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Wednesday, February 10, 2010

A Kiva Fellow Experience with Microfinance in Bolivia: Part 1

By Nilima Achwal

When my co-worker Moses Lee at the William Davidson Institute asked me to write a blog post about my experience last year as a Kiva Fellow in Bolivia, I did not even know where to start or what to encompass. Living and breathing Kiva for three months implied me getting involved with microfinance in every sense-with laypeople that lend in hopes of making an impact, the energetic brains at the Kiva headquarters, the ambitious executives at the local microfinance institution, the underrated loan officers that work tirelessly to overcome the many obstacles in lending to the poor, the proud and driven borrowers themselves, and, equally importantly, the other Kiva Fellows that constantly collaborated on best practices, supported each other, and shared an excited, passionate energy online. Each of these interactions supplied me with so many different types of insights and inspirations that I did not know what I would even attempt to communicate to NextBillion.

At the end of the day, I just knew that I wanted to communicate the energy that every one of those interactions lent me. No matter how conversant (or not) the people at any given level were about the processes, difficulties, and possibilities of microfinance, I was struck by the way that a giant multitude of very different people had come together for something that, in fact, was functioning well and impacting thousands of lives across the globe. When one is only a tiny part of a movement, it is extremely easy to doubt its real and potential impact.  What allows this particular chain of people to shake the earth and create real change is simply their understanding that their small part of the link is not just valuable, but indispensable to the whole. They are all driven by the realization that the "whole" sums down to the simple concept of a vegetable seller's ability to feed her children or a seamstress' chance to leave her abusive husband and be self-sufficient, which they deem important enough to tackle the various difficulties one encounters when trying to create change at the base of the pyramid.

For those that are not familiar with Kiva, it is a person-to-person micro-lending website on which anyone can lend as little as $25 to an entrepreneur in the developing world. Kiva loans have a 98% repayment rate with 0% interest, but the lenders do receive a summary of the impact of the loan (a "Journal" update) on the entrepreneur's business and quality of life. These Journal entries are fundamental to the Kiva model because they take the place of the interest a lender would receive on a loan, instead providing them with the satisfaction of having had a positive impact on another individual. That is not to say that there is no interest charged to the entrepreneurs. After a lender sends their money by PayPal to Kiva, Kiva funds the microfinance institution, which charges interest to its borrowers. Kiva currently has 108 partner microfinance institutions (MFIs) in 52 countries.

Fundación Agrocapital, the MFI with which I worked in Bolivia, charges 30% interest on most micro-loans, which the institution uses to sustain and expand their own operations, repaying only the principal amount back to Kiva to be disbursed back to lenders. Though this may seem like a high interest rate, in the world of microfinance it is relatively standard. Microfinance institutions must cover many extra costs that a mainstream financial institution does not have to, like compensation for the time and money involved in travelling to borrowers' homes in far-flung locations. In addition, these interest rates are much lower than the entrepreneurs' alternative: borrowing from local moneylenders or "loan sharks" for rates up to 150%! Many women I spoke with were grateful to have access to capital at a manageable interest rate.  

With this model, Kiva revolutionized capital flows to MFIs around the world because for the first time, there are hundreds of small capital streams supporting many credible MFIs around the world, as opposed to in the past, when there were infrequent, very large investments producing a bottleneck effect in just a few localized MFIs. Kiva monitors their partner MFIs' administrative capacities and restricts its funding limits accordingly in order to avoid bottlenecks. Kiva recognizes itself as an administrative burden as well, since loan officers must write borrower profiles (a personal synopsis of the borrower and her business) and periodic Journal updates, and therefore sends Kiva Fellows to partner institutions in order to assist with administrative tasks and implement sustainable and efficient processes at the MFI in working with Kiva.

That is how I was given the opportunity to speak with hundreds of borrowers in Bolivia about their experience with micro-loans. The women and men I interviewed for Journal updates had a variety of businesses, the most common being ambulatory clothing/cosmetics/food sales, market stalls (more expensive), small stores (even more expensive), and small "cocinas," or simple lunch or dinner joints outside of their homes. The majority of the borrowers were positive about its effects; the micro-loans had allowed them to incrementally keep growing their businesses.

Most borrowers started out with very small businesses, and after a series of loans had grown their businesses substantially. The borrowing process works like this: borrowers take out short-term (think 6 months) loans to buy capital, they pay back the whole loan, and then take out another, usually slightly larger amount to buy even more capital. The borrowers normally go through a series of loans before one can see the impact on their businesses, but the businesses do grow substantially, and the majority of borrowers I spoke with had a more stable economic situation after a few years because of the micro-loans.

Stay tuned for personal stories of the driven, assiduous Bolivian borrowers and their innovative businesses. 

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