George Scott
George spent about a month in Chifeng, Inner Mongolia, as the first Wokai Fellow.
In most of the villages I visited in Chifeng, the most common forms of agriculture are herding animals and raising crops. It’s a hard life that I think most of us wouldn’t take well to. Rising every morning before the sun at 4 or 5am and working through until going to bed at around 9pm. The benefit of a microloan is that it makes this life a little easier, allowing the loan recipient to produce a little more in order to sell a little more so that they can afford a little more comfort in their lives; improving the quality of their housing or paying for their children’s education. But whilst these benefits are plain to see, could more be done to structure the rural loan to suit the rural borrowers even better?
CZSWDA's rural loans are structured to be repaid over 12 months. The first repayment is made 30 days after the loan has been issued and then repayments are due every two weeks until the loan's completion. For urban borrowers or borrowers who use their loan to fund an enterprise that produces a regular cash flow this is not a problem. In one village I visited called Masatala, the predominant form of agriculture was dairy farming. Each household owned a few heads of cattle, and work was shared between the whole village. The microloans they took were used to buy animal feed for the winter or even calves to extend their herd. The cows are milked twice a day, 365 days a year, so the regular cash flow the dairy cows generate is ideal for making the repayments on their microloan.
In other villages I’ve visited I’ve visited it has more often then not been the case, since households raise crops during the summer, as well as livestock. These methods of farming don’t provide as regular a cash flow as that provided by dairy cows. You could think of it as a very slow maturing investment which after the initial outlay -- planting crops or buying a small pig -- won’t generate any cash flow until maturity, when the crops are harvested or the large pig is sold at market. But, since the first repayment of a rural microloan is due only 30 days after the initial loan given, I think this creates a disconnect between the loan repayments and cash flow the loan is supposed to help generate.
If the loan proceeds don't immediately generate cash flow, the loan repayments can easily become a huge burden to the recipient, as it forces her to take on extra work, or sell extra stock just to be able to make the loan repayments. Instead of improving her daily life, a loan ill-matched with the life of the borrower can actually increase the financial pressure that is put on the borrower. This is of course not the case for everyone (some families may have larger stocks, especially if they have previously taken a loan and thus anticipated this issue). But, for a borrower in their first loan term this may be too much.
During my time in Chifeng, the borrowers often mentioned the length of this initial period, asking me to make it long enough for them to generate some income. I had to tell them that it wasn’t exactly in my hands but I would see what I could do. As far as I see it, this mismatch between cash flow and loan repayments is a huge detriment to microfinance’s objective, because it compounds the pressures of an already hard life with the added financial pressure of extra loan repayments.
Perhaps it could be avoided by having a staggered loan repayment period which effectively postpones the initial repayment by a period of time consistent with the generation of cash flow from the type of enterprise in which that group of borrowers specifically engage. Arguments against this staggered or seasonal loan are that that it may lead to a lack of discipline amongst other borrowers; Once borrowers hear that others of their peers aren’t required to make regular repayments they might be reluctant to do so themselves. Another is that an increase in the range of loans offered could lead to confusion amongst the regional loan officers, making it harder for them to keep track of repayments which may lead to increased rate of delinquency.
Whether these are valid practical obstacles, or an easy excuse, indicative of inflexibility and an unwillingness to adapt is not for me to say, but in keeping with microfinance’s ethos of poverty alleviation I would hope that there is enough innovation and flexibility in the industry to ensure right is always done by those who are in need.
P.S. The issues I mention here have been discussed extensively in the international microfinance community. For an interesting discussion about the distinction between the promise of microfinance and its typical impact, I invite you to read "The Micromagic of Microfinance" from the Wilson Quarterly. To read about a scientific test of various repayment schedules and their effects on microfinance borrowers in India, I recommend "Is Microfinance Too Rigid?"
I look forward to hearing your feedback on these important issues.
Happy Holidays!
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