Sunday, November 14, 2010
Microlending and Haiti
Photo by John Carroll
November 13, 2010
Can Microlending Save Haiti?
By DANIEL COSTELLO
VENANTE LINO, a small-business owner who lost nearly everything in the devastating earthquake in January, stood in line here along with dozens of other impeccably dressed women, all waiting to pay the latest monthly installment on the emergency loans they received to rebuild their businesses.
Mrs. Lino approached a folding table in the courtyard of one of the few remaining buildings in this town, located near the quake’s epicenter. She emptied her pockets of cash and gave all $40 to the loan officer.
“Every day, I wake up and ask God to make this better. Many days, I don’t think he’s listening,” says Mrs. Lino, a 63-year-old grandmother who lives under a tarp in her backyard with three grown children and four grandchildren, surviving on the meager income from a small food and cooking-oil business she reopened this summer with loan money. “Without this help, I don’t know where my family would be.”
Here in this once-bustling coastal town about 20 miles west of Port-au-Prince, more than 30,000 people — a third of the population — died as a result of the quake. Throughout Haiti, the toll may be as high as 250,000, and the economic effects have been staggering. The country’s economy is expected to contract by as much as 9 percent this year, and more than a million residents live in tent cities. And an outbreak of cholera, as well as a hurricane early this month, have left the nation even more vulnerable.
Especially hard hit are the tens of thousands of small-business owners, known as ti machann, who sell everything from heating oil to school uniforms from their homes and are often the sole breadwinners for their families. Because Haiti’s credit markets remain frozen, people like Mrs. Lino would have had almost no chance to rebuild if it weren’t for microbanks like Fonkoze, Haiti’s largest, which gave loans to the women in Léogâne.
In the best circumstances, sustaining a “bank to the poor” is no easy feat, but in Haiti after the earthquake, the challenge has been extraordinary. Even before the quake, 80 percent of the population lived on less than $2 a day. Today, while some 50 nations and organizations have pledged a total of $8.75 billion for reconstruction, less than 15 percent of the total promised for 2010-11 has arrived. (The United States has not yet paid all the $1.2 billion in reconstruction funds it pledged.)
Haitian microbanks provide a crucial lifeline to the poor, but their financial situations are sometimes nearly as precarious as those of their clients. Moreover, the banks are operating in a country that lacks many of the basic building blocks for businesses — reliable transportation, communication and supply networks — thus making the challenges all the more complex.
Their importance to hundreds of thousands of Haitian borrowers and savers gives these little institutions an outsize importance, making them “simply too big to fail,” said Greta Greathouse, a consultant with the United States Agency for International Development’s microsavings and lending program in Haiti.
“You are dealing with a very vulnerable and fragile population,” she said. The banks “need to get stronger on a permanent basis so they can offset the operational risks that come with Haiti because of the earthquake and the inherent risks that are unfortunately a way of life for the country and its people.”
MICROCREDIT banks, or microbanks, were pioneered by Muhammad Yunus, the founder of the Grameen Bank, which started 40 years ago by giving loans of a few dollars each to poor entrepreneurs in Bangladesh. In 2006, Mr. Yunus received the Nobel Peace Prize for this work.
In most cases today, microcredit clients start off with loans of as little as $25 to start a small business. The loans are often given to women who tend to spend their earnings directly on their families and communities. Many borrow in groups of five or more, and all members of the group work together and are responsible for repayment.
Some microlenders provide only loans, while others also offer education and health services. Partly because costs are so high, effective interest rates are often significantly steeper than those at traditional banks. In Haiti, rates range from 30 percent to 55 percent a year.
“Haiti is one of the most complicated environments for anyone to do business, let alone a small lender with an extremely poor clientele,” said Alex Counts, president of the Grameen Foundation, a nonprofit in Washington that fosters microlending. “Appropriate levels of interest are important, but it’s also essential these organizations continue to do the important work they do.”
One of the largest of Haiti’s microcredit groups, Finca Haiti, wrote off almost a third of its portfolio after many clients died in the earthquake or lost their homes and businesses. A staggering 53 percent of its borrowers were late on their payments. After losses of its own, ACME, another Haitian microbank, raised additional capital this summer.
Fonkoze, Creole for “shoulder to shoulder,” was started by the Rev. Joseph Philippe, a Haitian priest, in the mid-1990s. It has 45,000 clients and 43 branches across the country, but it lost $2 million in the three years before the earthquake. In 2008, after losses from a particularly bad hurricane season, the organization considered closing its for-profit bank and incorporating that division’s 24 branches.
Over all, the share of microcredit clients in Haiti who have defaulted or are at risk of doing so has risen to 18 percent, more than double the rate of a year ago. The international standard is 2 to 3 percent. Several of the Haitian microbanks, particularly some very small ones, could close or reduce their operations if their portfolios don’t improve, according to microbanking experts in Haiti and elsewhere. It’s likely that some will have to consolidate in order to survive.
Microbanks in other countries are increasingly aiming to become self-sustaining so they don’t need to continually raise funds to pay operational expenses. Some have transformed themselves from nonprofit into for-profit banks, raising questions of whether altruism and capitalism can co-exist. India’s largest microlender, SKS Microfinance, went public this summer, raising $358 million, and other banks may do the same.
