|  Jason Walcutt and I both attended, in a secularly religious way, the free vegetarian cooking class put on every week by the Hare Krishna club at NYU. The cooking class attracted a lot of lefties, and Jason, a business school student who always sat in the front row and wore a leather jacket, stood out.
Jason is a pretty funny kid. He talks, a lot, in a high pitched voice that sounds like he's warming up to sing. He speaks Mandarin. Allegedly, he was the brains behind the New Englander's Club, a group of 4 students that "discussed New England" once a month while NYU footed the bill at fancy restaurants like Le Cirque. So when a friend forwarded me an e-mail from him, telling tales of working in microfinance in Mexico, I had to find out more. Microfinance (specifically here, microcredit or microloans) involves local organizations lending small but usable amounts of money to impoverished or struggling entrepreneurs. Money from loans is typically used to buy tools - a cow for plowing, materials for a family manufacturing operation - that can help make the borrower economically self-sufficient. Loan terms tend to be a few months, with interest rates pegged to local norms (which usually seem exorbitant at first glance; whether or not they actually are exorbitant is another matter).
So there's a bunch of issues that you can probably see coming - what is this good for, who decides, how do they decide, what are the specifics that determine which programs fail and succeed, are we feeding the poor from the hand of Adam Smith, capitalism is evil so where is the underside and how are these dickhead bankers making a profit off of this?
Jason (wearing his leather jacket over a Ho Chi Minh t-shirt) and I sat down to speak in Washington Square Park, where he told me about the differences between working in India and Mexico, why he thinks microfinance should be handled by banks and not non-profit NGOs, and about that time he stole a fridge from someone's house.
How'd you get into microfinance?
I was heading home from NYU and I remember I was heading home from graduation, and I thought I was going to hitchhike across the country and go work as a fisherman in Alaska, and then hitchhike down to Mexico, that was my big plan, and then a buddy gave me a call and said, "someone dropped out of this program I'm doing and they need someone else to work for an NGO in India, would you be interested?" so I just got lucky with it. And I didn't really have any other real plans so I said sure. They asked me what I was interested in, I said entrepreneurship, helping people start businesses - that was sort of what I had studied in school - and I guess that paired up well with microfinance. Real quick, how would you define microfinance?
Providing funding for people, entrepreneurs, on a very small scale, but who are all trying to do their own individual business activities, starting up small little shops. OK. So you knew about microfinance before you went to India? I actually didn't know about microfinance before I went over. There was definitely a Google search done after I found out about the job. It was right at the point where, I think, microfinance was starting to get a lot of press, in 2005. I got set up with a fairly well established, mid-sized NGO, about 30,000 members - all women, set up in a self-help group system, where 5-10 women meet every week or so and they talk about their problems. And over time they establish a sense of trust and community, and then they start doing other activities, like saving money together, and once they build up enough savings, they can give out loans. So the NGO started out as a self-help group and sort of turned into a pretty substantial microfinance organization. We worked in the middle of India, in Maharashtra, which is about 10 hours east of Mumbai. My specific role was starting up a separate program, a micro-health insurance program. What the NGO realized while they were doing this work in India, was that a few people defaulting, and they did research and found that the reason some people were defaulting was that they were taking the money they got from microfinance loans and using them for hospital bills. The government of India is supposed to provide free health care for people, but it doesn't actually work out that way -- you find that the system is very corrupt, the public health care systems provide very basic health care, if that, and that the doctors, if they're actually there, aren't that helpful. A lot of times people are forced to go private institutions, private doctors, that charge substantially more and it sort of creates a poverty gap. Does that happen a lot, people using the loans for non-business purposes? Well, the people always want to say, yes, this is for a business. In India, I was working for an NGO, which has a social/community aspect that a bank doesn’t have, so for these, the money was just going to people that needed loans. The alternative is that the people would go to a loan shark, who just don’t loan out money to the types of people we were dealing with, which are people that make about $2 a day, which put them just above the poverty line. If they went to a loan shark, they’d have to pay something like 100% interest, 120% interest. What were you guys charging? Around 60%. Those figures are per year though, and most loans are for a few