Due to violence in Colombia that displaced over 25,000 families each year, when The Colombia Project began in April, 2000 there was no alternative but to work through existing grass-roots organizations to establish micro-loan programs on the ground. As it turned out, this was the best way to operate. Existing organizations already had salaries, rents and overhead covered. The Colombia Project only had to raise funds for the loans. Organizations already working in the community were in a good position to assess the viability of business plans and the reliability of loan applicants. Therefore, they generally made better loan decisions than a newly established organization. They were already known and respected in the community and experienced a high repayment rate.
Direct Path to Sustainability
Implementing the loan program through pre-existing infrastructure results in a more timely and sustainable program. Once the organization is comfortable running the loan program, it can continue at its existing level of funding indefinitely, with no further reliance on outside resources. Ideally, the program grows until it maximizes its potential, until it has sufficient capital in the permanent loan pool to meet the evolving micro-credit needs of the community. If something prevents it from reaching that full potential, it can still continue operating with the funds it already has on hand.
Additional Tool for an Existing Anti-poverty Tool Kit
Funds from The Colombia Project are, in essence, a grant to a non-profit to build a sustainable micro-loan program. Colombia Project micro-loans are an additional tool for an existing anti-poverty tool kit. Whether the primary mission of the partner is health, education, empowerment or something else, partners find that getting additional funds into the hands of their clients helps to achieve the primary mission. Thus micro-loans are not a distraction from the primary mission, but a supporting element for that mission.
The Colombia Project’s zero-overhead model not only reduces our fundraising efforts, it also screens potential partners to find just the organizations we most want to work with --- those which are always willing to go the extra mile for their clients. We are up-front in acknowledging that we provide nothing for overhead and salaries but the message must be repeated several times before it sinks in. Once most organizations understand there is no funding for good intentions in running the micro-loan program, they quickly disappear. For those who are willing to take on an extra burden to help their clients, the system is designed to reward them well for good results. It is a real blessing to have a micro-loan model that provides for self-selection of ideal partners and screens out others.
Understanding that the most difficult work would be in the early days, when the learning curve is steepest, we allowed for the largest and easiest earnings to occur in the early years. For every dollar we send our grassroots partners, after they have invested that money twice, they are allowed to withdraw 50% for special projects, administrative expenses, or ad hoc events. The earnings are theirs to use as they please, including 100% of interest earnings. Interestingly enough, it is challenging to convince most partners to withdraw earnings. They often feel they are taking money that impoverished micro-entrepreneurs need more than they. Only when we convince them funds will be provided to replenish the loan pool will they withdraw their earnings. And since they are highly motivated to serve their communities, they typically use funds for fixing up homes for the poor, finishing a community center, providing equipment and facilities for disabled people, etc., something of clear benefit to the community.
Once the permanent loan pool is large enough so that no additional funds are needed, that 50% revenue stream disappears but the interest generated from the loans provides a steady substitute revenue stream for the grassroots partner. Ideally, they have implemented incentives for repayment and have streamlined their administrative process so that the interest revenue is adequate compensation for their work effort.
Our Small Size Attracts Only the Right Type of Partners
Lack of funds forced The Colombia Project to begin with small funding allocations to micro-loan partners -- usually $1500. If a partner could invest that amount twice in micro-loans and achieve at least a 95% repayment rate, we would send more. International wire transfers are expensive, incurring costs both in the U.S. and in Colombia, so we didn’t want to go lower than $1500. As it turns out, $1500 is low enough that it does not attract what I call the ‘sharks’ – those who come stalking when money is being doled out. As compared to other international aid programs, The Colombia Project is small which is advantageous because we are spared the aggravation of wasting valuable time and resources dealing with people who are not truly interested in helping impoverished entrepreneurs.
Importance of a Written Understanding
Through the initiative of a loan partner in Ariguani, we developed an agreement that documents the responsibilities and expectations for The Colombia Project as well as the grassroots partner. Having a signed document on file is always less important than having written documentation of our partnership process. The agreement is primarily informational. It commits TCP to send additional funds on request (if available) if the partner sends timely and accurate reports showing that all previous funds have been invested twice with at least a 95% repayment rate. It is a careful balancing act to make sure we always have funds available for qualifying partners but don’t have too much money sitting idle in the bank. Our philosophy is that the maximum amount of funds should be invested in loans to marginalized entrepreneurs where it is both helping individuals and earning interest for the grassroots partner, not sitting in a bank account.
Let’s See How This Goes
This unofficial agreement basically says that if this process works for you, we will provide resources to expand your program to the size you want. Neither party can predict, at the beginning of a partnership, if it will work out or how well it will work out. I am certain that many of our partners would not have committed at the outset to a program of the size they ultimately administered. It would have been too intimidating. What works best, therefore, is this handshake, informal agreement of ‘let’s try this out and see how it works.’