While most microbanks in Haiti remain nonprofits, and have less financial transparency, Fonkoze started a for-profit bank (in addition to its nonprofit arm) in 2004 and reports both divisions’ earnings. It operated at a loss for three years but has stabilized after $15 million in donations this year.
Haiti has had natural disasters before, of course. But the earthquake’s impact on the nation’s banks was staggeringly high, in no small part because of the damage in Port-au-Prince, the capital, which accounts for 60 percent of the country’s gross domestic product. The banking sector, already fragile, was crippled. Out of 1,800 microbank employees in the affected region, 600 lost their homes. A quarter of the $38 million in outstanding microcredit loans in the region could end up defaulting, according to an analysis by Ms. Greathouse.
Despite the risks and financial costs, several Haitian microbanks are expanding, saying their loans are one of the only paths to self-sufficiency for the growing number of poor people in Port-au-Prince and the countryside.
For example, after losing a third of its 12,000 clients after the earthquake, Finca added back 1,000 clients this summer with the help of a grant from the Citibank Foundation. It’s a risky move: the percentage of Finca Haiti clients who are more than 30 days behind on their payments, a standard known as portfolio at risk, remains at 35 percent.
In July, after its director was ambushed in an attempted robbery, the bank moved its headquarters from the capital to a nearby coastal city, Saint-Marc, according to Rupert Scofield, the president of Finca, which is based in Washington and operates in 21 countries.
When it comes to doing business, “Haiti is probably the hardest place in the world right now outside maybe Afghanistan,” Mr. Scofield says. “It always seems just as things get stabilized, something else happens to pull the country back.”
Anne Hastings, Fonkoze’s co-chief executive, has become something of an international aid celebrity: she was a high-profile attendee of the Clinton Global Initiative conference this fall in New York. (The bank’s profile rose significantly in the days after the earthquake, when it was one of the only banks operating outside Port-au-Prince, and Ms. Hastings secured American military assistance to airlift $2 million in cash to desperate clients.)
Soon after the quake, Fonkoze wrote off 10,000 loans — almost a quarter of its total number — with funds from the Red Cross and others. The bank then gave each client a new loan and a one-time cash payment of $125, at a total cost of $8.5 million.
In recent months, the bank has broadened its health program and aggressively stepped up its operations, particularly in rural areas where poverty rates are highest and seem to be growing.
The bank has enlarged a loan program, called Ti Kredi, or Little Credit, to reach poor families that are not ready for larger loans. Ti Kredi offers loans of just $25, shorter repayment periods, additional support from loan officers, and literacy and health classes.
In another program, clients are offered goats or chickens so they can sell milk or eggs, as well as a weekly stipend of $7 to help with expenses, and to ensure that they don’t need to kill the animals because they are hungry.
SINCE the summer, Fonkoze loan officers have canvassed the lush, mountainous region on motorcycles, in pickup trucks or on foot to sign up as many as 3,000 new clients and to meet with existing ones to monitor their progress and to collect loan payments.
One recent rainy day, Steve Werlin rode for more than an hour on the back of a pickup truck outside Mirebalais, a small, central plateau town two hours north of Port-au-Prince. Mr. Werlin, a regional Fonkoze director, was on his way to meet Marie Ange Joute, a 30-year-old mother of two. Ms. Joute joined Fonkoze in September and lives with her children, mother, sister and niece (who was sick with a severe eye infection) in a small mud house with a tin roof on a 20-by-20-foot parcel of land. The house, which Ms. Joute inherited from her father, is her only asset, and she said the family had sometimes gone without food and medical care over the last year.
She has no business background but recently received two chickens and a goat from the bank and started selling eggs and heating oil from her house. To save enough money to expand her inventory, she joined a savings club with 10 local Fonkoze clients. Each woman saves a third of her weekly stipend so that once every 10 weeks, they get a lump-sum payment of $20 for larger purchases.
Clients are required to do many things on their own, and face penalties if they cannot meet certain goals. On the day of the visit, Ms. Joute had yet to build a shed for her goat, which could become sick in the rain. So she was told she wouldn’t get her stipend the next week unless the shed was built. (Fonkoze gave her materials and training to build the shed, and she complied.)
“I want to make my own money and care for my family,” she said. “I want to provide for us if something goes bad. I know how to work.”
AFTER the upcoming presidential elections, Haiti’s government is expected to issue new banking regulations, including rules for microlenders. They aren’t regulated now, though they have appealed for years to the government for rules that could bring more certainty to the industry. If a microbank went out of business, for example, it is not clear what would happen to the many clients who deposit their savings in the bank.
Fonkoze has 200,000 savings accounts, totaling $14 million. Currently, it uses those funds to make new loans, and it says that all of its accounts are secure. Because it was able to write off risky loans early this year, according to James Kurz, a senior Fonkoze financial adviser, its portfolio at risk has fallen to 5 percent in recent months.
If Haiti’s economy doesn’t improve and the country cannot stem various other problems, even some people who have managed to eke out a living with the help of microcredit could face more difficulty.
Sainte Anne Louis sells sodas, canned goods, clothing and homemade peanut butter outside her home in Mirebalais, yards away from a construction site for a new rural teaching hospital. She says her sales have fallen by nearly half this year, in part because it has been hard to secure enough inventory.
Mrs. Louis, 54, supports her entire family, including her husband, two daughters and their families. She worries about what will happen if things don’t improve soon. “We are grateful for what we have today,” she says, “but we pray tomorrow will be better.”