03 September 2010

You're not in Bangladesh anymore

What do the bustling, crowded, aromatic streets of Bangladesh have in common with Tonga’s tiny tropical capital? Grameen microfinance, of course.

Throughout the past ten years, giving small loans to low-income individuals slowly became the new vogue in development, and even gained popularity in the global downturn in the US.

It's an intriguing development tool, because at its best, microfinance gives
usually poorer individuals a small amount of money that allows him or her to start a business. In turn, the money from the small business helps the individual pay back the loan, and continue with a reliable income source in the future. Aid without dependency, development that maintains personal pride.

Several years ago, I did a lot of research on the effectiveness and cultural aspects of microfinance for my undergraduate anthropology thesis, in a struggling attempt to figure out whether it was the next new development wonder-drug or just a seedy loan shark in a clever disguise. I found that microfinance is neither.

What I really found was that Grameen-style microfinance is almost entirely dependent on a set of cultural and economic factors - an interesting mix to apply to Tonga.
Microfinance works the best when:
  1. People base survival off of money - in Tonga, almost everyone has a farm plot and money is generally a useful extra for luxury goods and cultural events
  2. People have access to a nearby market and demand is generally high - while this may be true in the capital of Tonga, there is a very limited economic market throughout most of Tonga, and most people have to travel a long way to a big enough market.
  3. People are used to credit - in Tonga, people are used to both free money through aid, and credit in the form of legitimate banks as well as loan sharks. The credit concept is not intrinsic, but neither is it new and strange.
  4. Money is worth something (no horrible inflation) - Tonga's monetary system is generally very stable and reliable
  5. People value the commitment to the borrowing group just as much as other community relationships - in the Grameen model, people borrow in groups and must keep each other accountable to pay their weekly repayment amount, so keeping the peace must not override group pressure to pay. In Tonga, community peace and good relationships supersede all else, to the point that performance reviews and constructive criticism largely do not work in Tonga.

Last week, all of this came back to my mind because I met with Lorisa Canillas, manager of South Pacific Business Development Tonga, or SPBD.

Like my research focus, it is modeled after the Grameen bank, a Bangladeshi microfinance institution started by Professor Muhammad Yunus in 1976. He describes the model in his classic book, Banker to the Poor, a really excellent read for those (like Mark and I) who are fascinated by development, but couldn’t really care about finance itself.

In the Grameen model, groups of women use a group loan to start or improve their businesses, paying the small loan back in installments at weekly meetings. Usually, almost no one defaults on a loan, because of the peer pressure to repay, and because of the money generated by the business the member runs. Because the Grameen model was so heavily based on the Bangladeshi environment in which it started, a lot of people have discussed its relevance in other parts of the world.

SPBD is the only microfinance institution in Tonga, and according to Canillas, in the first year of its existence it has grown immensely to 2,000 clients, none of which so far have defaulted on their loans.

Canillas says that the biggest difficulty is motivating repayment among clients. People joke here that Tonga imports remittances and exports people, and it’s not too far from the truth. With so many remittances regularly coming in from overseas, many are used to the mindset that another check will come eventually if they just wait long enough, a pattern that puts a huge strain on the family members working internationally, and often causes the family in Tonga to go through short “feast” periods and long “famines.” Steady income from a job often allows these same families to regularly pay for school fees, buy nutritional food, and maintain their standing in the community through church donations.

SPBD trainers also are working with clients to keep their businesses open more than once or twice a week- another pattern created by dependency on remittances. Frequently, Canillas says, clients start a small business only to lose interest several months later, and with a large part of the loan still to be repaid. This puts a strain on the many excellent, responsible business women in the group, and so SPBD does not allow a borrower a second loan unless she has kept her business running.

From my own experience at TDB, many borrowers view a loan as free money for the present, and don't plan on how to pay it off later, so I wonder if SPBD women start a business in order to get the money, rather than the other way around.

Canillas says that their main objective is to improve their clients’ quality of life, and says that their ultimate goal is to graduate clients into the formal sector. SPBD hopes to reach a target of 4,500 members within 5 years, but because of the very small population in Tonga, expects that they will have saturated the market for micro loans by then and will branch into other services. SPBD is currently doing an impact study that will be completed at the end of the year, and it will be fascinating to see what they find.

So from all that, the biggest question in my mind is "is microfinance good for Tonga?"

Like my question about globalization, once again for politics sake, I will refrain from strongly voicing my opinion. That's for Tonga, SPBD, and you readers to decide.

1 comment:

  1. An excellent and insightful reflection. Thank you!


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