Cali, Colombia 7:00 AM on the last Saturday in July. For a change, it’s not raining as we head west. In about two hours, we drive up a narrow uneven road, which occasionally scrapes the bottom of our muddy Kia. I’m here on a field visit to a prospective borrower of UNI2 – a Colombian microfinance lender.
The tiny farm has been cobbled together from bamboo, scrap wood, corrugated plastic panels, tarpaulins, and assorted found materials. Canvas curtains serve for doors. It gives the impression of of being improvised yet organic. The pig sty melds into the chicken coop, into the flower and vegetable gardens, all of which surround the residence. In front is a roofed porch. This is the site of an informal cafe from which the farm’s owner, a woman of middle years, supplements her income by serving drinks and snacks to neighboring farmers and workers. The need to have supplemental income as well as the resourcefulness to earn it, were common among UNI2’s borrowers.
I was in Colombia, assisting microlender Finamiga UNI2 with content development, marketing, and strategy. UNI2 is a provider of really small loans. It lends for farming, retail, manufacturing, and motorbike or light cargo vehicle purchase. The two hundred and fifty dollars of the title, corresponds to about a million Colombian Pesos ($COP). About the average Colombian monthly wage and the smallest loan UNI2 makes.
Depending on your location and tastes, a few hundred dollars could buy you a new golf club, a pair of balcony seats to a production of Tom Stoppard’s latest play, Leopoldstadt, when it opens in New York later this month, or a single ticket to see the New England Patriots vs. the Detroit Lions. In effect not something, which will make a significant difference in your style of living. If you were a peasant farmer in Colombia, your answer would be different.
A million or so pesos buys fertilizer, seeds and seedlings, power tools, chicks, which will become laying hens. Larger loans of a few million pesos, are used purchase piglets, calves, or leases for additional workable land. A “big” microloan of three to six million (still less than $1,500), might be used to buy a low end motorcycle. The prospective borrower in this case, hoped to be able to buy a motorbike to more easily get into town and keep her small farm supplied.
These are not loans, which a standard commercial bank, in Colombia or elsewhere, would typically make. Borrowers seldom have assets or credit history, which would qualify them for any loan. In a sense, microlenders are bankers to the unbanked and “unbankable” by conventional banks. Still these are loans, not grants. Borrowers undergo due diligence vetting. Those who are approved are charged interest, though at a below market rates. UNI2’s customers pay an interest rate averaging less than four per cent, not a full risk adjusted rate, let alone the usurious rates charged by Informal networks, gangs, and loan sharks.
UNI2 is not a charity. Its business model seems to be working. Loan default rates are lower than in Colombia’s commercial banking experience. Borrowers often take out succeeding loans after they pay off the current one. With focus on a few key market segments, lower expenses, including very Spartan offices, UNI2 can sustain itself and grow while remaining a low price lender.
UNI2 tries and generally does provide more than “dumb money.” Their due diligence and field visits focus the borrower’s plans and priorities and sometimes include advice and perspective.
UNI2 both services and retains the loans on its books. Nonetheless, it can effectively resell them to third party lenders. In doing so, it acquires resources to fund further loans. One of these lenders, Kiva, has an intriguing way of supporting development. In essence, it crowdsources loans.
Kiva members are invited to contribute capital in increments of $25 US. Kiva lenders, can browse the sites prospective borrowers and allocate their funding to any project, they find compelling. Some of the loans are completely funded and managed by Kiva, others have been originated by UNI2 or other organizations like it.
The kiva loan is just that. If the borrower repays the loan by the end of its term, the Kiva member can choose to lend the principal to another project or get it back. Any interest derived from the loan, is kept by Kiva to fund its own activities. For $25, you too could become a microlender.