ASSETS OR LIABILITIES?
Microloans in the Caribbean
When executed correctly, fostering an entrepreneur’s or new business’s growth is one of the greatest ways to advance a local community. Progress in business is not the only realm, of course, but when growth is achieved here, it delivers a ton of truly fantastic benefits.
It provides ongoing income, grows an asset, and offers numerous flow-on benefits for the individual like building a broader social network and playing a deeper role in government. At the heart of it, it offers those who started the business, stability and greater financial security.
It’s for these reasons, and more, that microloans have grown to hold great support in recent years. At their best they can be a great vehicle for growing lives and a nation’s economy. But what issues are in play here beneath the surface? How have microloans fared in the Caribbean? And what changes are arriving to redefine this field? Let’s look now.
MAKING A SUCCESS OF MICROLOANS
In 2018 there is around US$34 billion circulating around the world in microfinance initiatives. At the heart of this funding has always been a strong but simple concept: that if aspiring entrepreneurs in developing nations are given the funds they need to build a business, they would go ahead and do it!
Conventional loans to would-be entrepreneurs who may have little existing income, employment or assets wouldn’t work. Beyond the red tape of the application process, conventional loans seek repayment with interest. Oftentimes these interest rates are very high in developing nations, making the idea of borrowing money even more daunting.
This additional financial pressure - not to mention mental and emotional toll on a person already struggling to achieve and hold financial stability - means that even if an entrepreneur with little income could seek to gain approval for a loan, the prospects for a successful outcome would be unencouraging.
Microloans also enable the supply of ancillary employment services that could be taken for granted by many businesses fortunate to enjoy greater profitability. From sick leave to workplace insurance, to the payment of an accountant for an annual tax return, as a whole, microloans make up a big ecosystem.
NO SMALL DRAWBACKS
While on paper microloans clearly look to be a promising pursuit, in reality debate continues as to their overall effectiveness relative to other options. While providing the financial support for someone to start their own business is clearly appealing, business is, of course so often a mix of expertise, good strategy, and timing.
In the absence of an entrepreneur having these qualities on their side, providing a path for their greater education - so as to find employment with another business before then perhaps starting their own venture - could provide a more stable and secure route. This is especially so because of the variables that exist from one community to another.
The success of an initiative like microloans in one nation (such as the Grameen Bank in Bangladesh) is rightfully inspiring, particularly for the results it has yielded in delivering greater equality of opportunity to women in the nation.
But such an initiative cannot simply be replicated elsewhere without consideration of unique local factors.
THE CARIBBEAN EXPERIENCE
The Multilateral Investment Fund (MIF) has been a pioneer of microloans in this region. operating since 1993. While it does not directly fund entrepreneurs, it has over US$100 million at its disposal for use in Latin America. It is active within 26 countries throughout the region and, most impressively, has scope to provide up to $2 million to a project.
What the MIF has done well is engagement with stakeholders at the grassroots level, using local partners instead of an exclusively ‘top down’ structure, to see funds channeled via local groups who know their communities and countries best.
The Caribbean MicroFinance Alliance (CMFA) has also been a leader in this field. Recent years have seen it perform strongly, with 2015 seeing over 22,000 clients served, and US$23 million deployed as loans in the region.
These results are impressive but so, too, is the CMA’s wider work in promoting responsible lending within the region, as ultimately its membership still accounts for less than 50% of the total sector in the Caribbean. That means its words are just as important as its deeds, especially because much of the success of microloans is dependent upon subjective attitudes.
Growing financial literacy is not a goal confined to the Caribbean. Yet it’s also true that often the ability of microfinance and microcredit institutions to succeed is hampered by (what is usually considered) good financial practice. In a cultural quirk, statistics show English-speaking Caribbean nations typically record a higher rate of savings compared to non-English speaking nations.
This is fantastic for their savings account, but it can mean the recognition of the options available via microfinance and microcredit initiatives is not always immediate. Many entrepreneurs and businesses will delay the prospective growth of their business that would otherwise be available via microfinance.
MICROLOANS IN THE E-COMMERCE ERA
One of the changes we’ve also seen in recent years has come with the rise of the ‘Kickstarter economy’. It offers an alternative to the microloans formula.
Once upon a time not-for-profit channels commonly existed in a centralised and remote structure. Today all that is required to generate income for a new business is a solid presentation online and a PayPal account.
While websites like Kickstarter and GoFundMe won’t replace the microloans sector by default, they are illustrative of the new opportunities the digital economy is creating for businesses to grow and generate capital. When it comes to seeking to deliver the benefits of microloans while also navigating unique cultural quirks in certain nations and communities, it’s another avenue.
SMALL LOANS IN A BIG WORLD
Microloans may retain a mixed record but part of this is owed to coverage; just the same as it’s often overlooked that, save for 25 nations or so, every other country in our world of almost 200 is classified as developing. Even economic giants like the People’s Republic of China, Brazil and India are developing.
Ultimately, while microloans are most prominent in developing nations, all professionals globally in business can encounter great challenges thanks to a poor legal structure or financing.
It’s a confronting reality in a world where approximately 836 million people (around 12% of the world’s population) continue to experience extreme poverty while, for many decades, strong economic growth and the rise of the middle class in booming economies like India have made inroads.
Certainly developing nations have different challenges compared to developed ones but those challenges are not necessarily always exclusive. Progress in one area could assist in the other.
In Latin America and the Caribbean alone, some 600 microfinance institutions have lent around $12 billion to more than 10 million low-income clients