Credit Gap? Micro is beautiful

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4 March 2010

Many now fondly remember the days of cheap credit and apparent financial stability in the early 2000s. Those were the days where you would deposit your money and earn a reasonable rate of interest while businesses and individuals could receive a loan to open or expand a business, buy a home, go to university, etc..

The past is indeed a strange place: they do things differently there.

Banks and industries are still heavily reliant on government bailouts. Without this support many would go under. These Northern institutions can be seen as being on life support – they are kept alive by the bailout but are still pretty sick.

Developed countries have created packages to bail out stricken banks and industries, yet developing countries have no such option. So who is bailing them out?

Much of the money loaned in the last decade appears to have been spent on consumption, creating a debt-fuelled boom. Those debts are now being called in and credit terms are being tightened, making loans to support productive uses more difficult to come by.

This makes for a more risky business environment. Many sound businesses go to the wall in times of tight credit, not because they cannot make a profit on units sold, but because they cannot get sufficient access to finance to manage their cash flow.

Governments have provided financial institutions with billions of dollars in bailouts to boost the economy. Much of this seems to have gone into patching up the banks’ balance sheets and very little is available to businesses. Many small and medium entrepreneurs are unable to find financing and, worldwide, businesses are closing their doors as a result.

Slump down South

Many countries, such as Argentina, have awaited the aid of the International Monetary Fund (IMF), overseer of the global economy. Yet unlike the bailouts of CitiBank and insurance giant AIG, funds from the IMF must be repaid, in dollars instead of domestic currency, with interest.

Northern bailouts directly harm the developing world by giving Northern businesses another advantage over their Southern competitors. During the World Economic Forum, the head of the World Trade Organization confirmed this, admitting that the bailout packages of rich developed countries may end up having a negative effect on the developing world, since bailout packages can have the same effect as protectionism. Such policies would cripple developing countries, as not only have prices dropped but so has demand of foreign commodities.

With aid pledged by developed countries but unpaid, and developing countries unable to create their own bailout packages, many poorer countries are struggling to find a way out of the recession.

Even in good times, businesses in the developing world face many obstacles as financing options are limited. But in a recession, formal lending suffers dramatically. So many people in the developing world seek the aid of micro-finance institutions for the small loans they need.

Micro-finance institutions can help traders, craftspeople and small entrepreneurs in poor countries secure finance for their small and medium-sized businesses. But these institutions are financed themselves by other financial institutions, grants and donations that may themselves be suffering from recession.

Enter Kiva

One organisation filling the credit gap is Kiva (

Kiva is a not-for-profit organisation based in San Francisco. It’s an organisation with an innovative approach to micro-financing: person-to-person lending. This connects predominantly Northern lenders to Southern entrepreneurs living in areas without access to credit. Lenders can give as little as US$25.

Kiva, which currently operates in more than 40 countries, has attracted thousands of lenders who loan out millions of dollars by working with medium and small micro-finance institutions that are able to reach the more rural loan applicants, who are often those most in need.

Kiva facilitates interactions between lenders and recipients through journals, stories and blogging. In keeping transaction costs low Kiva volunteers translate journals and work alongside in-country micro-finance institutions on verifying loans and receiving payments.

Non-dividend loans (where interest is not paid) allow small businesses to launch or expand. This can genuinely transform the earning capacities of entrepreneurs. Instead of focusing on financial returns as in the ‘good’ old days, Kiva is all about looking toward the social returns of the future.

Such is the case of Evangeline Parrocha. She has received a loan of US$150 to buy in new products for her grocery store in the Philippines. The loan not only offers her better financial sustainability, but may also benefit her community, and thus society, by providing long-needed products that had not been available before.

In developing countries, governments have neither the means nor the mechanisms to bail out their small, medium and especially micro-enterprises when exports are low and prices have dropped. There are no government bailouts for the rice farmer in Indonesia, the coffee producer in Costa Rica, or the fisher in Togo.

Kiva is one organisation experimenting with new ways to support developing world businesses.

Instead of waiting for the recession to end, it is time to be proactive and seek ways to bring each other out of the slump.

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