In 2007, I conducted an impact survey of microfinance with clients of a rural microfinance institution in the central Andean region of Ecuador, to find out how microfinance really works. Many people throughout the space question if microfinance works at all, but our focus instead was how to make it work, better. Of the many findings, one thing stood out clearly: it takes time.
During the countless site visits we made throughout rural Ecuador, we kept hearing that microfinance was indeed working. But, those more experienced clients, working on their fourth or fifth loan noted that it took them three or four loans to really gain an improved quality of life.
This fact is central to the design of most microfinance systems: the graduated loan scale. As each loan is paid off, a bigger loan is available. In this Ecuadorian case, there were four defined steps in the initial scale: $400, $800, $1200 and $2,000. Beyond instilling incentive to repay, the graduated scale also prescribes a growth pattern, and a specifically common behavior, which we saw through Eva.
When we gave Eva a $400 loan, she did exactly the same as every other microentrepreneur I’ve ever known – she increased her production capacity, by buying a potato peeler. For Eva, a potato peeler meant she could make more salchipapas and could now open her restaurant for lunch. However, for Eva and her peers, increased production does not mean increased demand. There is a gap, or surplus, created as a result of this microfinance behavior.
Although they will eventually settle in at equilibrium, with production matching sales, it takes time. Which means it won’t be easy to pay off the current loan, and will take longer to see true impact as they move up the graduated scale. So, that begs the question, what should micro-marketing/sales look like these artisans? How can we, as Chaka and the international marketplace, act in response to this surplus/gap? And, what else do you know of that is working, that Chaka can contribute to, to accelerate?