Given recent press criticizing microcredit, Whole Planet Foundation is providing the following information to assist in responding to Team Member, customer questions or concerns from the public.
FAQs:
1. What about the poor living "idyllic" lives on "peaceful" small farms? And protecting them from a "consumer mentality" and "big businesses" who surely would abuse them? Why don’t we just leave them alone? What about suicides associated with microcredit loans?
• Living at the poverty level is very dangerous, precarious and not at all idyllic. Suicides among the poor, although not generally studied, are believed to be quite common, perhaps with rates much higher than in the wealthy countries.
o Chronic childhood malnutrition is very common and reduces a child’s IQ by an average of 20%. (Per the noted Peruvian economist – not the Spanish explorer - Hernando de Soto).
o Almost uncountable parasites and diseases such as malaria, dengue, Rotavirus and seemingly countless others kill millions of poor every year. Disease we don't have to worry about and for the most part conquered years ago.
o Life expectancy can easily be half of ours.
o Suicides have always been high among the poor. Before microcredit, there were moneylenders – loan sharks. Many so-called “microfinance” lenders today are just loan sharks in new clothes that use brutal techniques to collect delinquent loans.
FAQs:
1. What about the poor living "idyllic" lives on "peaceful" small farms? And protecting them from a "consumer mentality" and "big businesses" who surely would abuse them? Why don’t we just leave them alone? What about suicides associated with microcredit loans?
• Living at the poverty level is very dangerous, precarious and not at all idyllic. Suicides among the poor, although not generally studied, are believed to be quite common, perhaps with rates much higher than in the wealthy countries.
o Chronic childhood malnutrition is very common and reduces a child’s IQ by an average of 20%. (Per the noted Peruvian economist – not the Spanish explorer - Hernando de Soto).
o Almost uncountable parasites and diseases such as malaria, dengue, Rotavirus and seemingly countless others kill millions of poor every year. Disease we don't have to worry about and for the most part conquered years ago.
o Life expectancy can easily be half of ours.
o Suicides have always been high among the poor. Before microcredit, there were moneylenders – loan sharks. Many so-called “microfinance” lenders today are just loan sharks in new clothes that use brutal techniques to collect delinquent loans.
o There are many causes for suicides among the poor, just like with the wealthy, such as:
1. Release from the burden of a dull, stifling life of hard labor
2. Escape from the responsibility of supporting a large family created as a sort of social security for “old age” (sometime after 30) and to provide “free” labor for the family farm
3. Escape from illness, including chronic depression and other mental illnesses where there is no money for medical care, or no medical care even if a little money could be found
4. Old age itself is an additional burden on the poor family and is often accompanied by painful physical conditions from decades of working the farms. Suicide is what you do when medicine and hospice are not available.
• Life on the "poverty factory", i.e. the subsistence and so-called "peaceful" farms, is gut wrenchingly difficult with 16+ hours of backbreaking days for both the very young and old is not uncommon during planting and harvest seasons. At the best of times, these farms breed little more than child labor, chronic malnutrition, over population and ignorant illiterate people who will never be able to escape poverty. During the worst of times, they breed famine and even an early death.
o The farms get smaller with each new generation trying to farm the same plot of land. The rest flee to the city, but are ill prepared to do much except manual labor.
o These farms and farmers are some of the worst environmental stewards, destroying forests, over using chemicals and soil depletion among others.
o Suicides are not uncommon, as poor nutrition, high infant mortality, diseases, grueling work or not enough work, putrid living conditions all take a psychological toll.
• Local moneylenders, government bureaucrats and other local plutocrats abuse and steal from the poor who have no power or rights to stop them.
o Property rights are almost non-existent. de Soto’s studies show that wealth creation is almost impossible without some way of storing wealth in real assets.
o Judicial systems are corrupt and favor the landowners and wealthy.
o Police frequently brutalize the poor, especially with the urban slum dwellers.
o When governments ban microloans to the poor or heavily regulate interest rates this only deprives the poor access to capital that could help them live better lives and drives them into the hands of the local moneylenders who interest rates can run into the thousands.