months, so 60% interest is 5% per month. What were you actually doing for the health care program? For me it was really interesting, because I got to travel throughout India to study different kinds of health insurance programs that had already been started by NGOs. I got to go to Bangalore, where I saw a hospital sponsored program, and I went to another that had a partnership model, and another that had a community based program, which is the one we decided to go with, where all the funds actually come from within the community. The other two usually requires a larger financial backer in case things get out of hand. How’d that work? Everyone pays a premium, and that amount of money supports the health insurance that they pay out. I think we were charging about $1 per month for the insurance. So everyone pays the premium, and how health insurance works is that not everyone uses the health insurance every month. If your health insurance covers surgeries, you’re going to need a lot of cash on hand to cover the bills, but ours was a more simple program of primary care and checkups, where we worked out deals with doctors where we guaranteed them business every month in exchange for a reduced rate. So it made business sense for the doctors, but there was also an altruistic element to them being involved in the program. And again, this is people just above the poverty line? All the communities I was working with were already part of the microfinance network, so they weren’t the poorest of the poor. They had stable communities, where they had funds coming in, but, you know, no electricity in houses, no indoor plumbing, kids were running around naked – It was definitely the developing world. What was your friend working on? He was working in the microfinanced communities, working on the business structure after they people had already gotten loans and had some savings, trying to start businesses that can employ people in the community, so the money stays in the community and doesn’t escape out. One thing he was working on was a home grocery delivery program, where, instead of having people go to the market every week, they would get a basket of groceries delivered every week. So the business charges a premium for the delivery service, but it also employs the local women, which gives them a job, more income in circling through the community. He also worked on outdoor toilet construction business. One of the differences I would figure between programs run by NGOs and programs run by banks is that the programs run by NGOs would bring a value added component to their loans - education, technology, etc. Right. A microfinance organization is just a few steps away from a bank, so the interesting thing about the NGO’s microfinance program was seeing how it shifted towards running more like a business. While I was there they had actually hired consultants to analyze them and figure out how to turn it into a business. That’s something you’re seeing a lot more of. Communities that utilize the NGO model can only take it so far; the NGO turns into a nice shell that you can turn into a business, that’s very workable, that already has roles assigned. A coordinator in the field gets made into a salesperson – where before they were going out into the field and teaching people about microfinance, now they’re going out into the field and selling loans. So one of the good things about an NGO becoming a bank is that it can then employ more people from the community? Yes. So then, and this is just the first thing that popped into my head, it might seem like it’s just a cycle, that people learn about microfinance, educate more people about loans, then sell the loans, and then the bank becomes bigger and can employ more people - which means it can educate more and more people about loans, sell more loans, and employ even more people. Aside from just giving the people who actually work for the bank a job, is the bank benefiting the community in any way? Or it just kind of snowballing into a bigger and bigger entity? One of the great things about it, and how I always viewed microfinance, is that it was sort of the capitalist way of social movement, social mobility, social enterprise. It goes to some of the lowest levels and says to the person, “If you work hard, you do your job and have a little bit of luck, whatever the venture it is you’re starting, maybe you have a scale and you weigh people and they give you a little bit of money, or a little handicrafts thing, if you do this and it sells, you’ll get more money coming in, and that money doesn’t go to a foreign bank, but goes back into the community.” Then with that money, you can either take out another larger loan or maybe it goes to your neighbor, who themselves start larger enterprises. And part of the reason why America’s been so successful is that we’ve had so much access to credit. One of the biggest shocks I had when I went to China or Mexico, was how hard it was to get credit. It’s very hard to trust people. Here, you just pull out a credit card – I’ve got three in my pocket right now. But in other countries, it’s not that easy. And that’s why we’ve really grown so much; it’s so clean and it’s so nice. We have the access to capital and credit if we need it. So microfinance takes that idea and brings it to the lowest level. When you hear that an NGO is