September 30, 2009
Microfinance in Malawi
Posted by Christine Hurt

Hello!  I am back from Malawi, and my head is still spinning.  After spending a week or so in a country where 2% of residents have running water, I have to say that I doubt I'll look at most of our luxuries the same.  I'm sure those of you who have traveled in developing countries have already experienced this strange re-entry, but I'm processing. . . .

Anyway, for two days in Malawi my group shadowed employees from Opportunity International in an effort to understand its microfinance operations "on the ground."  This experience was very beneficial in beginning to understand why microfinance can work and why it sometimes doesn't.  The operations that we observed begin and end with monitoring.  As far as underwriting criteria go, the one thing that gets the loan officers comfortable with the borrower is monitoring.  This is a country where few borrowers have access to paper, and no one I saw had electricity in their house, so no one had an in-home computer.  Never mind the Internet.  Documentation on business revenues, cost, and profits is probably nonexistent before the first loan.  So, loans begin very small -- about $100-150.  The timeline to repay is short -- a month or two.  The interest rate is not nominal -- 2.5% a month.  If the first loan is repaid, then the borrower may get a second loan.  There are no refinancings of unpaid loans.  And, borrowers must have an "exit plan" -- a plan to build up savings so as to quit borrowing at some point.  To get there, borrowers are required to deposit weekly into a security account with their trust group (more about that in a minute) and into a savings account.  Borrowers are also taught how to keep business records and calculate profits.

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But wait, there's more.  The loan officers are titled "Transformation Officers," and this is no joke.  To borrower from Opportunity International, borrowers must attend Transformation Meetings.  I attended one (in Chichewa, a language I do not speak), and it was like attending church.  The officer gave a sermon about reinvesting one's profits into one's business.  Two analogies that stuck out -- Opportunity International was like your friends helping you jump start a car with a bad starter.  They arent' going to push you your entire journey, just at the beginning.  Another analogy about reinvesting profits involved a farmer eating his seedlings.  These meetings are monthly.  In addition, each borrower is part of a "trust group" from her/his village.  Trust groups are generally 7-10 people, who guarantee each other's loans.  Each trust group is instructed to write a "constitution," which is basically a partnership agreement detailing what to do with defaulters.  Because citizens of Malawi feel deep ties to their villages, these trust groups are powerful forces.  Defaulting and having fellow villagers pay your debt would create grave reputational consequences.  Once a borrower has 5 or 6 successful borrowings, they may "graduate" and become an individual borrower.

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So, we visited two trust group meetings and one transformation meeting.  We also visited the Limbe branch of Opportunity Bank and visited several clients in the Blantyre market.  Although brochures tend to depict colorful pictures of borrowers starting schools or selling fresh fruits and vegetables, the clients we saw in the two days eked out grittier livings.  The selling of secondhand clothes was a popular business (these are clothes that we have donated to Goodwill once or twice and have made their way to Africa in bales, which are sold to dealers).  So was the sale of potatoes, bananas, "freezes" (popsicles), cooking oil, dried fish and "time" (cell phone minutes on scratch-off cards).  The places of business may be a stand outside a house, a stand by the side of the road, or in a market.  That being said, these loans had changed people's lives, enabling them to buy their goods wholesale instead of retail, open up multiple stands, hire employees.  Life is hard in Malawi for business people -- there seems to be very little shipping of goods as we know it.  Resellers travel for hours on buses or in vans ("minibuses) to South Africa or Mozambique for goods.  (We brought medical supplies in our suitcases to the Mulanje Mission Hospital because shipping is so unreliable.)  There is no refrigeration for storage.

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Opportunity International also provides the great service of banking.  For the villages that we visited, there are no banks.  So, Opportunity Bank has a mobile bank (like a Brinks armored car) that goes to each village once a week.  (The week we were in the Mulanje district, Monday was a holiday in honor of the last day of Ramadan, and people were very upset that the mobile bank hadn't come!)  This allows people to save each week and to also make payments on their loans.  These businesses are cash businesses.  I saw no checks in Malawi.  A few places (our hotel, etc.) would take credit cards, but the fee was as high as 10%.  So, people get cash every day and have no place to put it.  At one trust meeting, a female client urged Opportunity Bank to open a physical building in Mulanje (they plan to) because, as she put it, she is tempted to misuse her profits when she has to wait a week to deposit them.  At the same trust meeting, a male client challenged Opportunity's policy of requiring savings account deposits during the term of the loan.  If he was getting loans to grow his business to provide for his family, then shouldn't he be able to use the profits for things in his house?  The answer from the trust officer was simple:  Sure.  After you repay your loan, you can use profits for whatever you want. 

There have been reports about a possible microfinance "bubble" -- private equity firms coming in, doing "no document" loans, refinacing microloans, borrowers with huge microdebt and no business to generate profits.  There is more competition in the microfinance industry.  The borrower who wanted to spend his profits made clear that other microfinance outfits were offering loans with no such strings.  The more sound way to run a microfinance organization in developing countries seems to be the Opportunity International way -- transforming the borrower, training the borrower, monitoring the borrower.  OI also employed Malawians, who were familiar with the villages and the marketplaces.

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