How Community Loans Work
Investing in communities to alleviate poverty for everyone
The following was written for the Kiva Fellows blog. See the original here, posted in January 2010
Microfinance is a term to describe the broad umbrella of financial services to people without access to a traditional banking system. Microfinance institutions (MFIs) provide these types of services, which include microcredit, insurance (health, life, crop), savings accounts, remittances, and others. Most MFIs rely on social collateral for repayment, which, in turn, is dependent on the strength of the community. The community is at the center of the mission of microfinance, and some of the most interesting services offered by MFIs are aimed at making the community better as a whole.
Villages served by NWTF frequently support a single industry. A community on the water might derive its livelihood from fishing or oyster farming. Similarly, a community in the middle of a rice field s likely to revolve around rice farming. The NWTF members in the community either have businesses in the industry (i.e. operating a fishing boat or renting crab nets) or supporting the industry (sari-sari store, buy-and-sell, used clothing). In these cases, the health of the community is directly tied to the strength of the industry. This is where community-based loans are useful.
In a partnership with the Asian Development Bank (ADB), NWTF began offering community loans in a few branches. The members in that branch are part of a cooperative, contributing a certain amount of money that can be invested in something that benefits the common good. The cooperative chooses an investment, which NWTF will fund through a community loan. The coop then repays the loan through its communal fund. So far, NWTF has funded several of these projects, all of which are success stories.
In one community, the major industry is rice farming. Many of the clients are Agrarian Reform Beneficiaries (ARBs), meaning they received one hectare of land each when most of the farmland was redistributed during the 70’s and 80’s. The problem is that one hectare of land does not produce enough to justify investing in a rice mill. So, the members harvest the rice and transport it to a middleman, who mills the rice and sells it wholesale. But when the community collectively owns several hundred hectares, it begins to make sense to build a mill. No one member can individually afford to finance a rice mill, but as part of cooperative, they can all contribute. Using a community loan from NWTF and the ADB, they built a rice mill. By milling the rice themselves, the members of the community save on transportation costs (you can ship twice the amount of milled rice without the husk for the same amount of money) and cut out the middleman. Collectively, they increase their profit margins. The extra income is more than enough to cover the additional repayments for the community loan. As an added benefit, the community has now become a middleman itself, as the surrounding communities are now sending their rice to the new mill.
Another community had no electricity. It is too rural and remote to be connected to the electric grid, and no utility would invest in the infrastructure to reach them. The solution to the problem of rural electrification is distributed energy – a generator, solar lanterns, wind power, etc. It refers to any type of electric generation that does not rely on a grid. This is an interesting and complex issue, but it is for another post. The NWTF member cooperative in this community chose to invest in a micro-hydro facility and a home connection for each household. In a partnership with an international NGO focused on rural energy delivery, NWTF distributed a loan to create a small dam in a river near the community and establish a full connection for each home. The loan covered the cost of the wiring through the village and within each home – even the light bulbs were included. Now, the entire community is electrified. In fact, the cooperative is now functioning as a genuine electric utility, distributing energy to homes in the surrounding area for a per-kilowatt fee.
These are a few examples of how community loans have improved the income-generating capacity of several villages.
Community Loans in Action
I spent all last week touring a province in the Philippines with a 7-person team in an effort to gather market intelligence about the region. The purpose is to determine whether or not NWTF should open a branch here. Much of our day is spent driving around a town (one in the morning and one in the afternoon) looking for the poorest neighborhoods. The Dilapidated Housing Index is a means of making a snap judgment about whether a community is sufficiently poor for microfinance to be beneficial. If most of the houses on the street are made of bamboo, corrugated aluminum, and bamboo leaves, we know we are looking in the right place.
On Thursday morning, we were driving through a coastal town when the paved road turned to dirt. According to the driver and director of the research department at NWTF, when the road turns to dirt, you know you are headed in the right direction. Sure enough, within a few minutes we reached a squatter community bustling with people. (In the Philippines, the government protects squatters, and large communities spring up on other peoples’ lands.) The road was just wide enough to fit the van and lined with nipa huts and sari sari stores. We passed by two makeshift basketball courts before coming to the end of the road. We parked the van and split up to walk around and talk to the people. Unfortunately, the interviews are all in Illonggo, so I chose to follow the director down to the shore. He began talking to a group of women on the beach holding their infant children. If they could have a loan to spend on anything in their community, what would it be? Their response: diesel fuel or an icemaker. I’ll explain why this is important, but first some background.
In this community, there are approximately 1,000 homes. Most families derive their income from diwal fishing. Diwal are large oysters that are popular here in the Philippines. They are shipped to Manila and other parts of the country to be served in restaurants. Everything revolves around the fishing industry here. Crab traps are stacked next to a house on the beach. There are pails of small fish everywhere, waiting to be distributed to the fish markets in the provincial capitol or sun-dried on long racks to be sold as dried fish – a common business among NWTF clients in fishing communities. We ask whether 5,000 pesos ($100 USD) would be sufficient for a microloan. For some people, they respond, 5,000 would be enough. But many families would require a loan of 15-20K to purchase a new motor for their pump boat. For a new branch, this isn’t possible. New clients start at 5,000 pesos, and work their way up to 20K over the course of 5 or 10 loan cycles. So, for the time being, if a branch does open here, these potential clients will have to start small. A community loan, on the other hand, could potentially enhance the earning-potential of everyone in the village.
On the beach where we are standing, there are probably 40 pump boats. Some are on the beach for repair, while others anchored just off the shoreline. Each is outfitted with an outboard motor that runs on diesel fuel. If this community could install a storage tank and buy diesel fuel in bulk, they could collectively reduce the input costs for running their fishing businesses, resulting in higher profits for everyone. Similarly, if they had an icemaker, the fishermen could store their catch on ice. This would allow the community to function as a co-op, selling enough volume to perhaps eliminate middlemen and get better prices for their catch. These are the direct benefits of a community loans. As with anything in microfinance, there is a ripple effect, producing many indirect benefits as well.
In a small and very poor barangay such as this one, money tends to stay within the community. People buy their clothes, detergents, and other necessities at the sari sari stores and eat locally prepared food. Therefore, additional income at the primary producer level (the fishermen), which comes from the surrounding towns, is recycled within the barangay. The local businesses make more money as a result, which they can invest in their childrens’ education or putting an addition on their home. In a squatter community, a family could even potentially earn enough to buy the title to their land. In other words, when the primary industry becomes more efficient and profitable, the community at-large inevitably becomes the beneficiary.
Community loans are not widely used here in the Philippines, and I am not sure about the rest of the world. However, they have revolutionary potential because of the broad and sustainable impact they can have on a community.