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April 16, 2003

Village Banking Supports Tomato-Selling in Tanzania (and Other Community Investing)
    by William Baue

FINCA provides microfinance to groups of villagers at market rates to create businesses that remain sustainable in the local economy long after loan repayment ends. -- In 1995, Sherida Mkama invested $10 in capital to establish a small business selling tomatoes in the Mwanza marketplace, a ferry's ride away from her home in Kamanga, Tanzania. Despite her entrepreneurship, she could never manage to rise above the cycle of near-poverty.

"I was doing good business, but my capital never really expanded," said Ms. Mkama, whose profits went into providing tuition and school uniforms for her 10 children while her husband's income went toward feeding the family.

This situation changed in late 1998 when she joined the Village Banking group Tugeme. Through this group, she received a small loan from the Foundation for International Community Assistance (FINCA) to buy spare parts for her bicycle, which allowed her more time to sell at the market.

"[T]ransporting the tomatoes is simple and fast," Ms. Mkama said. "I can now easily afford seeds and insecticides for my tomatoes." Ms. Mkama is now saving money, even after paying for her children's education.

FINCA founder John Hatch pioneered the Village Banking model in 1984 at Rural Development Services, a consulting firm where he worked with Rupert Scofield, the current executive director of FINCA International. Mr. Scofield had encountered a similar model during his stint in the Peace Corps working on an agricultural cooperative in the Guatemalan highlands in the early 1970s. Mr. Scofield administered $50 loans to tenant farmers and sharecroppers.

"I was very impressed by how a small amount of capital dropped into a huge surplus of underutilized labor could create a lot of value, allowing borrowers to generate a marketable surplus that could then be ploughed back into the family for better nutrition and education for the kids as well as money to buy medicine," Mr. Scofield told "What a huge rent they were able to extract from a small amount of money!"

Village Banking is a system where a group of 20 to 40 villagers receives small loans of $50 to $100. This system is predicated on a number of social and financial principles. The first principle could be considered "collective collateral," an alternative to material collateral.

"If one or two borrowers fail to repay, then the others have to pay for them," explained Mr. Scofield.

This system incentivizes the group to self-select only those villagers who are least likely to default. A single missed loan payment places the collective loan into FINCA's portfolio at risk (PAR) category, which stood at a mere two percent of their entire portfolio as of January 2003.

Sherida MkamaFINCA works almost exclusively with women, another Village Banking principle.

"Women have historically proved to be better credit risks, as they tend to be more responsible, perhaps from having to take care of the children," Mr. Scofield said. "And frankly, they tend to be more creative and risk-taking than the men. Because they manage the household money, they know where the returns are in the marketplace on any given day."

Village Banking charges a commercial rate of interest, distinguishing it from most community investing that charges below-market interest rates. FINCA believes that market-rate loans force borrowers to create a sustainable business model that can continue to survive in the marketplace after the loan is repaid.

"This was an unexpected thing for us, but the experience of taking a loan versus a grant and actually paying it back with interest turns out to be a very empowering thing for a poor person," said Mr. Scofield.

FINCA encourages sustainability by requiring all borrowers to place 20 percent of their loans in reserve accounts with the village bank. These funds can be drawn upon to avoid defaulting, but more importantly, these savings create capital for the borrowers. FINCA's network of approximately 230,000 clients in 20 countries has collectively saved $9 million.

Such success in savings has inspired FINCA to transform its most mature Village Banking programs--those in Ecuador, Uganda, and Kyrgyzstan--from nonprofit credit lending institutions to deposit-taking institutions as well. In addition to accepting Village Banking clients' savings, these programs are becoming joint stock companies. Shares are available to equity investors through the Village Bank Capital Fund, which currently contains $1.1 million in assets. The largest investor thus far is the Calvert Foundation, with a $400,000 stake in the fund.

FINCA's Capital Markets Group is currently soliciting "patient" individual and institutional social investors, or those with an investment horizon of five or preferably ten years. FINCA hopes to generate an eight percent return.

"We're hoping to develop strategic alliances with socially responsible investors that can help give us support in transforming ourselves from these not-for-profit credit-only institutions into financial intermediaries that are safe and sound places for the poor to put their savings," said Deborah Burand, director of FINCA's Capital Markets Group. "We are trying to turn ourselves into a banking community for the poor around the world."

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