NGO "ANOTHER WAY" (STICHTING BAKENS VERZET), NETHERLANDS, SUSTAINABLE INTEGRATED SELF-FINANCING DEVELOPMENT PROJECTS AND ADVANCED DEVELOPMENT TECHNOLOGIES

The cooperative interest-free micro-credit structures provided for in integrated development projects are innovative. They are complementary to the local money structures covered in the preceding sessions, under the framework of which they are created. They are fundamentally different from those described by Nobel Prize winner Muhhamad Yunus in his book Banker to the Poor, (Public Affairs, New York, 2003) in relation to his Grameen Bank. A good summary of Yunus’s book is available at Banker to the Poor, The Economist, Get Abstract, 2007. Yunus and his work have recently been subjected to a more critical analysis than was the case in the past. There are reports on harsh methods for obtaining repayments, high interest rates, and falsification of default rates, which were often claimed to be less than two percent. The Brennpunkt programme by the National Norwegian Television, Oslo, transmitted its documentary on Yunus Caught in Micro-debt on November 30, 2010. The original version, in Norwegian, is available at Fanget i Mikrogjeld. Suggestions of possible misuse by Yunus of aid-funds made in the documentary were officially refuted by the Norwegian government. Nevertheless the film . shows in detail how microfinance works and its consequences on the borrowers. The Norwegian Minister of Development and Environment at the time “left the post” at the end of March 2012, and the Norwegian government “will no longer finance new MFIs [micro-finance institutions] ” (T.Heinemann, No more financing of MFIs, NRK Brennpunkt, Oslo, 19^th June, 2012.)

“There has been a collective delusion that microfinance and its link to entrepreneurial activity is a powerful tool to alleviate poverty despite little evidence to show that this model works.” (Parminder Bahra, Microfinance : Is Grameen Founder Muhammad Yunus a Bloodsucker of the Poor?, The Source, Wall Street Journal, New York, 6 December, 2010.)

In his Ph. D. thesis Enslaving Development : An Anthropological Enquiry into the World of NGO, (Chapter 8 pp. 267-303), (Durham University, Durham 2010) M.Mannan describes how neo-liberal market ideas have come to “colonise” the development sector in Bangladesh. “Micro-credit did not do much to improve the well-being of women but released the elite from their religious and social obligations to help the poor and women in need” (p. 300).

At p. 286 cites a BRAC client :

“You came to help us. Why are you charging interest?”

At p. 298 :

“I accepted money to become rich, but now happiness has disappeared.”

The negative effects of “financial inclusion” of the poor are discussed by M. Bateman in Why Doesn’t Microfinance Work? The Destructive Rise of Neoliberalism, Overseas Development Institute (ODI), London, July 2010. (Book launch presentation). Book : Zed Books, London, 2010. ISBN 978-1-848133327.

“A microfinance customer is overindebted if he/she is continuously struggling to meet repayment deadlines and structurally has to make unduly high sacrifices related to his/her loan obligations”. (Schicks, J., Over-indebtedness in microfinance – An empirical analysis of related factors on the borrower level, Université Libre de Bruxelles, Solvay Brussels School of Economics and Management, Centre Émile Bernheim, CEB Working Paper 12/017, Brussels, 2012, p. 3.) Appendix 2 (p. 38) of the Schicks paper lists the borrower sacrifices and acceptability levels :

“1) Reduce food quantity/quality (cut down eating)

2) Reduce education (e.g. taking children out of school)

3) Work more than usual (e.g. take additional labor, work longer hours, on Sundays, and when ill)

4) Postpone important expenses (e.g. for health, housing, business assets etc.)

5) Deplete your financial savings (e.g. money in the house or in a savings account)

6) Borrow anew to repay (take an additional loan from another lender)

7) Sell or pawn assets (e.g. jewelry, cattle, productive or household assets)

8) Seizure of assets (MFI takes property by force to make up for missed payment)

9) Use family/friends' support to repay

10) Suffer from shame or insults (also gossip about you/exclusion from a contract)

11) Feel threatened/harassed by peers/family/loan officer

12) Suffer psychological stress yourself or in your marriage

13) Other

Respondents ranked the acceptability and frequency of each sacrifice on a scale from 1 to 4.

■ Easily acceptable, Only just acceptable, Not really acceptable, Not acceptable at all.

