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Solidarity Lending Benefits the Rural Poor

solidarity lendingFor too long, the plight of the urban poor had monopolized the concerns of those working to eradicate abject poverty. The millions of people in rural poverty have been forced to toil in silence, overshadowed by their urban counterparts and underrepresented by the advocates of economic development. Most are relegated to subsistence agriculture, making the best of what little they have. However, a renewed emphasis on the rural poor has facilitated new and innovative techniques to help, among them solidarity lending.

One such pioneer is SHARE Micro Finance Limited, which offers loans to rural women in India in an attempt to fund entrepreneurship among the rural poor. Recently, a number of studies have been conducted to assess the effectiveness of such programs, with some encouraging results. An article from the Stanford Graduate School of Business tells the story of Vinod Khosla, a venture capitalist from India. Khosla described solidarity lending as a “virtuous pyramid scheme” where groups of women are given modest loans from SHARE. This program differs from individual loans because “the group members are under strong social pressure not to default…and if one person does, the others have to make up for it”.

The program empowers women to invest the money in a stall at the local market or use it to invest in equipment which enables them to produce or transport their items more efficiently. To some, this may seem like only a marginal benefit, but Khosla reports that among nearly 200,000 clients, 77 percent saw reduced poverty.

To test the feasibility of such programs further, a study on solidarity lending was conducted in Mongolia, which compared the results to those of regular lending practices. Research showed that while repayment rates were similar, food consumption increased among group lenders, an encouraging sign to researchers.

Another study on group lending conducted by the African Growth Institute in Kenya revealed that “microcredit is an important entrepreneurial tool in alleviating poverty”. They also found that group lending was a way of achieving greater financial stability.

Because of innovative initiatives like solidarity lending, the rural poor are better equipped to prosper. By providing groups with much-needed access to financial capital, farmers from India to Mongolia to Kenya are no longer overlooked.

– Brendan Wade

Photo: Flickr

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Credit Access in Laos Growing with International Assistance

Credit Access in LaosFor many years, the government of Laos has been working to improve the country’s financial infrastructure and in turn its economic abilities. In more recent years, the focus on financial improvement has been through credit access for small and medium enterprises (SMEs). Improving access is an ongoing mission with a variety of different aspects that need to be addressed.

SMEs are vital to Laos’ economy and people, employing a large percentage of the country’s working population. Yet, a lack of credit access in Laos for these SMEs, with only about 12 percent being able to receive formal credit, leaves many businesses unable to grow and compete with other enterprises in Asia.

In 2014, the World Bank Group funded $20 million towards the growth and expansion of SMEs in Laos. This growth was accomplished with the use of long-term credit access. These funds, which were provided to commercial banks, made it easier for SMEs to access loans by reducing collateral and creating less of a risk for the banks themselves, which made them more willing to provide these funds. Although this project did allow many SMEs to upgrade their infrastructure and expand operations, it still was not enough to solve all the issues related to credit access in Laos, and many businesses continued to suffer.

As of 2017, Laos has been working to reform its credit system in order to improve access to funding for SMEs. The first step of reform is working to create a standardized credit reporting system. Although this is not a direct solution for credit access, it is a move towards it. Credit reporting is a way in which banks and lenders are able to maintain and access credit histories for companies wishing to receive funding.

This makes it easier to assess risk and in turn, allows more SMEs to receive loans and reduces costs and collateral when doing so. The creation of a credit reporting system requires both funding and planning, which Laos has looked outside the country for. Japan, Canada and Switzerland have all aided with funding and planning as part of a larger International Finance Corporation project to improve the economic infrastructure and financial access of Laos.

Credit access in Laos is improving with government reforms and projects that make the financial systems and economic infrastructure of the country more hospitable for SMEs. However, this process takes a lot of time, planning, and funding, which Laos is unable to provide on its own. With further increase of foreign support, Laos will continue moving towards improving credit access in the country. This will help improve the country’s economy as well as provide many jobs for its people. As Laos’ economic abilities increase, it will not only better provide for itself, but become a more valuable asset to the global economy and the many countries invested in its financial future.

– Keegan Struble

Photo: Flickr

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Improving Credit Access in Ghana for Small Businesses

Credit Access in GhanaLocated on the western coast of Africa, Ghana is a country of lowland hills, secluded beaches and historical colonial buildings. Named Africa’s most peaceful country by the Global Peace Index, Ghana is considered a leading African nation due to its status as the first country south of the Sahara to break free from colonial rule.

