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I spoke last month at the annual Inter-American Forum on Microfinance (Foromic), which is sponsored by an arm of the Inter-American Development Bank called the Multilateral Investment Fund. (The MIF invests in the private sector while its parent lends to governments.) The conference took place outside San José, Costa Rica, in a resort off the highway to the airport.
Acceding to longstanding lobbying, I brought my boys on this work trip. I figured Benjamin (12) and Alexander (8) might taste joys of international travel such as long flights and immigration lines; see a bit of rainforest; and accompany me to visit some microfinance users, seeing lives different from their own. Mai came too, but she had to return home a day early for meetings.
If you, unlike me, are fluent in Spanish and English, you can watch all 90 minutes of my afternoon panel's discussion of How Microfinance Affects the Lives of the Poor. It was chaired by Nancy Lee, who was a CGD visiting fellow, who now heads the MIF, and who would, weeks later, hand candy to Alexander in front of her house on Halloween. The star of the panel was Carlos Labarthe, cofounder of Compartamos. For me, the highlight was Rich Rosenberg’s blunt question from the floor, at 01:06:00. See what you think of my reply, at 01:19:48.
At 6:30am the morning after, the boys and I split that joint in order to see the real Costa Rica. At least that’s how I saw it. I think they experienced it more as giving up swimming pools and all-you-can-eat buffets in exchange for a monotonous five-hour taxi ride. (It was supposed to be three before factoring in weather, traffic, and an overheating taxi engine.) Before my conference session, I had met with several people from a non-profit microfinance group called FUDECOSUR. Its modest offices can be found in a town in southern Costa Rica called San Isidro de El General, on the west side of the Parque Central, just behind Farmacia Miravalles. The taxi with the overheating engine took us to the Hotel Chirippó on the southern edge of the Parque. Hotel Chirippó does not have swimming pools or buffets. It does have a restaurant out front selling hamburguesas y papas, so the boys did OK. The restaurant also seems to be a social base for American expatriates, perhaps mostly Vietnam veterans stretching their pensions in a low-cost country. One flagged me down and expressed his hope that I would help win America back from Obama bin Laden and find out why the government isn't telling the truth about 9/11. Learning that I was a mathematician, he recommended a book on the circular harmonics of pyramid power.
The conversation the previous morning, with FUDECOSUR's director, Leonardo Azofeifa, and other employees, was more enlightening. Essential to that meeting because of my shameful language skills was Kiva Fellow Julie Kerr, who generously translated for me and helped with with trip logistics. A volunteer, like all Kiva Fellows, she is temporarily posted to FUDECOSUR to audit the institution's processes for posting stories and pictures on kiva.org. (For Kiva, the threat of fraud is ever-present.) A couple of years ago, just after my famous post about Kiva, I visited its offices in San Francisco's Mission District. One strong impression: a wall-sized map of the world with post-it notes showing where Kiva Fellows were. This corps is the organization's eyes and ears around the world, an essential part of the business model.
Leo, the FUDECOSUR director, explained that his organization was created by CARE in the early 1990s in response to the widening economic inequality of the 1980s, a time of hardship throughout Latin America. FUDECOSUR aims to serve subsistence farmers. Most people come to Costa Rica, he said, for the beaches and the zip-line rides through the rainforest canopy. They don't see the poverty in the country's interior. Like all microfinance institutions in Costa Rica, FUDECOSUR is small, with 2,767 clients reported in 2010. It works by setting up village banks, which are informal institutions that serve 30--40 members. The members elect the officers, who run meetings and make lending decisions along with FUDECOSUR representatives. Leo explained that FUDECOSUR uses outside funding, such as from Kiva, to finance its lending. It plows some of the surplus into free training for borrowers. For example, four years ago, FUDECOSUR responded to a request for help from members of its bank in Cedral de Cajón, on the edge of the Chirippó forest. It taught them how to grow crops such as lettuce, tomatoes, peppers, cilantro, and celery using hydroponics. According to FUDECOSUR, the innovation took.
Not surprisingly, Leo depicted FUDECOSUR as more than a microcredit group. It is about community development and community solidarity. Microcredit is a means, as a useful financial tool and a way to draw participants and funders.
I asked Leo whether it is difficult for farmers to begin repaying loans within a week of disbursement, as is typical in microcredit. Coffee bushes and sugar cane don't generate income a week after planting. He explained that interest is paid only monthly or quarterly and principle annually. Loans can extend up to five years. Deferring payment so much is unusual in microcredit because it tends to invite default. (Care to repay your mortgage in a single "balloon" payment after 30 years?) And that is why microcredit has historically not served subsistence farmers well. But FUDECOSUR says borrowers representing all but 2% of its outstanding funds are in good standing.