■ Once in past year, 1-3 times in past year, > 3 times but not often, Frequently in past year.”

Bateman’s criticisms appear to be taken seriously even in The Micro-Finance Illusion : The Post 2015 Development Agenda Should Rethink its Development Approach for Local Financing, Published by the Global Policy Forum through the United Nations Non-Governmental Liaison Service, New York, 14 February, 2013.

Official approach to profit-making Micro-credit finance at the cost of the poorest is changing. As Claire Provost wonders whether the microcredit story was “a convenient guise, at least for some, to pursue personal gain and other aims” (The rise and fall of microcredit, Guardian, Poverty Matters Blog, London, 21 November, 2012.)

Furthermore, “all impact evaluations of microfinance suffer from weak methodologies and inadequate data” (Duvendak, M. et al, What is the evidence of the impact of microfinance on the well-being of poor people ?, Report 1912, EPPI Centre, Social Science Research Unit, Institute of Education, University of London, London, August, 2011 for the Department for International Development. (ISBN 978-1-907345-19-7), conclusions p. 4). The authors point out on p. 75:

“Microfinance activities and finance have absorbed a significant proportion of development resources, both in terms of finances and people. Microfinance activities are highly attractive, not only to the development industry but also to mainstream financial and business interests with little interest in poverty reduction or empowerment of women, … it remains unclear under what circumstances, and for whom, microfinance has been and could be of real, rather than imagined, benefit to poor people.”

Micro-credit loans under the Model are interest-free and free from all formal money costs, as they are managed under the local money systems set up. They offer a viable alternative to the business-based micro-finance industry.

This section refers to micro-credit systems in general. The following section 6. Interest-free micro-credit systems : in depth analysis refers to the actual setting up of the micro-credit structures.

Here is a drawing showing the interest-free micro-credit loans cycle.

Multiple re-cycled interest-free micro-credits will provide formal money needed to develop local production capacity. The rest of the development will be done with the LETS systems.

The capital available for re-cycling in the form of micro-credits is made of:

a) Part of the initial seed money until it is needed for the project.
b) Seed loan repayments.
c) Micro-credit repayments.
d) The long term maintenance fund.
e) The system capital replacement fund which will be built up after the ten years' seed loan has been fully repaid.

For instance, a woman may need a sewing machine to be able to make clothes. She will need "formal" currency to buy the sewing machine. That money will be available in the form of an interest-free micro credit. She will sell outside the local LETS system some of the clothes she makes to earn the "formal" money she needs to repay her loan. The rest of the clothes can be sold within the local currency LETS system.

As she repays her loan, the repaid capital can be loaned again for another interest free micro-credit project, so the available seed money repeatedly re-circulates within the local economy.

The micro-credit structure will provide each family, on an average, with a total of at least Euro 1500 in micro-credits for productivity purposes during each period of operation of ten years.

Illustration of the micro-credits system.

How the original grant of seed-loan is used.

MICRO CREDIT SYSTEM STRUCTURES IN INTEGRATED DEVELOPMENT PROJECTS.

The Cooperative Local Development Fund will manage formal currency funds necessary for running the project, acting on instructions of the project coordinator given on receipt of the indications received from those responsible at tank commission level. The Fund intervenes only in the practical management and transfer of the funds. Funding decisions are taken by the users' structures set up under the project. The Fund formally belongs to the users. In principle, all monies paid into the fund are contributed by the users themselves. Formal money budget costs (€ 30.000) are needed only to physically set the micro-credit system structures up.

Where seed funding for a given integrated development project is by way of an interest-free loan, the seed money reverts to financing parties at the expiry of the 10 years' interest-free credit term. The money to be repaid is collected in the Cooperative Local Development Fund and continuously recycled for interest-free micro-credits until repayment falls due. In that case, the interests of the financing parties are protected by their representatives (if any) nominated to the auditing commission and by prescribed auditing procedures. On-going monitoring will be carried out by the Cooperative for the on-going maintenance of project structures.

The Cooperative Local Development Fund will be formed during the capacitation workshop held in each project area for that purpose.

The services of the Fund will be paid in local LETS monies at a fixed rate per transaction to be set during the workshop. The Fund can then use its LETS credits to pay its staff, and if it so wishes, to purchase goods and services inside the project area and sell them for formal money outside the project area to cover any formal money costs.

