Tackling the 'credit crunch' justly

from Ekklesia

By Patrick Hynes

The much publicised “credit crunch” refers to the way loans and other forms of credit are becoming difficult or more expensive to obtain. This crisis may bring harder times for us all, individuals and businesses alike. But access to credit has always been a daily problem for people who are poor, as they are often denied fair finance due to a lack of collateral. The notion of collateral, where property is used to secure a loan, ensures the poor will always be poor.

With no collateral there is no chance of a loan, the means to self-employment and therefore to own something as basic as a shelter. Someone needs simply to break through this vicious cycle of poverty, and thus enable people to earn a dignified living for themselves and their families.

Early explorations into Microfinance, doing the maths

Muhammad Yunus , the Nobel Peace Prize winning economics professor, illustrated the poverty cycle with the example of Sufia Begum, a woman who made bamboo stools for a living. Without access to fair finance she had no choice, but to borrow each day 5 taka from a middleman to pay for the bamboo to make one stool at a time. Sufia was then contracted to sell the one stool back to the middlemen for 5 taka 50 paisa, leaving only 50 paisa to live on, barely enough to stay alive.

After finding similar families borrowing the total equivalent of US $27, Professor Yunus was both shocked and sickened, exclaiming:” My God, my God all this misery in all these forty-two families all because of the lack of $27!”. So the professor lent his own $27 and went on to establish, with others, the idea of microcredit: small loans to micro entrepreneurs.

Through microfinance, Sufia was able to borrow money at a reasonable rate of interest, and repay the money when she had sold her craftwork at the market for a better price. Over time she could afford to save money and buy raw materials at the right time and price.

The problem of access to credit is still true today for producers of handicrafts, or people who borrow the equipment to earn their trade: a sewing machine, a loom or a tuk-tuk taxi. When the machine is owned by the middlemen, they only allow the worker enough from their income to stay alive. It is a desperately cynical system of humankind’s capacity for the continuing exploitation of others.

The same poverty cycle is a familiar story to many farmers who have no choice but to sell their coffee and other commodities at poverty prices. Here again, it is trade credit that can provide access to a Fairtrade price for their produce.

The world’s economic problems often appear to be deep rooted, complex and political. However, breaking this cycle of poverty for the micro-entrepreneur appears to have a simple solution: lend some of your money! There is an everyday credit crunch in developing countries, but Oikocredit can help you to make a difference.

Oikocredit’s roots in church related investment

Founded in 1975 by the World Council of Churches (WCC), Oikocredit began as a pathway for churches and church-related organisations to invest in communities where the poor and disadvantaged had little access to fair finance. This was microfinance before it had a name. At the time of Oikocredit’s inception, many church organisations were only just beginning to ask what sort of return they should expect from their investments.

Was maximised profit really the central objective? Or should the churches simply follow the Gospel path to direct the nature of their investments: a path of faithful stewardship of resources and solidarity with those less fortunate? For the many churches who invest in Oikocredit, the answer today is clear: an investment in sustainable lending offers a far richer reward to both recipients and lenders than the simple pursuit of financial return.

The WCC may have inspired Oikocredit’s beginning, but it is individuals who inspire their Church to participate and it is individuals who today provide most of the investment. Of over £200 million invested in Oikocredit, 86% comes directly from individuals. These are people who invest part of their own savings for a modest 2% return. These small sums of money together make the difference to the lives of people living in poverty.

The Oikocredit process

So how does it work? How is your money invested via Oikocredit to those in need? One way in which Oikocredit works is through locally based microfinance institutions (MFIs) which provide small loans, the local equivalent of £5 to £300, to disadvantaged people.

Oikocredit provides MFIs with credit, so that small loans can be made to micro entrepreneurs, subsistence farmers and the self-employed. Oikocredit does not disburse grants or subsidies, believing that the best way to help people is to let them help themselves. And unlike traditional financial service providers, lack of collateral (such as land or other property) does not exclude the recipient from receiving a loan.

In fact, Oikocredit’s experience shows that the commitment of the people themselves is often a more powerful guarantee of success than the ability to put forward collateral.

A typical loan recipient could be a smallholder who works his land and sells his produce within the local community, or a mother running a clothing-business from her home who needs money to purchase a sewing machine. The aim remains the same, whoever receives a loan: to help the recipients improve their quality of life and take more control of their future.

