Consumption! Consumption! Consumption!
But don’t worry, I’m here to tell you that Consumption is not a dirty word!
Before I became a Kiva Fellow, I was a Kiva Lender, and whenever I saw a consumption loan, I admit, I “clicked” away. I judged these loans, labeled them, and stuck them in a box called, “Lame: borrowers lack initiative.” My thinking was, “Why don’t borrowers just concentrate on improving their business, and then they could save-up their profits for X.”
The problem: I was looking at micro-entrepreneurships from a developed world perspective.
1) I’ve come to understand that micro-entrepreneurships (businesses) in practice are really not like the small business I had envisioned (complete with product differentiation, growth plans etc., profit margins – in a word a STRATEGY). The fact is that starting a “business” in the developing world is usually out of necessity (no jobs in the formal sector, unfair labor practices, no skills etc.) versus a conscience choice to spread a product or idea someone loves. Profit margins from these micro businesses are tiny and very irregular so money must be managed tightly to eek out some savings.
2) Saving money is a simple idea – but that does not mean it is easy. Running a successful (profitable) micro-businesses does not necessarily mean you can build up a store of money (save) for a large purchase. In fact, one of the biggest challenges for the poor (recipients of micro-finance services) is accumulating lump sums of money.
For arguments sake, let’s say this month there is actually some money left to save. Where does one put it? A bank, right? Maybe. But for many micro-finance customers that is not always option. Take Cambodia (where I am working with Maxima) for example, in order for a Microfinance institutes to take voluntary savings here, they must have $250 million USD in reserve (which is one pig piggy bank)!
So, you ask, why doesn’t the client just hang onto the money?
Well, many do and it works out. However, there are real risks to savings like theft, family members coming to ask for money (this is a big one – social pressure – in a word >>>GUILT TRIP), temptation on non-strategic purchases, overspending during festival time.
Now, where there is a will there is a way…
For the people that do not have access to formal savings there some creative alternatives, using the resources they have at hand. One example: savings clubs which consist of village members contributing to a shared pot each month and rotatating who gets the big pot at the end of the cycle (once everyone has contributed the cycle ends). This is called a ROSCA – Rotating Savings and Credit Association. There are also ASCA’s – Accumulating Savings and Credit Association – which work slightly differently, members loan out the money while it is accumulating). However, both devices are sill subject to a certain amount of risk (people can decide to stop participating and there are no real penalties). In addition, these savings obviously take time to accumulate, and the money (your money) is not available on demand (some people sell their turn in pot collection if another member needs it more).
In the developed world we have tools. When we want to save for a big ticket item we can set up an automatic deposit from a checking to a savings account. This gives us the discipline many of us need to save. (Without ING Direct I would not be sitting here as a Kiva Fellow right now)! I think it’s something we need – as humans – to be accountable to something/someone outside ourselves so that an emotion ( the little red devil on your shoulder) does not temporarily take over.
Okay, the point is – my initial “just save your money” idea is a lot more complex than I thought! So Back to consumption loans…
Situation: The rainy season is coming…. Mrs. Sokhom has been selling meals for five years. She cooks by herself for sale in front of a garment factory about one kilometer from her home. Her husband has been a wooden house constructor for fifteen years. The couple is in the process of repairing their house and lacks the money to finish part of the house. Therefore, Sokhom is requesting a loan of US1000 to purchase materials for making a wall for her house.
Solution: Consumption Loan – Home Improvement 1000 USD (I have to remind myself that when I see “home improvements” as the “loan purpose” on Kiva – that it’s not for new tiles and new kitchen cabinets – even though that is my initial reaction)
Check her out – as she boisterously tells me about her improved her living condition.'
But life is imperfect and often unfair so I am happy to report that Maxima, offers consumption loans so people like Mrs. Sokhom can stay dry, healthy, and run their businesses.
Mary Riedel, KF 10, Cambodia, Maxima
PS - I have been reading a very popular book right now Portfolios of the Poor (by Daryl Collins, Jonathan Morduch, Stuart Rutherford and Orlanda Ruthven) which looks at the spending patterns and financial needs of the poor by journaling specific borrowers in three coutries and their lives over time. I haven’t made any direct quotes but it has influenced my perspective – that perhaps we need new micro loan products for things other than business investment.