1. Loan sharks use brutal techniques to collect on delinquent loans and confiscate meager property.
a. These local moneylenders are often the same government bureaucrat who is outlawing the competition.
b. Slum landlords in many cities are actually bureaucrats who build shanties and rent them out to the poor. Property rights and microlending give the poor weapons to use against these corrupt bureaucrats who are often trying to kill any legislature that would impinge on their side businesses.
2. WPF refuses to work with government run MFIs (microfinance institutions), as we’ve found these are almost always poorly run, corrupt and generally inept
o Whole Planet Foundation works primarily with Grameen or Village type microloan organizations that do not require collateral or use legal coercive means to collect.
1. The Grameen or Village Method is fairly complicated but includes a gradual increase in credit as the borrower proves she can handle the debt
2. The group (of usually 5) guarantees the first borrow whom they select to receive the groups first loan. Once that loan is being repaid successfully, a second member is selected and so forth.
3. Due diligence is done and education is given to make sure the borrower has not taken out other loans or will take out other loans.
4. Loans are kept small. The example of the Bangladeshi woman who had $250 in debt, which is almost 2 years income to a subsistence Bangladeshi farmer (urban manual labor pays $17 a month) could never happen in a Grameen style MFI that is run correctly
5. We do an enormous amount of local due diligence and site visitations before agreeing to fund a particular MFI. We now have permanent Regional Director stationed in Latin America (Costa Rica), Africa (Senegal) and Asia (Hanoi).
• Multinational businesses are now seeing that there is a lot of business that can be done with the poorest-of-the-poor by packaging and pricing their products specifically for the poor.
o These quality products are no more expensive than the traditional poor quality products the poor have been buying.
o These new products often generate much needed jobs at this level, the so-called “bottom of the pyramid”.
o The poor have the right to not only access to capital but quality products that will make their lives a little nicer, easier and dignified.
o Yet many anti-business groups oppose big business from providing services to the poor.
• Becoming part of the world community, the "consumer mentality" community will bring prosperity and a happier and heathier life to the world's poorest.
o It is estimated that by the end of this century the average "poorest of the poor" person at the very least will be living at the level of an average person in Portugal today and very easily could be living at the level of an average lower middleclass American. In essence, world poverty as we know it will have been eradicated.
2. Does it work?
• In one word, YES, microcredit can help relieve poverty, but it is not a silver bullet. A poor women and her family do not escape poverty after receiving a single loan. Challenges continue but microcredit provides a tool and access to capital in order to change her and her family’s lives. Whole Planet Foundation believes in the power of the poor and is committed to supporting new, more, and better opportunities to alleviating poverty.
• The claim that after decades of microlending in Bangladesh there is no evidence that poverty has been reduced is a comment we’ve heard often.
a. Bangladesh’s population now stands at over 160, 000, 000, or more than half what we have in the US and they are all crammed into a space about the size of Ohio.
b. Obvious poverty hasn’t been reduced due to the huge population growth; population growth is a result of extreme poverty.
i. Still, millions of lives have been improved although the need is still huge and demand for capital enormous.
ii. Nevertheless, even in Bangladesh the growth of the population is now about half what it was in the 1970’s
iii. This follows the worldwide trend that as a population gets wealthier, the rate decreases.
c. This seems to contradict the report, which states that according to “standard” measurements poverty hasn’t improved.
i. We’ve never seen any measurements standards that are even remotely close to being universal. Indeed, we believe that each community would have to have its own standards to measure against.
d. It is undeniable that when a woman consistently takes out and repays microloans successfully, as millions in Bangladesh and elsewhere have done, her family income will improve.
i. Perhaps not above the so-called poverty level of, say, $4-5 a day, but many easily double the $1 or less a day income to $2 or more.
ii. This increased income is generally spent on the wellbeing of the family, providing better nutrition, education, housing and medical care for children and, thus, giving these children the real opportunity to escape poverty.
iii. We like to say that escaping poverty is generational.