becoming a bank, you think that it loses that social component, but actually it just…you’re not losing on the social component because the rules are the same, it’s just making sure that people abide by…if you don’t pay your loans, the community suffers. I do believe that an NGO gets to that point and doesn’t become a business is actually harming the community from further development. If someone takes out a loan and doesn’t repay it, and NGO might say “that’s OK”, but that hurts the NGO and it hurts the community, and that means that another person can’t get a loan now. So it’s important that you get stricter standards, and that’s what a business does, makes sure people pay. That whole social component comes into play much more strongly in Mexico. OK, can you tell me about Mexico then? I was in China and ended up in a meeting with the head of one of the first microfinance banks in China, seeing if I could get a job working there, and I didn’t, but I told him that I really wanted to learn and that I was willing to travel to wherever the next for profit microfinance program was going to start up, and that ended up being Mexico. So that was a big change – Right away, you could tell that [the one in Mexico] was a business. In India, people would sort of wake up, go into work whenever they wanted, and if something didn’t happen that day, that was fine. That might have just been India, a cultural thing, a “whatever whatever” attitude at times; things get done in India, but time just seemed like it was never an issue over there. But in Mexico, they had an office, everyone in shirt and tie, loan officers in matching uniforms. So the organization in Mexico was a for-profit company that had 5-6 branches spread across the state of Vera Cruz, which is on the Gulf of Mexico. I was there when the organization was about one year old. I guess one thing, the clients were very different. The poorest of the poor in Mexico are different than the poorest of the poor in India. The people we worked with in Mexico were lower middle class, just above poor – way above India. They had access to credit, and they were in a city.
The Mexican microfinance organization only gave loans to businesses, so you could only get money if you had been up and running for X amount of time. And that’s where I learned a lot about how they actually determine whether or not they can give a loan to someone, they had a very strict procedure. How it works: they have loan officers that would just walk around the city and go into businesses. In Mexico, you know, there’s a ton of small little mom and pop shops, selling tacos, shoes, groceries. So they go into the little shops and say, “Hi, my name is So and So, and I’m from this Microfinance Organization, and let me tell you about this loan.” It was door to door sales of loans. I always thought it was funny because I imagined if in the US, I just walked into a pizza place and was like, “Hi, my name’s Jason, I want to sell you a loan.” But that’s how you sell loans in Mexico.
So they meet with the people and take their information down, go back to the office and do a credit check on the business, then go back to the business and do an evaluation. The evaluation was 5 or 6 pages and was basically an accounting. Most of the places don’t keep records, they just go by, “OK I bought X number of tortillas this week and X amount of lettuce and by the end of the week I have this much left over so that means I have to buy this much more.” So we would go through and say, “How many tacos do you sell a week?” “50 tacos a day, so 350 tacos a week.” “How much do you sell each for?” “5 pesos.” So you’d get the revenue and do the same, “How much do you pay for each head of lettuce” etc etc. So then you can figure out their profits.
Then you’d list the assets they have – chairs, a refrigerator, a TV for people to watch. You’d also do their family’s assets, because a lot of people lived in the back of their stores. So, “OK, you have a car, you own your house.” So we’d get a financial profile of the family and their business, and then we’d run the numbers through some formulas, just like a bank here in the US decides whether or not you’ll be able to pay back one of their loans. Then the loan officers go to the bank manager and the loan committee and everyone asks questions about each candidate, so other loan officers can ask you questions like, “Well how much cash do they have?” – so everyone can be very critical of each other. So the whole thing took some time. The company also has strict standards, like each officer has to get X amount of people each month to qualify for a bonus. What were you doing? Did you know Spanish? I was following the loan officers around. They didn’t pay me but they gave me housing. So I would walk around with the people, and you learn Spanish pretty fast when people are speaking it all day. In the beginning it was pretty tough, especially without knowing the lingo for cash, other slang. But by the end of my stay, I did one complete deal, where I found a person and said, “Hola! Me nombre es Jason. Soy un consultador.” And the person would say, “OK, I don’t know who you are, but sure, go ahead.” But the people who run the businesses are actually very smart; right away they’d say, “What’s the interest rate? Per year? Are there any secret fees?” They were actually pretty savvy.