While Ghana has already taken major steps towards improving the country’s stability and proficiency, such as improving water sanitation and education, it still has a long way to go in terms of building up its economic stability to mirror those of other nations. One key method to improve the country’s economy is through strengthening farmers’ access to technology and making loans more accessible to small and medium-sized enterprises (SMEs), which are both happening through improving credit access in Ghana.

Strengthening credit access in Ghana would help alleviate poverty on a large scale, and this would be mostly due to how it would help farmers and business owners. In Ghana, agricultural production encompasses 23 percent of the country’s GDP, while SMEs make up approximately 50 percent, and having credit access is a vital component of making these industries run efficiently and smoothly.

In the agricultural industry, technology is an essential component of the Ghanaian culture and economy, and unfortunately, many farmers lack access to technologies that have the ability to make the agricultural system productive. In order for farmers to have access to such resources, they need to have access to credit.

In recent years, research has shown that improving credit access in Ghana will boost the country’s adoption of more productive technologies, which will lead to a rise in the country’s overall GDP. A study was done by Swiss Management Center that also found the combination of high cost of credit and unavailability of credit are Ghana’s main constraints on the Ghanaian economy.

Lack of credit access in Ghana is a major barrier to technology adoption, and in order for Ghana to reach a stable economy that incorporates food security and safety, Ghana must find a way to overcome this. In a policy brief conducted by the Global Hunger and Food Security Initiative at UC Davis, researchers identified two main concerns of credit access in Ghana:

  1. Index-insured loans are not as reliable as payouts and may not cover losses.
  2. While credit loans increase credit supply, these types of loans have an extremely low demand.

In this survey mentioned above, 73 percent of the sample borrowed money in 2014, while only 54 percent demonstrated a willingness to pay market value for their insured loans. This problem of insurance is quite profound in Ghana, as lower-income and lower-educated farmers are more inclined to take out uninsured loans to cover technologies and farming supplies, while banks would prefer insured loans in order to protect their portfolios and reduce the number of borrowers.

Likewise, banks do offer loans that are specifically made to meet the needs of small businesses. However, banks are often hesitant to lend to the SME sector, and this is largely due to credit history. Banks that lend to small businesses are only willing to do so at extremely high-interest rates, something that many companies are not willing to accept.

However, despite the conflicts of interest and benefits that are occurring within the credit access debate, Ghanaian policymakers are currently creating a plan that details a comprehensive strategy to improve credit access in Ghana, and the hope is that it will focus on improving the structure and stability of the country’s smaller businesses.

Both the Ghanaian agricultural and commercial industries have long ways to go until they are on a path of improvement rather than standstill, but Ghanaian lawmakers are determined to find a way to improve the country’s future credit availability.

– Alexandra Dennis

Photo: Flickr

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Financial Reforms Aim to Expand Credit Access in Montenegro

Credit Access in Montenegro

As with many countries in the region, the real estate bubble that burst in 2008 exposed longstanding weaknesses in the Montenegrin financial sector and left a laundry list of obstacles for the country to overcome in its wake. These obstacles have become major inhibitors of credit access in Montenegro.

As is often the case, small and medium-sized enterprises have been hit particularly hard by this credit squeeze. Fortunately, the international community has stepped in to improve short-term credit access in Montenegro in the short term while the Montenegrin financial sector modernizes for the long term.

Prior to 2008, the Montenegrin financial sector was plagued by poor governance, little oversight and inadequate and outdated financial infrastructure. In the wake of the crisis, key stakeholders have been working to rectify these problems against a backdrop of ongoing deleveraging. While these changes were needed, this restructuring has left Montenegrin banks incapable of meeting the demand for credit.

Business owners who can secure loans from Montenegrin banks complain of high interest rates, extensive collateral requirements and overall a very risk-averse lending policy. For many business owners, securing a loan from a Montenegrin bank is simply not an option. This gap between supply and demand is being filled in two different ways: by the informal economy and by international actors.

Many would-be business owners (and individuals) have turned to the informal economy to meet their financing needs. This often entails borrowing under the table from loan sharks. Not only does this open borrowers up to unnecessary risk, but it also presents an obstacle to modernizing the financial sector.

The other option is to secure financing from international actors. Many organizations are working to provide improved credit access in Montenegro while the country’s financial sector gets back on its feet. These include the EBRD, the Investment-Development Fund of Montenegro, internationally-backed microfinancing institutions and other international organizations that have stepped in in a microfinance capacity.

