Introduction
The majority of people in San Jose live on less than $2, US, a day. They do not have bank accounts and cannot access loans from traditional institutions. They have no savings and their lives go from one financial crisis to another. The only real option to get enough money to start a business is to borrow money from an area person who charges 10% interest per month. Most people who use this “loan shark” do so when there is a life threatening emergency, such as the head of the household is very ill and they need money to get medical treatment. Most San Jose residents own nothing except maybe their land. Many people using the local loan person have lost their land when their land was used as collateral for an emergency loan they could not repay. The result is that these people are sharecroppers having to pay the “loan shark” to live and farm on the land that was theirs before. This reality means people in San Jose cannot start a small business because they cannot get access to enough cash to implement their business ideas.
We identified an agency (Adelante) is the state’s capital, la Esperanza, that works with communities to offer micro-loans. What we found is that the financial requirements to participate in the Adelante program were well beyond what people in our area could afford. Community members would have to pay to join a cooperative before they could apply for loans. Because of this, we created our own micro-loan program.
Details
We created business classes to help people understand the basics of loans and micro-businesses. There were classes for first time applicants and for those who were re-applying for a new loan after repaying their first loan. Loan applicants had to submit a business plan and then a committee mainly made up of family medicine residents approved or denied loan requests. Through early missteps we found it best to include respected community members in the committee because some applicants would submit great business plans but were known alcoholics or unreliable in others ways. First time loan recipients could only borrow a small amount. If they repaid the first loan then the amount they could borrow increased with each loan they successfully repaid.
Common Business Plans
- Fruit & vegetable selling in Esperanza
- Tamale sales at community gatherings and sporting events
- Bread sales at community gatherings and sporting events
- Pig raising
- Chicken rearing
Outcomes
For those loan recipients who were serious the loans really improved the quality of their lives. Some people started small, such as bread sales at soccer games. They used the profit from that initial loan to buy piglets that they raised and then sold for a larger profit. The successful people routinely paid their loans back on time. In our business education classes we strongly encouraged keeping business expenses separate from household expenses so they could reinvest in their business. The reality is that for most of the very poor there always seems to be some emergency that requires taking the business money to cover other essential costs of living. Poverty is very hard to get out of when there are no financial reserves, no matter how hard a person works. We noticed that the people who were already a bit better off than the average person generally got more benefit from the loans. They had reserve resources so the loans allowed them to expand into new business areas.
The micro-finance program was managed by family medicine residents. In part, this was done as a learning exercise for them. They made the final decisions on who got loans. All too often the residents would see a very poor person with a poor business plan who was a known risk for repayment and they would still approve the loan. They let their emotions make the decision for them. In their heads they would say that a $45 loan for this extremely poor person might help them in some way, and losing $45 for the program was no big deal. This happened so often that loan repayment became a problem. We worked on the concept that a finite pool of money was available for loans. We could not make new loans if outstanding loans were not repaid. As the number of defaulted loans grew the ability to make new loans dropped to the point where we decided to put a pause on the micro-loan program. Some of the loan defaulters have repaid their loans, but more than 20 people still owe money. If and when we decide to re-start the micro-loan program we will need to create hard stops for the loan approval committee.