Learning of the success of microcredit programs in many parts of the developing world, Trust in Education wanted to provide this service to villages in Afghanistan. The most successful programs in other countries usually involve lending small amounts to women who are part of lending circles. The women provide no collateral, but as a group they pledge to pay it back. Their ability to borrow additional funds is dependent upon all the individual loans being paid back.The women are able to expand their businesses and improve their families’ lives with even very small loans. Peer pressure in these women’s groups create very high repayment rates (over 90%). The success rate for loans to men is so low that many programs don’t loan to men.
In Afghanistan, however, Trust in Education has little access to women in villages. Rather than assume the men wouldn’t repay their loans, Trust in Education initiated a small pilot program in a few villages.
In March of 2005, on our first visit to Afghanistan, we discussed the proposal with maliks (village leaders) in Lalander. They agreed to select 55 men who would each receive $200 to plant crops or buy livestock. The loans were evidenced by promissory notes, signed by each borrower, a malik, and three guarantors.
Unfortunately, a year later only seven men had repaid their loans. The seven were able to borrow twice as much the second year, as they had proven themselves credit worthy. We expanded the program to another village, and were able to make loans to 30 widows. Almost half the women repaid their loans. We suspect that many of the women who did not repay their loans were prevented from so doing by a male family member.
In 2007, we tried another approach. Sixty farmers selected by their leaders were each given five sheep. They promised to repay us the cost of the sheep within one year. All we have received are excuses. Not one sheep loan was repaid.
TIE’s microcredit loans have been interest free. Why? Interest free loans remove the objection some followers of Islam have to interest. In addition, it’s very difficult to judge how much interest is appropriate when making loans to people struggling to survive. What wouldn’t be perceived as “loan sharking” in the fifth poorest country in the world
We know that providing interest-free microcredit is a lousy business model. Without interest, the loan program’s operating costs must be subsidized by donations. But we didn’t even get to the next phase–assessing a financing fee–because the men weren’t even paying back the interest-free loans. Trust In Education’s pilot program didn’t work. Truth is, however, we would have wanted these families to have these small sums of money anyway. They just botched their opportunity to establish credit and impeded our ability to raise funds for the loan program. That’s what is disappointing.
We have not given up on microcredit financing. We have just given up on making loans to men. Our current strategy is to partner with other organizations that have successful microcredit programs. They will screen the borrowers, make and monitor the loans and we will learn from them. We will keep you updated as this story progresses…