Less to challenge than to explore, I asked Leo if he would like to become more commercial, charging higher interest so that FUDECOSUR would grow faster and serve more people. He acknowledged that he did not have enough money to lend to everyone who wanted to borrow. I told him Vikram Akula's story about the woman he denied a loan early in his career for lack of funds. She asked, "Am I not poor too?" After that, Akula says, he vowed to make a profit so that he could serve all those who needed microcredit. Leo took the point, but demurred. FUDECOSUR is growing, but moderately. He would rather put profits into training programs, or just keep interest rates down, than expand the lending faster. And he thought it best to commit to the Brunca Region. I asked what we should make of the fact that neither donors nor customers seemed willing to pay much for the training. He parried that the benefits of training are long-term while the pay-off from a loan---getting the money is immediate. As a result, people are more willing to pay for loans, relative to their actual value, and less so for training. As I see it, the FUDECOSUR business model loads training costs onto the loan, exploiting this irrationality (as economists would put it) in the hope of serving the client.
To contrast FUDECOSUR with conventional banks, Leo explained that his clients tend their crops 12--13 hours a day, saving them from flooding, stopping disease, etc. Time away from the field during banker's hours means lost income. That is why FUDECOSUR's village banks meet in the afternoons and evenings.
And that is why it was at 1:30pm, after the five-hour ride and the hamburguesas y papas, that Benjamin, Alexander, and I met up with Julie at FUDECOSUR's office behind the Farmacia Miravalles on the western edge of the Parque Central in San Isidro. We were off for a tour of two village banks that would run past dusk.
Our first stop was Pilar, just south of San Isidro along a stretch of the Inter-American Highway that, to an American's eye, doesn't live up to the grand name, being a two-lane road. We met with the officers of Pilar's new village bank in a one-room cinder block building next to the Catholic church, which itself faces right onto the highway.
Pilar village bank meeting (counterclockwise, starting at the right end of table): Carlos Emilio Sancho Rojas (Fiscal), Carlos Blanco Chacón (Vocal 1), Alexis Padilla (President), Maria Rodriguez Segura (Secretary), Milagro Arraya Varela (Support Committee), Geiner Gonzáles Marín (FUDECOSUR Chief Loan Officer), Julie Kerr (Kiva Fellow), Marina Jiménez Picado (Vocal 2)
The meeting alternated between conduct of business and conversation with me. Early on, the secretary, Maria Rodriguez Segura, read aloud from a notebook, reviewing transactions since the last meeting---loans requested, accepted, and denied, and the reasons. Geiner Gonzáles Marín, their loan officer and my guide, watched quietly. I quickly sensed the difference between village banking and the solidarity groups made famous by the Grameen Bank. To a substantial extent, the members run the group. They "own" it, taking pride in their responsibilities and the bank's mission. It was a nice thing to see.
Carlos Emilio Sancho Rojas, far right above, is the fiscal of the bank, which means he is responsible for tracking compliance with procedures. Carlos is an accountant in private practice. He said that the recession in the United States meant that Costa Ricans abroad are sending home less money. That strain has pushed locals to develop new economic activities. He had not borrowed yet, but wanted to, to finance a beauty salon his daughter would run.
Carlos Blanco Chacón is a vocal, an additional voice in loan decisions. He took one of the Pilar bank's first loans, 300,000 colones ($600) to support organic farming: lettuce and tomatoes, among other crops.
Alexis Padilla, third man from right and president of the bank, took pride in belonging to a community project to help the poorest families. There is a lot of interest in the community. The bank, he pointed out, was only three months old and has already made 6 or 7 loans.
Marina Jiménez Picado, the woman in the yellow blouse on the right, expressed similar pride. Her story is perfect for a microcredit web site. She had been divorced six years. Her husband had lost a lot of money, then left her with nothing. For years she wanted to own her home, but had to rent. She works now as a maid. FUDECOSUR gave her a loan to buy or build a house in this community. Now that she owns her own place, she feels like part of a community for the first time. She owes the roof over her head to FUDECOSUR.
I soon sawhow hard it can be to get a loan from a village bank. A guy in a blue T-shirt had sat near the doorway waiting patiently while the bank members talked to me. In time, he was invited to the table, and the members got back to business. He is a professional musician, and his truck, which he used to transport equipment and instruments, had broken down. He had applied for a loan to fix it. The committee explained the terms: a three-year loan at 24%/year. Then they denied the loan. Why? Following the ancient formula, the bank requires two cosigners on loans between 300,000 and 1 million colones ($600--2,000). And the cosigners must have property that can be attached. But one of his cosigners had already offered his property as collateral for another loan.
These men and women, I saw, might not be conventional bankers, but they had quickly acquired the banker's conservatism. Partly as a result---so far, at least---their beneficiaries did not seem like the community's poorest: an accountant, an organic farmer, a musician with a truck. This was not surprising, and not necessarily representative either. I was in Pilar there because of its accessibility from San Isidro, whose economy is probably prospering from tourism. And the people who jumped at the chance to join this bank, and become its first officers, were not randomly chosen locals. They were self-selected go-getters. In joining, I realized, they gained some power in their communities as gatekeepers to credit. No doubt such power in village banking is used for both good and ill, which is why FUDECOSUR loan officers need to keep a close eye on each bank. In delegating so much responsibility to the community, village banking may save money and empower people with ownership of their banks, but it also the sponsoring organization into the community's social structure, which it cannot completely control.