In India, some of the people would be like, “Credit? What’s a loan? What’s insurance?” They had no idea what it was. But the Mexicans were pretty on top of it. So I went through the whole thing, talking to them about the business, going to the committee and presenting about it, and the people got the loan. Did the loan officers get a commission on each loan? It was sort of a weird structure. It was a bonus system. Each officer had a target, 5 new loans a week maybe, not including reloans where you’d renew people’s loans. Just to give you an idea, each loan would be around 3,000 pesos, which is about $300, and was for a term of 4-6 months, with an interest rate of 60% a year, so 5% a month. What were most of the businesses using the money for? Lots of things. It depended on what the business was. My favorite was the taco guy, because, well, the taco guy wants to take out a loan, that’s funny. People would want to get shelves for their store, or a new sign for their business, maybe a fridge. I think the largest loan I saw was for 20,000 pesos, $2,000, to a mechanic that wanted to buy some special piece of equipment. How did the bank make sure the people were using the loans for their businesses? You really can’t. After you give them the money, you just have to hope they pay it back. And that’s one of the major problems, so you run into, “What do you do when someone doesn’t pay you back?” You have to remember, when a person doesn’t pay, it’s really bad for the bank. That means that money they’re expecting to come in can’t go to someone else. Even when they’re a day late, it becomes an issue. And it became a pretty bad issue. I came right when the bank was having a lot of issues with people not paying back the loans. What happened was that the bank managers had just approved a lot of bad loans, people that already had loans or bad credit records and they gave out the loans anyway. I got there when a lot of turnover was happening. That’s when I learned about the dark side of microfinance, which is what happens when people don’t pay. So there were times when I was on runs to steal people’s…well, not steal, but to take people’s refrigerators. You go into people’s houses and…if the people don’t pay, you can’t just say “No, it’s OK.” If this was an NGO, you might say that, but this is a business, so you have to get something to make the business run, otherwise the whole thing falls apart, and the people that are taking good loans out won’t be able to get loans anymore. I did a lot of banging on doors at nighttime, “Pay your loans back, we need the money now.” That stuff happens in the US too, so it’s not surprising that they use the same tactics in Mexico. To effective ends? Well it’s never good when someone doesn’t pay. What’s a bank gonna do with someone’s refrigerator? I guess they could auction it off, but a bank isn’t a seller of goods. It’s not really the desired outcome. But yes, they collected people’s goods and auctioned them off so they could make some money back. What did you bring to the program in Mexico? I brought them experience in microfinance, and no one was really fluent in English, so I did a lot of looking over documents, because a lot of the investors spoke English, and the bank was certified by the World Bank. I was there to learn but we both got something out of it. I wrote a few reports for them. How did you leave the job in Mexico?
So after my 4 or 5 months in Mexico, I went to the CEO and said, “Put me somewhere I can do something.” I wanted to go to China but they had just opened one up in China, so they said, “What not try Sudan?” They went from China to Sudan? Yeah, yeah. Sudan would have been a program in Khartoum doing Islamic banking which is like regular banking but you have to obey certain Islamic laws. I wasn’t quite sure how it worked.. Like, you can’t charge interest, right? Yeah, you can’t have usury and certain fees. Is that an industry term? Usury? No, no. That’s just…that’s what they [Islamic laws] say. But a few things happened, like the US put sanctions on Sudan, and the embassy closed, and I realized a few things. The organization wouldn’t really support me, and I don’t speak Arabic, I’m not Sudanese. It would take me at least a year to get used to living there and then a year to actually do something impactful, so it was a very long commitment so I sort of backed out of it. What would the setup have been like? I would have been in Sudan, trying to setup the microfinance organization, with the help of another company called Damas, which is a Dubai-based jeweler. It would have been a full out bank. You’ve done microfinance for a while -- have you become politicized about it, how it’s seen, etc.? I think it’s still very new and it’s not going to go away, because it’s very effective. For organizations, for the individuals. It fills a niche and need. There’s a really great book by C.K. Prahalad called The Fortune at the Bottom of the Pyramid [subtitle: Eradicating Poverty Through Profits], a University of Chicago management professor. There’s billions of dollars amongst billions of people at the very bottom of the pyramid. And these people work really hard, and they don’t get the benefits. These people have the hardest jobs in the world, things like shoveling in the dirt for 14 hours days, and if they can devote that same energy to a business or entrepreneurial activity, then they’re going to do well. They know what hard work is and