Jackline, Meerim and Agustina live thousands of miles apart on three separate continents. They come from different cultures and have different hopes and dreams for the future. But these three young women have one important thing in common: an ambition to make a positive economic contribution to their communities.
Jackline grew up as an orphan in Nairobi. Now she runs the school she founded, the Jacombi Foundation School for 150 low-income kids. She grew concerned when girls kept dropping out because there were no proper toilets in the school.
Meerim wanted to stay in school too. Her goal was to become a diplomat, but her family, from the Kyrgyzstani city of Talas, was unable to afford her university tuition fees.
Agustina’s ambition was to grow her family’s food business, but without credit she couldn’t invest. “A lot of women in our community want to be leaders,” she says, “but they don’t have the access to money.”
A lot of women in our community want to be leaders, but they don’t have the access to money.
The solution to all their challenges was microloans, which provide access to small-scale credit for people traditionally considered too much of a lending risk by banks.
By using the peer-to-peer lending platform Kiva, Jackline raised $725 for new toilets; in just 36 hours Meerim got the $1,100 she needed to continue her studies; and Agustina borrowed $5,200 that’s now enabling her to sell more bread, sausages and snacks.
“Before [the loan] there was only enough money to cover the bare necessities,” says Agustina. “The loan helped me a lot to progress, to make my house bigger and to pay off accounts.”
The microcredit industry has grown rapidly over the past decade, culminating last year in the initial public offering of what’s hailed as the largest peer-to-peer lending institution, the Lending Club, being valued at $5.4bn. The attraction for investors is simple: the potential rates of return are significantly higher than traditional forms of investment.
But there’s a problem. The World Bank’s lead economist, Bob Cull, argued during a talk in March that while the commercialisation of microcredit has enabled the industry to grow, that growth hasn’t benefitted the poor.
Microcredit alone is not appropriate for everyone.
A reason for this is that loans to the poor are being heavily subsidised by philanthropists, governments and international institutions, with most microloans covering just 70 per cent of their costs. In short, the market doesn’t quite work, and with interest rates as high as 90 per cent on some loans, the poorest, including girls and women, have been priced out – or, in some cases, they’re left with debts they can’t repay.
So what can be done to create more success stories such as Jackline’s, Meerim’s and Agustina’s?
Dean Karlan, from Innovations for Poverty Action, says we need to start thinking about a broader range of microfinance support, beyond just microloans. “Modern microfinance – savings and insurance, and more flexible credit products – has often generated larger impacts than simple credit,” he said in January.
Mayada El-Zoghbi, from the World Bank, agrees: “Microcredit alone is not appropriate for everyone. It fits within a broader suite of financial services, such as savings, insurance, and payments.”
When it comes to girls, financial services must be structured to meet their unique needs. This means reaching beyond the traditional, as adolescent girls have differing levels of vulnerability. Merely connecting girls to microlending institutions won’t work, because:
- Many girls can’t qualify for credit for a number of reasons: lack of collateral, experience, age, or because they don’t have the necessary documentation, such as government-issued identification cards.
- They lack physical access to the microfinance institutions as the majority are based in urban centres and towns, and most girls live in rural areas.
- Their businesses and enterprises are usually too small, requiring savings of as little as $10 to get started. This could be saved from savings or group loans.
A way to address these challenges lies in promoting savings alongside financial literacy. Girls can practice their new skills, gain confidence with their own money and take "safer" risks as they learn and save. They can also match some of their savings to a loan to minimise the risk of a larger loan.
Village Savings and Loans Associations are a safe way of giving girls access to credit.
Think globally, act locally
One model that shows promise is the Village Savings and Loan Association (VSLA). It is a self-managed and self-capitalised microfinance structure that offers simple, flexible, sustainable and informal savings and lending systems, and it’s aimed at members in markets outside the reach of formal financial institutions.
Once they are part of a VSLA, girls save predefined amounts on a weekly basis in self-managed pools of funds. When VSLAs are girl-only, they can set some of their own governance, giving them a certain amount of control by lending from their own savings and deciding the interest rate to charge on loans. This is a safe way of giving girls access to credit.
An added benefit is that VSLAs offer a safe space where girls can meet and make friends, develop trust and engage with role models, as well as acquire financial literacy skills. Group lending with frequent meetings increases social capital by broadening and deepening social networks, and this gives girls greater control over their lives.
Group-based saving also can help girls access formal financial institutions, since money is pooled in much larger amounts. When the fund grows, groups can decide to deposit it into a bank or microfinance lender. VSLAs prepare girls to deal with these institutions.
Better data needed
At the moment very little data exists on the global impact of microcredit – particularly for girls and women – making it too easy for critics to say that subsidies for microcredit schemes would be better used on other development projects, such as building roads, schools and hospitals.
But Jackline, Merrim and Agustina show that when microfinance reaches girls and women it can enable them to take control of their lives, invest the money for the benefit of the whole community and create sustainable economies from the bottom up.
In other words, subsidising microloans doesn’t have to mean no roads, hospitals and schools.
“When I graduate I want to open a centre where I will educate little kids with English and help them to study,” says Meerim. “I want to work in foreign countries and make international relations between Kyrgyzstan and other countries. [I want to] be developing our economics.”