There are signs that positive change is coming. In late 2017, the government passed a law aimed at comprehensively reforming the financial sector and improving credit access in Montenegro. The law creates new financial instruments available to business owners and opens up new opportunities for those struggling to secure a loan to avail themselves of financing and guarantees from the government.

The law also updates the regulations that govern the Montenegrin financial industry and help to bring Montenegro into line with international best practices. It is hoped that these laws will help to prevent another disaster like 2008 and ensure that credit access in Montenegro will not be affected by the next economic downturn. This legislation serves to prove that developing economies often need just a little bit of international support while they work to modernize their financial infrastructure, and that this support enables them to create improved frameworks that provide greater confidence moving forward.

– Michaela Downey

Photo: Flickr

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Increasing Microfinance Improving Credit Access in Serbia

Credit Access in SerbiaThe Balkan nation of Serbia suffers from many of the same problems with credit access as its neighbors. And as with its neighbors, these problems pose a significant obstacle to small-scale, grassroots economic development. That being said, there are several initiatives underway to help to improve credit access in Serbia until the Serbian financial industry is able to offer expanded opportunities to secure credit.

In the wake of the 2008 financial crisis, Serbian banks have set very rigid requirements in order to secure a line of credit. Interest rates tend to be prohibitively high for small business owners, and there are many regulations in place that discourage lending to small businesses and startups because they are perceived to be too risky. The government has introduced subsidies and risk-sharing programs to try to mitigate this problem at great cost to the state, but this has not been sufficient to really improve credit access in Serbia. It is estimated that small and medium-sized enterprises in Serbia are collectively in need of €267 million worth of financing that Serbian banks are not willing to lend.

This is not to say that the Serbian financial industry is underdeveloped or ill-equipped. The World Bank is quite satisfied with the state of credit access in Serbia at a broad level. However, it does acknowledge that small and medium-sized enterprises experience more difficulty than they should when trying to access credit.

There have been several positive developments over the past several years that bode well for the future of credit access in Serbia. Recently, banks have begun to change the risk assessment procedures that they use when dealing with small and medium-sized enterprises. Where previously these entities were assessed in the same manner as a large corporation would be, many banks now use a procedure that takes into account the comparatively small size of these enterprises and does not allow size or inexperience to negatively impact the applicant.

Additionally, many international entities have stepped in to extend additional microfinancing money to be used to improve credit access in Serbia. The European Investment Bank recently provided €30 million to ProCredit Holdings in Serbia. This is intended to promote long-term, stable credit access in Serbia that will encourage economic growth and development for years to come.

While credit access in Serbia remains less than ideal, these recent developments represent major improvements over the previous situation. If similar improvements continue to follow, it can be expected that improved credit access will precipitate much greater economic development in Serbia in the coming years.

– Michaela Downey

Photo: Flickr

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Successful Efforts to Improve Credit Access for SMEs in Mongolia

credit access in Mongolia

In 2016, 43 percent of Mongolia’s herders owned less than 200 animals, limiting their ability to access credit from lenders. Without credit access, these herders face challenges to produce hay for the winter, build animal shelters and move their herds long distances to reach sufficient pastures. However, efforts are being made to improve credit access in Mongolia.

 

USAID’s Reach Project

In June of 2016, the U.S. Agency for International Development (USAID) and Development Solutions NGO launched the Reach Project to support Mongolia’s small and medium-sized enterprises (SMEs). The Reach Project’s main goal is to improve and scale access to credit for Mongolia’s SMEs by helping them find appropriate financial products for their needs and to qualify for loans. The U.S. government expects the two-year project to improve Mongolia’s economy.

“SMEs make up 20 percent of Mongolia’s GDP, but they don’t have efficient financial resources,” said Mongolia’s U.S. Ambassador Jennifer Galt. Additionally, 75 percent of Mongolia’s SMEs would need more collateral assets in order to take out loans. “We will provide real support to small business through the Reach Project to meet their demand,” Ambassador Galt said.

The Reach Project takes place in Mongolia’s Dundgovi, Selenge, Bayan-Ulgii and Dornod provinces. The Reach Project also partnered with the government of Mongolia’s Credit Guarantee Fund. The fund can provide credit guarantees of up to 60 percent of individual loan amounts to Mongolia’s SMEs.

 

Positive Effects of Mongolia’s Rising Credit Access

On June 28, 2016, an executive summary from Mongolia’s retail sector revealed that the country’s improved credit access facilitated a further rise in disposable income. Mongolia’s banking sector has expanded rapidly in the past few years and there is now a multitude of non-bank financial institutions and credit cooperatives. Improved credit access in Mongolia has dramatically boosted the average Mongolian’s spending power as well.