Micro-credits will be granted at tank-commission, well-commission, and central management levels. How much will be distributed at each level will be decided during the capacitation workshop.

Loans at tank commission level will be handled during a fixed agenda-point at each tank-commission meeting, during which monthly contributions and loan repayments are collected, and new loans distributed. Credit balances are transmitted to the local well-commission. Each tank commission has a micro-credits delegate and a substitute.

Loans at well commission level will be handled during a fixed agenda-point at each well-commission meeting, during which loan repayments are collected, and new loans distributed. Credit balances are transmitted to the central management group. Each well commission has a micro-credits delegate and a substitute.

Loans at project level will be handled during a fixed agenda-point at each micro-credit management meeting, during which loan repayments are collected, new loans distributed, and statistics and policy decisions discussed.

SOME BASIC PRINCIPLES APPLYING TO MICRO-CREDITS IN INTEGRATED DEVELOPMENT PROJECTS.

Rules for the organisation of the Micro-Credit meetings will be set up during phase two of the various project applications with the full participation of the beneficiary communities. These rules must lay down the general principles behind the systems. These would, for example, presumably include the following principles:

1) All loans are to enable the beneficiary to extend his/her LETS and formal currency income by producing more goods and services.

2) The goods and services must benefit the general interests of the community and encourage exchanges under the local LETS systems. o:p>

3) Some of the goods and services must be saleable outside the LETS systems to earn formal currency to repay the micro-loans.>

4) The Micro-Credit loans must promote the rapid circulation of formal money within the beneficiary communities. For example, using formal currency to build a clinic or hospital would not qualify for micro-credits because the capital invested cannot be re-circulated. On the other hand, buying equipment for testing water quality (foreseen in the Model) would qualify, as the formal currency cost can be recovered by charging in formal currency for water analyses conducted for users outside the project area until the micro loan has been repaid.

5) Special priority will be given in the first instance to micro-loans to start the collection and transport of compost, urine, and grey water, and establish the recycling centres that will collect, store, and export non-organic waste products from the project area. The formal currency micro-loans will be recovered by sale of the waste outside the project areas.

6) Beneficiaries will provide at least 3 family members and/or friends to guarantee the timely repayments of the micro-credit loans.

7) Beneficiaries will provide due backup for their micro-credits to ensure continuation of their investments and repayments in case of disability or death caused by accident or illness. (With thanks to Ms Angela Eikhout, Eindhoven, Netherlands for her contribution.)

Some do’s and don’ts.

Indian micro-finance banker Harishchandra Sukhdeve wrote the following contribution to the Micro-Finance Gateway resources list on 26th September 2007. His words have been edited with his permission for inclusion in this Model.

“Group formation and its nurturing in a right way is a key to not only poverty alleviation but also conflict resolution and women’s empowerment.

Women’s groups are found to be more efficient and professional.

However, while forming groups certain Do's and Don'ts are must.

A list of do’s

01.Inter act with people through village level meetings.

02.Encourage groups to hold regular meetings.

03.Educate them about community living, public hygiene, education, nutrition, etc.

04.Proactively pass on all legitimate benefits to farmers/villagers.

05.Ensure trouble-free timely finance to farmers as well as other group members.

06.Promote farmers groups for collective farming.

07.Promote share-croppers' groups.

08.Ensure/facilitate appropriate training for entrepreneurship development.

09.Encourage innovation and self regulation by the groups.

10.Encourage inclusiveness.

11.Encourage young volunteers to promote the culture of the groups.

A list of don'ts:

01.Do not allow groups to be formed of the same family members except for farmer’s groups for collective farming.

02.Do not allow groups to finance to non-members.

03.Do not allow one person to become member of more than one group.

04.Discourage control of groups by any single person.

05.Do not try to regulate the groups too much as this may hamper their ingenuity,

06.Do not stretch hand-holding for too long a period. ”

THE MICRO-CREDIT FUND AND EMERGENCIES.

How would the cooperative micro-credit fund work in conditions of extended drought or other emergencies? The project creates social, financial, productive and service structures. These structures are permanent. They are run by the management cooperative set up for the purpose, and they remain in place as long as people continue to live in the project area. This is so even where inhabitants return to the project area after a temporary migration outside of the project area for survival purposes.

