02 February 2011
Microloans - good or bad news?
Microloans are very small amounts of money lent to poor people who would not otherwise be able to borrow. Microfinance schemes started in Bengladesh and India in the 1970s. Their original intention was to encourage entrepreneurship, so that disadvantaged people could start their own small businesses. For in-depth information about microfinance, please see this excellent article The Promise of Microfinance for Poverty Relief in the Developing World
A news item in the Guardian newspaper (UK) on 1 February 2011 describes how things have changed for the worse in India since those early days [read the article]. Commercial firms, driven solely by profit, are now involved in microfinance. Interest rates charged are typically from 25% to 40%. Borrowers are taking microloans to buy consumer goods or even food. Poor people find themselves with debts they have no hope of repaying and interest they cannot afford. They are harassed by aggressive debt collectors, and some have been driven to suicide.
Despite this disturbing news, there are many microfinance schemes which still adhere to their original principles, particularly those promoted by charities and NGOs. Pageant's Loan Scheme in The Gambia is designed to avoid all of these problems by giving control to the local community.
A news item in the Guardian newspaper (UK) on 1 February 2011 describes how things have changed for the worse in India since those early days [read the article]. Commercial firms, driven solely by profit, are now involved in microfinance. Interest rates charged are typically from 25% to 40%. Borrowers are taking microloans to buy consumer goods or even food. Poor people find themselves with debts they have no hope of repaying and interest they cannot afford. They are harassed by aggressive debt collectors, and some have been driven to suicide.
Despite this disturbing news, there are many microfinance schemes which still adhere to their original principles, particularly those promoted by charities and NGOs. Pageant's Loan Scheme in The Gambia is designed to avoid all of these problems by giving control to the local community.
- Pageant does not lend to individuals, only to groups - typically six women within the same community. Having a group means that each woman can help and encourage the others.
- Each group needs a coordinator. This must be a woman who commands respect in the local community, with a good understanding of how the scheme works and able to give Pageant feedback on progress. The choice of a good coordinator is the most critical thing in setting up a new scheme.
- Pageant does not get its money back, so the initial loans can be viewed as a gift to the community. Currently each woman gets 1500 dalasis (about £34), so Pageant has to spend about £200 to set up a new scheme.
- Each potential member of a scheme has to make a presentation to a community meeting explaining how her particular enterprise will work, and assess if the community will support it. In this way, all of the enterprises in a scheme have a very high chance of success.
- Once the scheme is running, each member is asked to pay back 1/6 of their loan at the end of each month, so all the money should be paid back in six months. It is then available for a second group of women, so successful Pageant schemes could go on indefinitely.