Mongolia’s central bank also implemented a successful price control program that brought inflation to 2.6 percent in 2013, 6 percent in 2014 and 5.8 percent in 2015. Mongolia’s price stability could have a positive effect on consumer spending and should similarly affect demand for high-quality retail space. Rising credit access in Mongolia has led to increased sales for the country’s retailers and has motivated international brands to open stores in Ulaanbaatar.

 

Web-Based Collateral Registry

In February 2017, the International Finance Corporation (IFC), in conjunction with the Ministry of Justice and Internal Affairs, launched a web-based collateral registry for Mongolia. The registry was part of a joint initiative to reform Mongolia’s secured transactions and improve the country’s financial access for SMEs. This reform would take place by facilitating lending against Mongolia’s movable assets as collateral.

Improving Mongolians’ credit access will also be a key factor in the collateral registry. The registry will enable creditors to search for Mongolia’s existing interests on movable assets and file security interest on the collaterals they approve. “Mobilizing movable collateral to boost access to finance, especially for MSMEs, can play a significant role in Mongolia’s sustainable economic recovery and job creation,” said Tuyen Nguyen, IFC’s representative in Mongolia.

 

Looking Forward

USAID’s programs will continue to focus on increased credit access for Mongolia’s SMEs. USAID is also collaborating with Mongolia’s government to strengthen the capacity of SMEs by helping them adopt accounting practices, gain financial access and develop business plans. In December 2017, USAID also announced plans to strengthen the financial literacy of Mongolia’s SMEs and help them access loans worth $25 million.

While more Mongolians have gained credit access, there is still much work to be done. On Feb. 5, 2018, the Heritage Foundation revealed that Mongolia’s economic freedom ranked 125th worldwide. Improving credit access in Mongolia will continue to be a priority for many entities and possibly attract more efforts to decrease the country’s financial dilemmas.

– Rhondjé Singh Tanwar

Photo: Flickr

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Consumer Credit Access in Panama Continues to Expand

Consumer Credit Access in Panama Continues to Expand

Reports from 2014 highlighted good news in the Panamanian economy. Continued years of growth particularly helped the credit sector, and lending was increasing at rates of more than 10 percent per year. This was a healthy rate in comparison with similar rates of overall economic growth in the country. Consumer lending was not left behind during this boom, and household credit access in Panama increased at rates nearly on par with general growth.

This increase in credit access in Panama was great news for its developing domestic economy. Panama’s strategic location and the canal linking some of the world’s most-traveled shipping lanes have made it a center of commerce since the early 20th century. However, despite countless international commercial links, many of Panama’s people did not see the benefits of strong development until a century after the opening of the canal. A new government measure of poverty released in 2017 showed that nearly a fifth of the population was living in significant poverty.

The strong growth reported in 2014 was followed by further increases in small household lending in Panama as microfinance products began to increase their offerings in Panama. In 2017, the government of Panama revised a large number of regulations to assist microfinance and its effects in reducing poverty in the country. This was joined by the creation of REDPAMIF, a nongovernmental microfinance network, to assist lenders in creating a fertile environment for the success of expanding credit operations.

Small consumer lenders in Panama are following the pattern of successful development and small lending projects worldwide in diversifying their offerings. From the same 2017 report, 40 percent of the microlending portfolio in Panama is in loans to women. Similarly, in a highly urban country (nearly three out of four Panamanians live in the metropolitan area of Panama City), 13 percent of their loans are disbursed to rural borrowers.

Panama’s economy has continued to improve rapidly. An investment to expand the canal, which opened to new and larger shipping vessels in June 2016, has paid off in rates of growth that are outpacing most of the rest of the world. With good management and continued success in innovative development trends, credit access in Panama and the country’s poverty rate should continue to improve in the coming years as well.

– Paul Robertson

Photo: Flickr

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Credit Access in Suriname Continues to Grow Every Day

credit access in Suriname
While small, the South American country of Suriname has a booming mining economy. With a recent rise in oil prices, Suriname has worked to overcome a recent dip in economic growth and currency inflation. Credit access in Suriname is also on the rise, and there have been several advancements in credit access and its reporting in recent years.

International Finance Corporation

The International Finance Corporation (IFC) reported that in 2013, Suriname created a new credit reporting system that increased the access businesses have to information about credit processes. This has been built and implemented to help build better business strategies and manage risky lending strategies, measures that then save small businesses from dangerous credit choices.