Once a loan has been made, the relationship between Oikocredit and its project partners is just beginning. Local Oikocredit staff closely monitor the projects and assist when necessary. A greater understanding of local situations and needs thus creates a better chance of success for the enterprise.

During the early phases of Oikocredit’s investment programme there was a degree of scepticism directed towards this type of investment, with many believing that investing in the poor involved an unacceptably high financial risk. Thirty-years on however, and the “unbankable” recipients have faithfully repaid their loans to a degree no one could have predicted.

In fact, only around 10% of the total amount disbursed in loans has had to be written off since 1975. This is firm proof that the vast majority have been successful. Especially when you consider that unforeseen circumstances such as: natural disasters, civil wars and economic collapses, have made it virtually impossible for some to repay their loans.

Furthermore no investor in Oikocredit has ever lost any of their savings in over 32 years of Oikocredit’s work. Special provisions are made for the potential of loan loses out of the ongoing income. This ensures that Oikocredit investment is sustainable for the future.

The people who benefit from loans are the greatest advocates of microfinance, aware that the entire community benefits from their success. People such as Irene Castro Quilca from our project partners Confianza in Peru.

“Confianza convinced me of my own potential”, one woman’s story

Over the past 15 years, Oikocredit has substantially increased the share of loan capital going to microfinance institutions (MFI’s) such as Confianza. MFI’s have made an enormous contribution to the participation of low-income women. Among these women is Irene Castro Quilca, one of the faithful customers of Confianza. “Confianza made a great impact on my life,” she says.

“When I started my partnership with Confianza, I was a poor subsistence farmer, unaware of my own potential. Confianza not only provided me with tools to improve the productivity and income of the farm, but also gave me confidence in myself and convinced me that I could change what I previously thought was unchangeable.”

Confianza underlines that microcredit for women can lead to sustainable improvement of overall family welfare, as the story of Irene Castro Quilca confirms: “I used the income of the first three years to expand my production. I started with a small piece of land where I grew potatoes; now I have two pieces of land, animals and houses to transfer to my sons and daughters who have also started their own business with loans from Confianza.”

Turning faith into action

Oikocredit is a simple solution to a big problem, but turning faith into hope for others is a tough challenge. The scripture guidance is simple enough: “To do justice, and to love kindness and to walk humbly with your God” . However a recent study found that people, even with deeply held convictions, find it hard to put their money where their values are.

“When it comes to choosing where to save most ethical consumers don’t live up to their principles”. The report’s author, Professor Alex Gardner said: “While they regularly recycle and are happy to pay more for ethical products, like Fairtrade coffee and organic food, they ignore their basic values when it comes to their banking choices.” Professor Gardener identified several main reasons: partly the complexity of money matters and apathy, but also that we are very attached to financial returns when we are privileged to have savings.

The question of how to make best use of resources is clearly challenging to us all. One possible danger is that we leave it to others, perhaps even to institutions to act collectively on our behalf.

We can’t leave it to the financial markets

Microfinance is without doubt a success story. Oikocredit now has to rise to the challenge to increase investment and keep pace with an ever increasing demand for credit. Globally the Microcredit Summit Campaign reported that microcredit has reached its first goal of reaching 100 million of the poorest families living on US$1 a day. With this success comes the prospect that commercial financiers will be increasing their interest in the microfinance sector.

Reacting to this Muhammad Yunus said, “Microcredit should be about helping the poor to get out of poverty by protecting them from the moneylenders, not creating new ones”! Oikocredit provides the opportunity to lend part of your savings to a micro entrepreneur for a modest financial return. This is a 100% social investment you will not find listed in the “Best Buy” tables of your daily newspaper.

Taking action

For information about how to invest in Oikocredit in the UK, please call, write or visit the Oikocredit website.
Oikocredit - PO Box 809 – Preston - PR3 1TU
Telephone: 01995 602806
Email: uk.nso@oikocredit.org
Web: www.oikocredit.org.uk

FURTHER READING:

Muhammad Yunus & Alan Jolis, Banker to the Poor (Aurum Press, 1999).
Alex Gardner, How Green is Your Money, (report commissioned by Triodos Bank: 2007)