Small loans to individuals who want to start or grow a business have existed at least since the 1970s, the largest provided by the likes of Grameen Bank and BRAC both of which originated in Bangladesh. In Malawi a prominent microloan institution is The Micro Loan Foundation (MLF), a British charity. Typically, microloans have a high percentage interest rate attached to them, around 25-30%. That figure looks monstrous from a comfortable western perspective but has to be seen in the context of bank rates available in Malawi (the National Bank of Malawi’s base lending rate is 23%). A crucial factor is that microloan-takers receive training and mentoring and the lenders won’t foreclose on defaulters, in contrast to the banks. The MLF’s default rate is tiny – 2-3%.
The Capacity Foundation levies a 30% service charge on first loans and 25% thereafter. 20% of both figures goes straight into the Social Action Fund described below. The remaining 10% on initial loans and the 5% for subsequent loans contributes to the Foundation’s overheads in delivering the programme (staff who supply training and mentoring, materials etc) on a pathway to making the operation in Malawi completely self-financing.
There are three features of the Foundation’s microloan programme that distinguish it from other such initiatives.
- First: the programme is designed not only to relieve poverty in the area but to generate a Social Action Fund – a reserve controlled by the community to pay for projects that would otherwise be paid by aid.
- Second: the Foundation’s microloans programme is open to both genders and all ages over 18, whereas the ‘norm’ is for microcredit to be concentrated on women owing to educational disadvantage and in pursuit of equality goals. Also, microloan institutions often assume that male loantakers will be feckless and default. The local population likes the Foundation’s open access policy, which prevents division within families and engages young people who have no prospects after they finish school.
- Third: our loans are repaid over ten months whereas loans are often repayable over as little as eight weeks. Our longer timeframe enables the business to grow at a comfortable rate.
The proof of the Foundation’s approach is in its results. The first wave of 41 loantakers completed their loans in full (100%) and on time – yes, men and young folks included. Most of them are applying for a second, larger loan while others have either used the profit from their loan to pay for school fees or to complete a project, or have generated additional capital from their thriving business.