Systems like these encourage lending growth and healthy business strategy in small countries. Although Suriname has little to no record of credit histories before 2013, the IFC’s new credit reporting system is a step toward healthier credit access in Suriname.

Female Investors and the U.N.

Suriname is in the process of an economic reboot after economic growth statistics dropped from five percent in 2012  to -10.4 percent in 2016. At a 2012 presentation to the U.N., a representative for Suriname spoke on behalf of the female population of Suriname and presented a proposal for a new national gender policy; the plan delineated how the nation would prevent further discrimination of Surinamese women in business practice.

One of the areas in which women have been hurt by discrimination is in the credit access market. By implementing this new policy-based on the Beijing Plan for Action, Suriname hopes to alleviate the added stress of gender discrimination on its credit market.

Growth of Credit Access

Although only two of many new policies offer a solution for credit access growth, Suriname has a strong and constantly increasing economy that helps to grow credit access within its borders.

– Molly Atchison

Photo: Wikimedia Commons

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Modernizing Credit Access in Azerbaijan

credit access in AzerbaijanAs is the case in many developing economies, credit access in Azerbaijan is not as easy to come by as it should ideally be. That being said, significant efforts are being made to improve the ease of credit access and ensure that the country’s financial system has the capacity to cope with the increase in demand for credit that will likely come with greater ease of access.

Many of the obstacles to credit access in Azerbaijan are similar to the ones present in other countries. It is particularly difficult for businesses to secure a line of credit. Lenders require extensive collateral and often charge high interest rates. Encouragingly, there are government programs that enable particularly small businesses to secure funding even if they cannot secure a line of credit from a private institution.

Poor financial literacy, especially among business owners, is also impeding credit access in Azerbaijan. Many are often denied loans because of problems that they could rectify if given the needed support and education. For example, many Azerbaijani businesses fail to keep written records because they fail to understand that this impacts their perceived creditworthiness.

Improving financial literacy is an important part of expanding credit access in Azerbaijan. The MicroFinance Bank of Azerbaijan has reported that consumer loans, in particular, are being disbursed at a much higher rate than before, suggesting that creditors are becoming more willing to lend more liberally to reasonably worthy clients.

Also noteworthy are the extensive efforts that are underway to modernize the financial system and promote new lending and borrowing practices. The country’s first private credit bureau was recently established and intends to promote risk pooling and information sharing among the 20 largest domestic financial institutions. It is anticipated that this alone will greatly improve credit access in Azerbaijan by promoting responsible lending and eliminating some of the logistical hassles of applying for and granting credit.

– Michaela Downey
Photo: Flickr

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Credit Access in Georgia Among the Best in the World

credit access in GeorgiaCredit in Georgia is comparatively easy to access compared to similar economies in the region. That being said, any deficit in this area is still a major obstacle to economic development. However, steps are being taken to identify the factors standing in the way of credit access in Georgia and determine how to eliminate them

Georgia is ranked as one of the best countries in eastern Europe and central Asia for credit access. Very well-qualified borrowers are able to secure lines of credit without too much difficulty, and the country’s financial system is conducive to lending. It is worth noting that a significant share of applicants are denied because they have unacceptably high levels of existing debt.

However, credit access in Georgia is an issue mainly for new businesses. It is estimated that 40 percent of the small to medium-sized enterprises in Georgia that need credit cannot access it because they are denied or discouraged from even applying. Those who can theoretically be approved for loans often find that the interest rate offered to them is prohibitively high. Seventy percent of applicants for financing said that high interest rates were an issue for them.

Another more minor problem is that it is easier to get a loan in U.S. dollars than it is to get a loan in Georgian lari. As a result, the exchange rate is depreciating and borrowers are extremely vulnerable to fluctuations. Many borrowers are not even aware that borrowing in a foreign currency exposes them to this kind of risk. This is a good example of the unintended consequences of poor access to credit denominated in the local currency.

Fortunately, those who are able to borrow thanks to microfinance programs offered by the U.S. and others generally report that they are happy with their experience. Georgia also has a good financial infrastructure in that there is centralized credit reporting, although many people do not fully understand how it works and are unsure of what to do if they run into trouble.

The Smart Campaign has done extensive research on financial literacy and credit access in Georgia. This research has helped to identify several ways to improve credit access in Georgia, which, if enacted, promise to boost the Georgian economy by encouraging greater financial security while also liberalizing lending practices.

– Michaela Downey

Photo: Wikimedia Commons