My one disappointment with the visit was the rain, which came in heavily every afternoon. It made it hard for us to explore outside, thus for the boys to see more of Pilar than this cement building with adults talking around a table. They were bored, and I felt like a bad father.
Next, we dashed under our umbrellas to the car and Geiner, the loan officer, drove us to the second village. He struck north and east off the Inter-American Highway, sharply uphill. Eventually, we left asphalt behind and bobbled over rocky roads through the crevices of the mountains. More than once, I admit, I visualized a mudslide sweeping us off the road and into a narrow valley below. (Something like that happened in Costa Rica to someone my mom knows.) My GPS showed us passing San Francisco on the left. After perhaps 15 minutes, we reached Cedral de Cajón.
The scene in Cedral was similar. I met with bank officers in a cement building. They too expressed happiness with FUDECOSUR's services and pride in their shared mission to advance the community. Now trapped by the dark as well as the rain, my children again fidgeted as grown-ups talked around a table, Kiva Fellow Julie translating. This bank is older, at about 5 years. I believe its members are poorer than those I met in Pilar, making more of their living from the land. But even they may be well off by FUDECOSUR standards, living relatively close to San Isidro and the Inter-American Highway.
Cedral de Cajón village bank meeting (right to left): Edgardo Arías Jiménez (Fiscal), Hellen Chinchilla Vega (Vocal 2), Manuel Vargas Angulo (Vocal 1), Miguel Mora Vargas (Treasurer), Antonio Vargas Hernandez (Vice President), Arrelio Arías Brelles (President)
There was Edgardo Arías Jiménez, fiscal, who said the microcredit helped people move forward from subsistence farming to microbusinesses. He and his wife, Hellen Chinchilla Vega, who is also an officer and sat next to him, had taken two loans at once, one for 500,000 ($1,000) to buy and fatten calves, one for 430,000 colones ($860) for cultivating coffee.
Manuel Vargas Angulo, a vocal, said he'd been with the bank two years and really likes the espirit de corps. They work like a family, he said, meeting every two weeks. He likes advising neighbors with crop problems. Many people ask for loans, so he and the other officers explain the rules and expectations, and activities most likely to win credit. He had a loan 250,000 ($500), also for a milk cow for own consumption.
Miguel Mora Vargas, treasurer let me know he had trudged half an hour in the rain to reach this meeting---not so much, I think, out of obligation, but out of pride, a desire to show off to an outsider. He said what he likes most about the village bank is seeing neighbors expand existing activities or start new ones, be the produce for sale or own consumption.
Antonio Vargas Hernandez, Manuel's father and the bank's vice president, spoke next, and at length; he's the one in the Jim Beam baseball cap. He echoed the FUDECOSUR director's comparison of village and conventional banks. With a conventional banks, you waste a lot of time applying for loans. You have to visit many times and fill out lots of paperwork. It's like banging your head against bricks. And it's intimidating. He spoke from personal experience: once he came close to getting a bank loan, only to be rejected. The village bank is efficient. It's in the village, so you don't have to worry about wear and tear on your vehicle, or leaving the fields for a long time. He used his loans to buy sickly pigs and fatten them, and to breed cows. The community, he believes, is a lot strong because of the bank because the members support each other. There is no defaulting in the village bank, he said, because they are a very tight community. He never thought he would run a bank. Now he is. It is a positive, overwhelming feeling.
The president, Arrelio Arías Brellas, spoke last. He described himself as a huge beneficiary. He had borrowed for raising and fattening cows, producing cheese. He believes that the bank committee is here to help the people with whatever needs they have. The joys of the nurturer are his joys.
I closed by asking them to talk about the weather. A year earlier in Yarvaguda, Andhra Pradesh, borrowers had told me about unseasonable rains that had destroyed their crops. In Costa Rica, the copious late-day rains were out of the ordinary too. But the farmers of Cedral de Cajón did not seem so concerned---yet. Living on the mountains between the world's two great oceans, they were used to rain. They diversify over time, planting crops on different cycles. Still, if the heavy rain kept up for more weeks, it could mean trouble. Rain, for example, hastens the ripening of coffee beans and them knocks to the ground to rot. That forces farmers to visit their plants more frequently and often to pick the bean early, when they are less valuable. The result is much more work for much less income.
Unlike in India, there was not dramatic backdrop to this visit. Partly as a result, my conclusions are not dramatic. It was impossible to infer from these short, translated conversations with non-representative members of non-representative village banks what the impact of microfinance had been on FUDECOSUR-served villages, thus whether it is worth the cost. But I gained an appreciation of how village banking more than solidarity group microfinance builds local institutions by delegating responsibilities to members.
Thanks to Geiner Gonzáles Marín, Leonardo Azofeifa, and Julie Kerr for their assistance with this trip and this post.
CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.