3. Is Whole Planet Foundation funding microcredit in India?
• Yes, Whole Planet Foundation partners with Professor Muhammad Yunus and Grameen Trust in the state of Kerala which is not affected by the issues in Andhra Pradesh, India. The criticisms, like collection methods and interest rates of the Andhra Pradesh State Government are key factors that the Whole Planet Foundation programs team has looked at with all of our partners.
• The recent suicides in India are very unfortunate circumstances. Indeed these are not Whole Planet Foundation-supported borrowers as we partner only with global MFIs that share our philosophy and allow us absolute transparency into their practices and accounting for us to independently evaluate and monitor in order to guarantee that our borrowers are treated fairly and with respect. A well run MFI takes great pain to make sure borrowers are not borrowing from multiple sources and that their credit load is manageable. However, as one can imagine, where money is involved, the unscrupulous abound. Our advice would be to ignore the sensationalist press reports always looking for the provocative.
4. Who sets the interest rate and how is it determined? Are interest rates to the poor usurious?
• Whole Planet Foundation does not set interest rates. Interest Rates charged by Whole Planet Foundation microfinance partners in the field are impacted by a number of factors and vary by country. We work with MFIs that have agreed to keep the interest as low as possible while covering inflation, cost of capital, MFI overhead and other associated health, savings, insurance and education services (when these service are offered), and profit. Profits are retained at the lending center and used to further possibly larger loans.
• Sometimes they are very high by Western standards, but the highest rates inevitably come from moneylenders who traditionally are the only ones are willing to lend to the poor. Risks can be substantial, but the poor are usually good credit risks.
• So, why the high rate from moneylenders?
1. In short, lack of competition. The term “usury” is subjective. What appears usurious to the West is actually quite reasonable, all things considered, in the developing world.
2. Interest rate levels in a competitive free market place will follow three laws of “neoclassical” economics (per Mark Skousen’s excellent “The Making of Modern Economics”:
The Law of Imputation: The Consumer Origin of Value; i.e. the consumer alone determines “productive activity” not the government or labor (as the Marxist asserted) or anyone else. The FINAL demand determines pricing.
Marginal Utility/Cost; i.e. prices and costs are determined at the “margins”; by the benefit/cost to buyers and sellers. The poor borrower will determine if there is sufficient benefit she can derive from paying the cost of a loan.
Subjective Value is ENTIRELY dependent on the DESIRES of consumers and producers; i.e. wages, rents, interest and profits are determined by the subjective valuations of the consumer and users. (The borrower isn’t going to pay the interest rate if it doesn’t have the value they think is necessary to justify the price.)
• That’s theory and the reality is that interest rates charged by competent, socially conscious microfinance organizations (MFI) are sometimes very high, as well. Note: Even Grameen Trust, Grameen Method MFIs and other MFI’s APR interest rates can reach to 70% and beyond. Why? Several reasons: Interest rates are determined locally by five main factors. They are:
1. Rate of inflation in the country.
Double digit inflation is not uncommon in developing countries. Interest rates have to cover inflation.
2. The cost of capital (COC) or rate that the MFI must pay for capital; i.e. cash in the capital market (banks, etc) that they use to relend to poor borrowers. Hundreds of billions of dollars will be needed to fund the billions of potential poor borrowers.
Cost of capital (COC) is often well into double digits 15-20% in developing countries. Interest rates now must cover inflation + cost of capital (COC usually does cover some of the inflation, but often not all.)
3. Cost of providing the loan (MFI’s Overhead) is very high due to the fact that the most successful operations usually visit borrowers 25-50 times a year at locations near the borrower’s homes and this takes an army of field loan officers, motorcycles and other support.
Traditional banks can’t do this. Interest rates now must cover inflation + cost of capital + MFI overhead
4. Additionally, some MFIs believe it is imperative that they extend other crucial services to the poor along with the loan. These can include:
Health exams and other medical services such as family planning and reproductive or parenting education
Business advice and education/training
Marketing advice and assistance for their crops or products
Mandatory savings (often cited as necessary to escape poverty)
Health and/or life insurance
5. Profit or for the non-profit “excess capital”. Either way, the MFI must end up the year in the black or face going out of business.
