Tiny Loans

Like most "Economic Development" organizations, Partners Worldwide supports business lending practices in developing countries, also known as micro finance. An article touched on some of the problems with micro finance in today's edition of The Wall Street Journal. The article, "A Global Surge in Tiny Loans Spurs Credit Bubble in a Slum," highlighted the fact that "lenders are aware that applicants often lie on their paperwork" to be able to get a loan because "many microfinance providers require loans to be used to fund a business." Small business owners make business plans and talk about their vision for their business, only to purchase a television, pay for a wedding or cover medical bills, as seen in the article and the experience of Partners Worldwide in Honduras.

Maria* is the owner of a small store in a marginalized area of Tegucigalpa. While her business was thriving, she took out loans in her "Community Bank." As in most microfinance lending programs, the other members of the bank were cosigners on her loan. Since she had always made payments, Maria was also offered an individual loan on top of her regular four month loans from the "Community Bank."

Individual loans were designed by the organization in Honduras to move people like Maria from the "community bank" so that they would not have a larger loan than the rest of the group combined. Some individual loans use mortgages as collateral, but most have two cosigners. Maria had a loan of $635 in her "Community Bank" and a $1,588 individual loan.

Early last year, Maria became depressed and her business was not open daily during regular business hours. When she was at the doctor, or in her room crying, she lost clients that began walking to other stores to purchase fruits and beans. As her depression was improving, she developed kidney failure and the business closed nearly entirely.

Throughout Maria's treatment, she took money from the business to cover her bills and her husband also took out several loans from various micro finance lenders. They currently owe close to $4,000 and the only income is the $291 that Maria's husband earns monthly as a security guard. To make matters worse, there is no inventory left in the business that was used as the pretext for the loans.

The local Partners Worldwide affiliate has worked with Maria and her husband to consolidate their loans and lower their monthly interest rates. They have plans to get out of debt in two years, but more importantly for everyone is to learn lessons from this case.

There is often more debt being offered to Hondurans than they can manage. Partners Worldwide affiliates are joining a national Credit Bureau to be able to minimize risk for their portfolios and for the clients.

Clients often say they will use a loan for their business, but instead invest in other personal expenses. Doing follow up visits to the business can help assure that clients invest in their business.