they’re willing to do it. There’s real potential to tapping into them and giving them a chance to start their own. So the potential for microfinance, is it in eradicating poverty? No, I don’t think that’s possible; we still have poverty in the US. It can definitely bring a lot of people’s standards of living up. I just think it’s a lot better than throwing money at people. You throw money at people, they don’t appreciate it and it gets wasted. But if you tell people, “You work for it,” people value that money and the work that they’ve done a lot more. One thing I should say is that I think NGOs really do a lot of great work. I think that they’re the way that it starts out. They get in the community and start to understand it. I worked with banks in India that wanted to start up microfinance organizations and they just didn’t have any idea…Each community is like an organism and their problems are so unique to them. So where a bank would try a one-fit model, an NGO would know the right way to market it and interact with the people the right way. So, maybe, the places you went would aspire to be served by banks, not NGOs? Yeah, absolutely. If all these communities had a local bank…If my parents can go into a Chase, they know the people that work at the bank and they know they can get a loan from them because they know that these people are trustworthy. In a lot of these areas, a very poor person will go into a big city bank and won’t get a few words out of their mouth before they’re asked to leave. In a community bank, the bank manager knows your situation and your individual business; I worked in Mexico with this branch manager who said, “I know this guy, I know his business, he always pays back.” And that’s a good feeling, when people that can trust the Bank and the Bank can trust people. When a bank gives a loan to a community business in a developing community, the intention is that the business will make more money, pay off the loan and be able to take more money home. Where does that money come from? Inside the community, outside? It depends on the community, but say in India they harvest sugarcane and travel to another village to get groceries and healthcare. So if someone starts a business that sells eggs, the people don’t have to go outside the village to get eggs, and the money circulates back into the community. Someone is getting less business, yes. But, say, that someone that is getting less business is a corrupt doctor that is charging exorbitant amounts for services that should cost a fraction of what he’s charging, then I hope he does get less business. That’s something I saw firsthand. I’d go into hospitals and just see doctors abusing their rights as doctors, charging ten times as much as they should be for a simple procedure, simply because there’s no other alternative. If he loses, I’m fine with him losing. Does that happen? So it’s like a capitalist justice and the free market is the sheriff? Yeah, it’s called social capitalism. You saw that in action? It was one of my eye opening moments. I would talk to people who would talk about a doctor that was overcharging, then a new doctor would come in with more reasonable prices and say, “No, what’s fair is fair and what he’s doing isn’t fair, and I’m going to be fair,” and as a result he gets lots of new business. So is that another example, that the more doctors or businessman there are, the more they will compete and the cheaper services and goods will be? Well, it depends on the product, but the hope is that the people who do good work will do well and the people that do bad work will do worse. Inequalities in these systems are present all the time and we hope that microfinance will help balance it out and give the people a little bit of leverage. Cash in pocket gives a person a bit more bargaining power. If you’re at the doctor’s table and he tries to charge you 10 times what he should, and you have cash in pocket, you can say to him, “Well then I’m going to go to the other doctor,” and the doctor in front of you might lower his prices. So yeah, it’s capitalism. When you read about microfinance you often see it framed in a certain way, like the guy that won the Nobel Prize, that it can lift countries out of poverty. Are you saying that’s not really how you think about it? The only way the industry’s going to survive is if it becomes more business-like and it takes a real business approach. You can’t let people off the hook when they don’t pay, and that causes problems for everyone in the community. Microfinance gives people a real good alternative to what they have, but there’s a point when the NGO needs to say it itself, “For our survival, for the community’s survival and growth, we need to put more standards in.” And that’s where the industry is trying to figure out what its next path is, what’s going to work in the future. I’ve seen dialogs with people from Africa and Russia and China and they mix their ideas together, this has worked here and not here, so it’s a real global test; everyone’s trying to figure out what’s the best thing and I think in a few years you will see some very clear cut models for how to do business in these countries.
The New Yorker wrote a nice article about microfinance, beginning with a few pages about Muhammad Yunus, who started the Grameen Bank in Bangladesh and won the Nobel Prize in 2006. The article is here.
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