Microcredit Helps Guatemalan Women
Non-Profit Organizations Make Small Loans to Aid Small Businesses
Nov 11, 2008
In Guatemala, malnutrition rates have been among the worst in the world. But thankfully, several organizations are working to aid poverty-stricken families.
Through an ingenious lending system called Microcredit, women-owned small businesses receive start up capital for their cottage industry trade. Whereas handouts only put a bandaid on the problem of poverty, Microcredit gets to the root of the problem by empowering people to help themselves.
Social Collateral
Microcredit, also known as Microfinance, uses the simple but powerful principle of social collateral and works like this:
- Loans of $100 to $200 are offered to women who own small businesses, such as raising chickens, making jewelry, or weaving mats.
- Borrowers are placed into groups and agree to be responsible for each other's debt.
- They must make up the difference if a group member defaults; otherwise, they lose their opportunity to borrow again at the next cycle.
- This responsibility gives the women incentive to follow through on their business plans. They keep tabs on each other and encourage each other to make deposits into their savings accounts.
- New loans are never available until the previous one is paid off.
- These loans are secured by nothing more than the borrowers' integrity, thus the term "social collateral."
Focus on Women-Owned Businesses
According to the study “Tracking the Progress of 239 Microcredit Program Participants in Guatemala” by Bruce Wydick, Economics Professor at the University of San Francisco, “Enterprises operated by female entrepreneurs appeared in many ways to be more stable than those operated by men." This is possibly because in Guatemala and much of the world, it is the women who seek medical care, purchase school supplies and strive for decent housing and meals for their families.
While a Microcredit loan can finance a business run jointly by husband and wife, in most models it is the wife's name on the loan documents, and it is she who is ultimately responsible for repayment. She knows that if she defaults, her family may not survive.
How Cottage Industries Benefit
If a Mayan woman living in rural Guatemala raises chickens, she might use money from a loan to buy chicks for $2 apiece. She would spend portions of her loan feeding them, sheltering them and vaccinating them. Then, in under six months she would sell them on the open market for about $4 each. To be able to buy in bulk makes a huge difference in her profit margin, and the increased capital gives her more buying power in the marketplace. This might mean new shoes for her sons, three meals a day instead of two, or buying school books.
"We no longer have to prove that Microcredit works. We have many studies that have shown that. Now we can focus on ways to improve Microcredit, and there are many interesting ideas out there, including adding health and/or business training to the package and adding low cost insurance to mitigate against risks," notes UC Boulder Professor of Geography Gary Gaile.
Lower Default Rates than Traditional Loans
Banks have an average default rate of about 3 percent, but Microcredit typically has a mere 1 percent default rate. This is because with a bank, if a borrower is delinquent, there are notices, fines and credit report consequences. But in a Mayan village, if a woman is having problems making her payments, the other women in her group are likely to pay her a visit and see how they can help her get back on her feet.
Two of the more prominent groups running Microcredit programs are Namaste-Direct and Friendship Bridge.
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