In conclusion, interest rates and fees must cover:
1) Inflation
2) Cost of Capital
3) MFI overhead
4) Other associated services, such as health, savings, insurance and education services
5) Profits or excess capital at year end
So, it is not only interest that is involved in the “interest rate” charged to borrowers. Still, these loans are appreciated and generally much cheaper than a moneylender, plus it delivers other valuable services and access that the poor borrower usually does not have access to. If the choice is having to pay higher than Western rates for interest or no access to capital, the choice is clear and unambiguous from the poor's point of view (if not the arm chair critic sitting in a comfortable living room or office thousands of miles away).
5. Why give credit to the poor?
• In communities void of jobs and based on the informal economy, credit is the first and often the only opportunity that the poor have to improve their family’s lives. Whole Planet Foundation focuses on supporting access to more opportunities in the form of microcredit with world-class organizations that deliver much more than a loan. Our partners provide a multitude of services from literacy workshops, to business training, to critical health services all which are not possible without first investing in the poor's own personal capacity with microcredit.
6. How often does Whole Planet Foundation monitor its partners?
• In order to assure the right partners with an appropriate methodology are selected, Whole Planet Foundation has a team of development professionals that live and travel throughout the developing world to conduct onsite due diligence and monitoring of our partners’ performance. This team conducts a site visit in order to select the microfinance partner and returns in person at least once during the grant period to monitor and evaluate, as well as conducting regular remote reviews.
7. What happens when a microcredit client cannot pay back a loan?
• On average over the last 30 years, this been 2-3%. Practically every MFI has a different approach to the problem. However, generally, with our MFI partners the portfolios at risk (PAR) are quite low - less than 3% is the norm. Within the 3%, the bad loans are either paid by the group, set aside while a new business loan is taken or simply written off. We do not support any MFI that resorts to asset taking or other coercive measures to satisfy a debt.
• During our due diligence phase of selection a new MFI partner, WPF will review these as well as all policies of a potential WPF grant recipient to make sure their policies are acceptable. However, we are not in the MFI incubator or improvement business; i.e. our mission is to get business development funds into the hands of the very poor. We look for MFIs who have a proven track record for doing just that. We have staff to monitor and evaluate how well our grants funds are spent, but no staff for MFI training development.
8. At what rate is micro lending growing throughout the world and what is WPF's growth?
Mixmarket.org has an extensive amount of information on MFIs. We can see Whole Planet Foundation historical data compared to yearly disbursement totals from about 1900 MFIs worldwide. We can see that not only is Whole Planet Foundation in line with the market but that MFIs on a global scale have experienced accelerated growth over the past 8 years.
Latest Whole Planet Foundation metrics show phenomenal growth since our first country (Costa Rica) and loan in 2006. We now have authorized grants in excess of $10 million, in 29 countries to over 170,000 families with about 800,000 direct beneficiaries in these families. The other indirect beneficiaries from re-lending the loan money over and over to ever more borrowers along with the positive economic impact from all these new businesses to the communities is incalculable. Surely it must be in the millions of beneficiaries. As far as our future growth, Whole Planet Foundation will almost double the number of countries we are working in from 29 as of January 2011 to about 60 by the end of 2012.
9. What have you learned from working with the WPF?
• One microcredit loan is almost never enough to help a poor family escape poverty. It will, however, along with subsequent business expansion loans, help individuals provide better nutrition, healthcare, housing, education and schooling to their children, who will then be better prepared to escape poverty. Ending poverty is a generational endeavor. Sometimes, although not very often, an economic middle-class level can be attained by a first generation microloan recipient.
10. Where can I learn more about Whole Planet Foundation?
• Our website at http://www.wholeplanetfoundation.org and our 2011 video on WFMU at http://wfmu.wfm.pvt/media_players/view/31/
11. How can I get involved in Whole Planet Foundation?
• Visit our website, read Banker to the Poor by Muhammad Yunus and other books recommended on our website, participate in the Whole Foods Market Team Member Volunteer Program, donate via payroll deduction, and raise awareness of poverty alleviation to help the 3.8 billion people living on less than $2 a day.
