Microcredit

At the Click of a Mouse

César Hugo, a 58-year-old Ecuadorian ironsmith, earns his living along with his four children fabricating doors, windows and iron bars. His business is in demand in the poor neighborhoods of Guayaquil, where robberies are common and iron bars serve as protection against break-ins. But Hugo’s business cannot grow or fl ourish due to a lack of capital. Yet he has not sought a local loan to solve his problem: his hope is the Internet. Hugo is counting on connecting to enough individuals who will each lend him at least US$25 so he can get the US$500 needed to invest in making a showroom to be able to present his products to potential clients.

In this circumstance, the magic of connecting small microentrepreneurs with investors, baby step by baby step, comes courtesy of Kiva, a microfinance organization whose website allows investors to select the business that seems most viable or interesting to them from an active portfolio of microentrepreneurs and then make a loan using a credit card. As the loan term passes, normally six months to one year, the investor recovers his/her investment. But all investments run a risk. If the loan is not paid back, the investor loses the loaned capital, something that has not happened during Kiva’s year in operation.

“Kiva has ties to 10 organizations that work in the field, all with access to the Internet; they select the investors and put that information and profile of the microenterprise into our system,” explains Matt Flannery, Kiva’s founder. The technology allows lower financial costs and greater transparency, according to Primal Shah, Kiva’s president. Investors know exactly to whom they are lending money and can follow the negotiation process online throughout the loan’s duration. “In Latin America we work in Honduras, Nicaragua and Ecuador,” adds Shah. The technology makes it possible to create a connection between microentrepreneurs and small investors that goes beyond financing, allowing donors not only to invest money but also emotional capital, if they so choose, Flannery explains.

United Strangers

Rural women in Central America have found an unexpected friend in the technology. “There is growing pressure to make microcredit sustainable. The amount of the microloans has continued to increase and the interest in rural zones dried up,” explains Bob Graham, founder of NamasteDirect, an organization that collects donations online to offer loans to rural Guatemalan women seeking credit for the first time. The funds raised by NamasteDirect are in turn donated to local microcredit organizations that manage the nointerest loans that the women will receive.

Graham is an expert in microfinance. He previously founded Katalysis, which led to the Katalysis Microfinance Network of Central America. Currently, 13 microcredit organizations are united in the network. Graham is openly enthusiastic about the boost that new communications technology is giving this field, and he recites with passion how the Internet can benefit NamasteDirect: “It allows us to establish a close connection between the borrower and donor; it lowers the cost of keeping current and potential donors informed; it’s accessible to the small donor without us having to assume any additional cost; it allows quick and efficient collection of funds for us and our associates; and finally, it allows users to donate as impulsively as they shop on the Internet.”

Another advantage, Graham notes, is that the Internet is here to stay and it is an indispensable tool for the new generation of philanthropists. “We wanted to create an organization that would last through time, that would help poor people become less poor with the help of small loans and that would do good social work using sound business practices,” Graham explains.

Simplifying the Complicated

Technology is useful only to the extent that it facilitates something that previously was not possible, lowers costs or opens the market to new products or players. Prodem’s automated teller machines represent a good example. They can be used by microentrepreneurs who do not know how to read or write, since the teller speaks to the user not only in Spanish, but in Aymara and Quechua as well. Clients respond by selecting different-colored options on the screen without having to key anything in, and they can withdraw money in both bolivianos and dollars.

ATMs also offer security to the customer because they use a fingerprint reader that authenticates the card’s owner. They can operate in rural areas that are not connected to any computer communication network, since the users have a card with a chip that contains encrypted information about their account.

The ATMs offer an advantage not only for clients— many of whom are accessing credit and traditional banking services for the first time— but also for Prodem, because it has been able to dramatically increase its number of real and potential clients and bring microcredit to thousands of new borrowers, many of whom live in rural areas which have been excluded by traditional banks.

Clients view the Prodem ATMs as belonging to them and they value the services that the machines provide. In the last couple of years, during the protests in Bolivia against the government and globalization, in which banks and public installations were targets of destruction, not one Prodem machine suffered damage. In some towns, the community organized to physically defend the machines. The image of a peasant defending an ATM is a real tribute to the power of technology to reduce the inequality gap.

With the Bank in the Pocket

The technology not only helps microentrepreneurs but also is a good ally of the organizations that work with them. The program Microenterprise Access to Banking Services (MABS) is a good example. According to John Ownes of Chemonics—the consulting firm that led the project—the goal was to help rural banks develop their capacity to provide profitable financial services to microenterprises.

“In the Philippines there are a large number of rural microfinance clients whose small transactions are extremely costly. At the same time an extensive network of low-cost cell telephones exists, and we saw the opportunity to operate virtual bank accounts using cell phones that allow the user to buy and pay for goods and services, send and receive money and make domestic and international transfers,” explains Ownes. The transactions and transfers are made through text messages, a technology that was not new to many users, which meant that there was no need to teach clients how to be familiar with something unknown. “When the program began, one company, Globe Telecom, managed more than 200 million messages per day,” Ownes reports. MABS made an agreement with Globe Telecom that led to the creation of GCash, a type of virtual money that can be used in the real world.

The system is fairly simple. Many small stores allow the exchange of cash for G-Cash. This saves time for the client, especially in urban areas where no bank is nearby, since there is no need to go to a branch. G-Cash is stored in the cell phone, which becomes an electronic purse. Through text messages in the phone, loan payments can be made, transfers sent or purchases made—instantaneously— at any time of the day or night.

Until now, use of cell phones for this type of activity has been more common in Africa and Asia than in Latin America, but this situation could change soon. According to data from the International Telecommunications Union, 32% of the Latin American population had cell phones in 2004, a percentage that is growing quickly and that is almost four times more than the number of users connected to the Internet. Between 2000 and 2004, the number of people with subscriptions to cell phones rose by 171%, a figure that continues to rise and that surpasses the number of people who have computers. It’s not strange then that as the number of cell phone users rises, at all income levels, they keep their bank in their pocket.