uncertainty if they were continually having to look for new customers to replace those that no longer qualified for microloans because their income had grown too large. However, should the upper income limit apply across the board to existing customers as well as new?

 

It’s very easy to continue handing our loans to the same group of customers, and it’s equally easy for the customers to become accustomed to taking our loans.  I see this in itself as the potential for a problem; instead of encouraging the development of self-sustaining businesses, borrowers may grown used to taking a yearly loan over time could grow dependent on their loan and may even structure their business’ cash flow around this regular influx of cash. The other maybe more important issue is by recurrently taking out loans each year, are they diverting money away from people who need it more then they do? It’s very easy to continue to hand out easy money to old customers even friends who are more then happy to keep receiving it, but should there be a cut of point where the industry says that’s enough, it’s time for someone else to have a turn? Is there a way that Wokai can ensure that it is continually helping the poorest of the poor, and that money that is donated gets to those people who need it most?

 

I am perhaps unqualified to talk about this and before drawing any more conclusions I would have to research much further. I think this is an interesting issue. Whether or not it is an issue here in Chifeng depends on the ratio of loan capital to potential borrowers, but in a country where I’ve been told there’s a huge shortage of loan capital, if it’s not an issue here it must be somewhere else. If anyone has any thoughts or even corrections on the conclusions I have drawn here, I would love to hear them.

Comments

[Courtney McColgan]

George -

Sounds like you are really getting your hands dirty. It makes me jealous!

Hope all is well in Nei Mongu

[Joyce]

hmm that story was not at all what i expected, and while my gut reaction was that "this is troubling" and hopefully the money isn't being diverted from other people who might need it more, on a cerebral, more business level, it does make a lot of sense for the local MFI to have a steady clientele base. Perhaps when returning customers come for a loan, the amount has to be used explicitly for some form of expansion of their business, not just buying inventory, but an actual good that they buy and retain that will continually affect business (i.e. a refrigerator or capital for store relocation). Just a thought, I haven't really brainstormed this through yet...

[Ben]

Interesting.
Is it the case that in a truly liberal economy an MFI would use it's clients flourishing businesses to grow into a bank? Another MFI would then move in to plug the gap in the market (i.e. providing loans to the people who have been shut out by the original MFI)
How easy is it to start an MFI in China?