The situation with the Cooperative Local Development Fund at any given point of time depends on the decisions taken by those chosen to manage it. It is reasonable to expect that in times of extended drought and similar crisis conditions that families have difficulties making their monthly contributions to the Fund and that beneficiaries (and their guarantors) have problems repaying the micro-credit loans they have received.

The micro-credit fund is cooperative. Should a point be reached where as a result of Act of God outside the control of the parties, families are unable to make their monthly payments or beneficiaries are unable to repay their debts, the managers of the Fund may decide to waive payments of contributions meantime or to leave it up to the families whether to make their payments or not. In any case the Fund would remain intact. It would continue to be systematically recycled interest-free. But the total amount in the Fund would not continue to increase as it would otherwise have done. In case of projects financed by interest-free ten year credits, the situation could arise that the monies collected in Fund turn out to be insufficient to pay the whole of the original loan back at the close of the first ten year period. On the other hand, where a productive period follows one of extended drought or crisis, the Fund management could require an increase in the monthly contribution of families to reinstate the Fund in time for repayment at the end of the ten year period.

In times of drought and scarcity, beneficiaries and those guaranteeing them may also face great difficulty in making repayments of their micro-credits. What happens in such a situation depends on the decision of the Fund management which is chosen by the Central Committee of the Project. Logic would suggest in such situations to grant more time to beneficiaries and those guaranteeing them to make their payments. This would lead to a slowing down in the rate of recycling of the monies in the funds, and therefore to a (temporary) slow-down in the rate of development in the project area. However, the capital in the Fund would still remain intact.

Yet another situation which might arise is that the drought or other environmental condition in the project area is so serious that the Fund management team decide to gradually reimburse the monies in the Fund to the inhabitants to supplement their extra costs for purchase of drinking water or food supplies for survival purposes. In practice this means that as monies are (with great difficulty) repaid by beneficiaries into the Fund, the repayments are for a period of time re-distributed amongst all of the inhabitants, or amongst the most needy. The cooperative local development fund would in this case operate as an Emergency Fund. The consequences of this use would depend on the reactions of donors and funding organisations and on the real and just possibilities of subsequent recovery taking the cooperative nature of the Fund into account. In the worst imaginable situation, the Fund might find itself without any capital left. However, even in that case the structure of the Fund would remain in place. Upon improvement in the climatic situation, families would recommence making their monthly contributions to the Fund, which would build up to full strength again after ten years.

Refer also to section 4.15 The effects of inflation on the Cooperative Local Development Fund and gift content and to section 4.16 Project insurance and forfeit in the form of gift in case of loss of capital structures.

1. Research.

Give a detailed two-page comparison between the micro-credit structures foreseen in the Model for integrated development projects and those of micro-credit agencies such as the Grameen Bank. First provide a short introduction. Then discuss the reasons for high interest rates charged in traditional systems and how they are eliminated in integrated development structure. Discuss the contrast between micro-credit loans seen as “business” and the cooperative system foreseen in integrated development projects. Discuss the nature and the difference between the target beneficiaries and the aspects concerning their exclusion (traditional systems) and non-exclusion (Model) from the system benefits. Discuss the indirect financial leakage from project areas under traditional systems and the way this is blocked by integrated development projects. Draw your conclusions.

2. Opinion.

On two pages take the results of your research and use them to make a presentation of the Model system to the representatives of Civil Society in your project area. Make a note of their reactions.

3. Opinion.

The previsions in the Model for integrated development take an average two-year pay-back time into account. After having spoken to the population in your chosen project area, explain on one page the average payback time you would foresee in your area and the consequences this would have on the on-going re-cycling of funds.

4. Research.

Provide a one-page explanation to the women in your chosen area of a 20 year cycle of management of the Cooperative Local Development Fund there What are their reactions?

◄ ►

◄ Fourth block : Section 3: Financial structures.

◄ Fourth block : The structures to be created.

◄ Main index for the Diploma in Integrated Development (Dip. Int. Dev.)

◄ List of key words.

◄ List of references.

◄ Course chart.

◄ Technical aspects.

◄ Courses available.

◄ Homepage Bakens Verzet

"Money is not the key that opens the gates of the market but the bolt that bars them."

Gesell, Silvio, The Natural Economic Order, revised English edition, Peter Owen, London 1958, page 228.