Colombia's Microcredit Economy: How Tiny Loans Can Both Bolster And Burn The Poor
BOGOTA, Colombia -- Microfinance became a buzzword in the world of social development when Muhammad Yunus won the 2006 Nobel Peace Prize for his Grameen Bank in Bangladesh. Today, Grameen America has 18 branches in 11 U.S. cities. And Accion, the country's largest microlender, works coast-to-coast with major operations in Texas, Arizona and California.
In developing countries like Colombia, microloans--$25 or $50 up to $1,500 or more--are a big business. The idea is to give loans to people who can’t get credit and who can't get access to traditional financial services offered by banks.
One such person is Elizabet Abella, whom we met in a steamy cinderblock kitchen in Barranquilla, a gritty port city on Colombia's Caribbean coast. She was preparing the food she sells to owners of streetside stalls.
"I’m preparing beans in a pressure cooker," she said in Spanish as sweat coated her hands and steam enveloped her.
She received her microloan from Opportunity International, a Christian faith-based organization that operates in 28 countries.
“We sell in the central market," Abella said in Spanish. She said the loan she'd received had greatly changed her life for the better.
In Abella’s case, collateral for her microloan of approximately $150 came from others in a group of loan recipients. The concept is known as a "trust group." If someone defaults, everyone else is supposed to pick up the tab. The concept is also used by other microlenders.
“Microfinance is one of those ideas that sounds really good in theory," George Washington University international business professor Noel Maurer told me.
He said microlending has had undeniable successes but that it can be complicated. The landscape of microfinance is littered with stories of people who can't repay a loan and who can't escape the cycle of debt. One Mexican microbank was slammed for charging more than 100 percent on its loans. A study at Yale found that one microlender in Africa charged its poor clients 200 percent.
Another study at Stanford concluded that microcredit does not significantly alleviate poverty in developing nations and that meaningful job creation is a better longterm solution to combating poverty. Other studies suggest that in some instances, microcredit makes life at the bottom worse. Part of the difficulty in understanding microlending's impact is a serious lack of reliable data on what works and what doesn't.
"It is not an easy panacea, nor is it one of these motherhood issues that I think everyone should just sort of blindly get behind," Maurer said. "If it goes wrong, it can go really wrong.”
Colombia is a crucible of microlending. There are seven for-profit microfinance banks here. And the World Bank’s microfinance office for all of Latin America is located in Bogotá. The World Bank has invested in one those banks, Bancamia.
I spoke with Bancamia's Senior Vice President, Margarita Correa Inau in her office in Bogotá.. "Helping people at the bottom of the pyramid," translates into profits, she said in Spanish. She said that without predictable profits, microlending cannot be sustainable.
"This is a business, period," she said in Spanish. Collateral is put up by foundations or agricultural cooperatives. The bank serves its clients one to one. You file a business plan and if you make the cut, you’re paired with a formally trained banker.
"There are some people who are delinquent," Correa continued. But as is often the case in microfinance, the default rate is low, about four-to-six percent and often lower.
However, when you speak with people here, they don't just talk profit and loss. They also talk about avoiding loan sharks.
“Up to 20 percent per day is the rate that loansharks get here which is stupidly high," said Boris Lozano, an analyst at Bancamia. He said the the chance to escape predatory loan sharks is one reason why microfinance clients typically pay their loan repayments on time.
“There is a myth that the field is a little bit responsible for itself, that the programs can cover their own costs.”
Servon is the author of the upcoming book, “The Unbanking of America.” It documents how U.S. banks fail to provide affordable financial services as growing numbers of Americans on the margins need them. With respect to microlending's footprint in the U.S., Servon says it is far more costly to generate and service microloans in the U.S. than it is in Africa or Latin America.
“Programs started developing in the late 80s and early 90s in this country," she explained. "There was this thought that if they were close to self-sufficiency in the developing world, that we could get there too. And then we figured it out that it actually costs a lot of money to make the loans.”
Despite those costs, commercial microcredit is growing in the U.S. Servon says there isn't one solution to poverty and economic development. She says many small solutions are needed and that microcredit is one of them.