30 June 2009

Most of the smallholder farmers in the village of Cariamamo are women, mostly widows supporting their families by themselves. We visited with them and listened to their stories on 17 June 2009.

Women's microfinance group and agricultural association at Cariamamo

Farming in Huambo requires fertilizer, which must be purchased for cash. Rotary is providing a first round of fertilizer for 25 village associations, but after that, they're on their own.

The solution is microfinance, where small groups of villagers, typically all women, band together to guarantee small loans for each other.

Small loans are made to, and within, "solidarity groups" of about 20 women who meet regularly to make payments, receive training and, typically, guarantee each other's loans

The women in Cariamamo went through three weeks of training, to learn about borrowing money and other financial basics. Then, they each took out a loan of about $275, planted a commercial crop, and repaid the loans in four months, at an interest rate of 2% per month. Every single loan was repaid in full.

Donna Dominguez, president of Cooperative Agrocalenga Caála, the microfinance solidarity group in Calenga. She is using the money she has earned through potato farming financed by the group to send her children to school.

The source of the loans is a microfinance operation sponsored by the European Union, World Vision and a bank controlled by the Angolan government. This World Vision-led program has already established ten community banks serving a total of 500 women. Four more banks are in the formation stage, looking for financing. Two days later, in Calenga, we saw how the microfinance process actually works.

The members of the Calenga microfinance solidarity group, all women, meet regularly to make payments on their loans. The payments are made in cash, in front of everyone.

The women's group in Calenga began with a program very similar to our Rotary project. At first, loans consisted of bags of fertilizer, just as we're doing with 25 other village agricultural associations throughout Huambo province. As we found, though, there's more to building a sustainable commercial farming operation than seed and fertilizer. Basic tools are lacking, transportation is a constant challenge and expertise is needed to fight plant diseases.

Everyone in the solidarity group is guaranteeing everyone else's loan, so all the accounting and other group business is conducted in the open. If there's a problem, everyone knows about it immediately and can pitch in to help fix it.

Meeting those needs requires cash. Banking and other financial services in Huambo are rudimentary, and generally available only to the relatively small wealthy and middle classes. There are no banks in the small villages targeted by Rotary and World Vision.

The answer, in Huambo as in developing countries around the world, is microfinance. The approach World Vision used in Calenga was to recruit a group of women from the local agricultural association to form a microfinance solidarity group. This group has 24 members, which is typical, although solidarity groups can range from ten to forty members.

Fingerprints certify that payments have been made. Technically, microfinance is considered informal lending, but that doesn't mean business is conducted haphazardly. Books are kept and checked at least as rigorously as consumer banks do in developing countries. Tight and transparent accounting helps produce high repayment rates. It also adds to overhead, which is a major reason microfinance interest rates tend to be high.

In this case, a bank controlled by the Angolan government agreed to participate. The bank made small loans, typically a few hundred dollars, to members of the group and charged an interest rate of 2% per month, which is actually low by microfinance standards.

As is common with successful microfinance programs, the Calenga group has gone through several rounds of lending, each round generally higher than the last. At this point, the average loan taken out by a member is $720.

Initially, the government-owned bank put up $1.2 million in capital and World Vision backed the loans with a $120,000 guarantee fund. This financing package was enough to begin the program in 42 villages, representing 4,390 families.

As the Calenga group began borrowing and repaying loans, they built their own guarantee fund. Starting with a 10% contribution in the first round, the women built the fund and their contributions into to 20% of the outstanding loan amounts. Half of that money is set aside to cover bad loans, the other half is used to fund additional loans for non-agricultural purposes.

Members borrow money from the solidarity group's own funds, and use it to start small businesses, which in turn can pay for educating children or for basic necessities. When the group lends its own money, they charge 5% interest per month, which is more typical of microfinance operations. The overhead costs of managing and servicing small loans in rural communities are high.

Evarista Maria Tesou (standing, center), a member of the Calenga microfinance group, took out a micro loan that was financed from the savings of other women in the group. She used the money to start a small business making and selling clothes, paid it back in full, with interest, and continues to grow her business through ongoing micro loans. Jonathan White (left), World Vision Angola operations director, translates.

The risk is not as great as you might think, however. In the bank-funded program, loans are made to members of the agricultural association as well as the solidarity group. The association's membership includes both men and women, and the repayment rate is about 80%. But when the solidarity group lends its own money, it is only to other women, and the repayment rate has been 100% so far.

There are a couple of reasons for the difference. First, women, in Angola and elsewhere in the developing world, tend to be more responsible with money. They will spend it on supporting their households with very basic necessities and, as income grows, on education, health care and home improvements. Men typically spend cash on what are politely called consumables and, in Angola, on a second wife.

Women, most of whom are heads of households and mothers of several children, usually have flawless credit histories within their microfinance solidarity groups

Second, membership in the agricultural association is determined by a number of factors, including traditional social and leadership roles. On the other hand, the members of a microfinance solidarity group decide who can and can't be a member. Because they have to repay bad loans out of their own pockets, members are very particular about who they let in. Because it's a separate entity, affiliated with outside organizations such as World Vision, the members can sustain this high degree of control.

Microfinance is about more than just making small loans. The objective is to offer a full range of financial services to people who would otherwise not have access to the formal economy. Savings accounts, insurance and other consumer financial services are offered by microfinance institutions elsewhere in the world.

Paula Alves, an Angolan microfinance expert working for World Vision, explains the new passbook program, which will open the door to more and better financial services for the women who belong to the Calenga solidary group and several dozen other groups she has helped organize.

Savings accounts are also a part of microfinance programs. Saving money is not generally part of the culture in Angola, but the women in the Cariamamo program have already saved about $50 each. In Calenga, these savings fund small business loans for now. Ultimately, the solidarity group hopes to grow its assets to the point that it can finance capital projects, such as building a potato seed warehouse. It is also introducing passbook accounts, where members pay about $2 for a passbook, then use it to manage their loans and savings accounts themselves, just as someone in California would do at a traditional consumer bank.

At this point, the microcredit groups started by World Vision are associated with what are generally called microfinance institutions, or MFIs. Instead, World Vision is, in effect, mediating between the solidarity groups and the government run bank, while the groups expand their activities on their own initiative. In the future, the program might be integrated into a more typical MFI, which would allow even more services, such as insurance and school finance schemes, to be offered.

The progress made by the women's groups in Cariamamo and Calenga is typical of successful microfinance programs across the developing world. The Grameen Bank, an MFI founded by Mohammed Yunnus in Bangladesh, pioneered many of these concepts, and won the Nobel Peace prize as a result.

The Rotary Foundation will back microfinance projects, and Rotarians from around the world have organized the Rotary Action Group for Microcredit. RAGM was well represented at the recent Rotary International convention in Birmingham, England. Microfinance was cited by many speakers as a key to future world prosperity. Most notably, Jane Goodall took time during her keynote address to the convention to emphasize the effectiveness of microfinance, giving it a place of prominence and importance alongside fighting climate change and living in harmony with the natural world as global priorities.

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