Page last updated at 00:03 GMT, Friday, 11 December 2009

Lessons from microfinance

Nils Blythe
Business Correspondent, BBC News

Margaret Chunga
Margaret Chunga who borrowed 12 to set up a fritter stall

It is hard to imagine that a £12 loan can be life-changing.

But for Margaret Chunga, living in the tiny village of Chipepete in central Malawi, a tiny loan has made a huge difference.

She used the loan to buy wheat flour, salt and sugar in order to set up a road-side fritter stall.

The income, she says, has enabled her to buy school uniforms for her children and she is well on the way to repaying the money she has borrowed.

And when it's paid off, she plans to take another small loan to buy fertiliser for her maize field.

"It's not aid that's just given and takes away peoples' sense of responsibility," says Peter Ryan, the founder of Microloan Foundation, a British based charity which has a network of 56 local loan officers working in rural Malawi.

"This empowers people. It's the first step on the ladder."

Lending success

Repayment rates are very good. According to Martha Nkhoma, the operations manager of Microloan Foundation, in the seven years the charity has been operating the worst year saw 98% of loans being repaid.

Martha Nkhoma
The key thing... with people who need to borrow money is that you understand their ability to repay
Martha Nkhoma, Microloan Foundation

No security is required for the loan. And the repayment rate would be the envy of most companies making unsecured loans in highly developed countries.

The loans are always made to women, who have the main responsibility for feeding their families.

To qualify for a loan the women have to form a group which is given training and required to support each other in repaying.

Even though the sums advanced are small, regular meetings are held with the local lending manager.

Good training and support are the key to successful lending, according to Martha Nkhoma.

But there is also a wider lesson for lenders in more developed countries.

"The key thing if you are working with people who need to borrow money is that you understand their ability to repay," she says.

It is a simple principle, but one which was set aside by supposedly sophisticated sub-prime lenders in the US, with disastrous consequences.

High interest rates

Microfinance loans come in a variety of forms. In Botomani village the women have banded together to develop new fields using irrigation from a stream.

Their loan was used to buy hoses and a treadle pump.

By pumping water up the hill and around their fields they can grow maize during the dry season, when there is insufficient rain to grow crops in the normal way.

Microfinance loans are typically made at high rates of interest.

Peter Ryan explains that, typically, someone borrowing £100 for four months has to make a series of repayments which will total £120.

Malawi farmers using treadle pump
Microfinance helps buy treadle pumps to help farmers

Part of the explanation is that the "base rate" set by the central bank in Malawi is high.

But the costs of administering so many small loans is also considerable.

Microloan Foundation provides its local loan officers with motor bikes so they can reach villages only accessible by dirt roads.

Peter Ryan accepts that the loan rates look high to European eyes, but points out that they are much lower than the rates charged by local money-lenders.

The idea of microfinance was developed by Muhammad Yunus, who founded the Grameen Bank in Bangladesh and was awarded a Nobel prize in 2006.

It has been widely adopted in the developing world.

In Malawi there are estimated to be around 15 microfinance organisations, with some run as businesses and some as charities.

Microloan Foundation has raised the money it lends from charitable donations. But it aims to break even next year on the £1m it has out on loan.

The reputation of high finance has seldom been lower than it is now.

But microfinance is a reminder that the ability to borrow is a crucial part of economic development. And Margaret Chunga is a witness to that.

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