I remember the collective gasp in the room when I mentioned that Sister Ruby had issued over twenty-five million pesos in micro-loans (approximately $14,000 at that time). Even she was surprised. Since she focused on the current loans and payments, she did not have a big picture perspective. As of early 2018, the program that she started in 2007 has issued over 530 loans valued at $130,000 with a 97% repayment rate. In the process, the Genova program has earned over $18,000 for various community projects (e.g. equipment for a program for disabled people, a school lunch program and others). This was accomplished with an investment of only $13,500 over a four-year period that was matched year after year by repayments from loan recipients.
Borrowers Committee Provides Stability
The best run micro-loan programs have a borrowers’ committee to help screen applicants, make visits to businesses and collect repayments. This prevents burnout from one person doing all the work, provides transparency and builds a sense of community ownership. In the case of Genova, the board provided continuity and stability that enabled the program to thrive despite six changes in administrators over ten years. Sister Ruby had an empowering approach with her loan recipients. She had great faith in their abilities. Other nuns with great compassion and empathy for ‘victims’ of poverty had lower expectations for success and perhaps didn’t push their borrowers to be the best they could be. They were often fearful of making loans and often let funds build up rather than take a risk on an impoverished entrepreneur, somewhat reminiscent of the Biblical story of hiding talents to ensure against loss rather than take a risk that could multiply those talents. Sister Ruby set the tone from the outset and her team carried on, training a series of replacement nuns in the same empowering philosophy.
At other sites that did not have a committee, it was frustrating to watch the program decline as funds built up and the number of loans decreased under new leadership. Payments often slowed down as well. While we might be fairly certain that the previous administrator would have continued to lend and collect successfully, we do not second-guess the new administrator. We respect the judgment of the person on the scene. To encourage them to take uncomfortable risks seemed akin to courting failure. It is difficult to successfully implement a strategy that does not have buy-in and is not shared by the entire team. I like to think that some future mentor, building on the experience of The Colombia Project will find a way to empower timid successors to successfully adopt the risk-taking strategies of their predecessors. Until then, the best solution to program deterioration appears to be the creation of loan committees. Genova, with its committee was able to survive a temporary change to less empowering leadership, but other sites closed under these circumstances.
In the case of PT, the administration remained constant but the community became dangerous with the failing economy. What started out as a robust program slowed to a trickle with just a few, large, long-term loans made to select individuals after a nun was attacked by a gang member on her micro-loan rounds. In this case, the mother of another gang member had received a loan from the nuns in PT and the money was quickly returned. Word went out that the nuns were not to be targeted, but the nuns rightly determined that the dangers in running a micro-loan program had risen to an unacceptable level.
Maximum Decision Making Is at the Local Level
With these stories in mind, we could hardly second-guess administrators in other sites who felt that loans were too risky.
The Colombia Project team determined early on that decision-making would reside at the grassroots level. They would do the screening, set the loan criteria and set the interest rate and loan terms, decide how to spend their earnings, determine what kinds of training to give and determine how to handle delinquencies. We highly recommend small, short-term loans, starting with people who already have a small business. We recommend trainings in financial literacy, budgeting, and especially accessing the service of SENA, the National Vocational Training Agency of Colombia.
Networking and Sharing Best Practices
We encouraged administrators to communicate with each other and share strategies. We recommend they visit all active borrowers at least quarterly, though the best programs have more frequent visits. We also encourage meetings where the loan recipients can share best practices and support each other.
Most partners are already providing some sort of training, typically connected to the primary mission of the grassroots organizations. We encourage them to enlist the support of government entities and universities or Rotarians that might provide free training, especially when this has the potential to lead to ongoing support.
We strongly recommend training prior to loan distribution to stress that TCP Global funds are a grant to the community to build a permanent, sustainable loan program that will serve them for years to come. We want borrowers to understand that if they repay their loans, we will send more funds so there will always be enough resources when they need a loan in the future. It IS their program and we want them to understand that this is not a handout but a hand-up.
We aim to have the non-profit and the community view the loan program as an asset both in providing loan funds for marginalized entrepreneurs and in providing a steady revenue stream for the non-profit. There is a strong correlation between how the loan program is valued and respected and how sustainable it will become.
Mentor Recommends – Locals Decide
We also recommend establishing the borrower committees discussed earlier, but basically the details are left up to the local administrator. If they get good results, we are willing to support expansion. The only firm requirements are that the loans be for revenue producing endeavors by people from marginalized communities and that the interest charged be no more than what is charged by local banks for similar loans.
Program Built on Trust
We find effective partners and place our trust in them just as we rely on them to find and place trust in good borrowers. These are flexible relationships built on trust and respect. While programs have faltered and closed, none of those did so before investing each dollar as intended more than once, which is a standard indicator of success by any international aid measure.
A Labor of Love
Primarily this is a labor of love. It grew from the love that volunteers who had served in Colombia felt for their country. For the TCP Global team, that love now includes a love for the model we have developed and a desire to see it implemented in as many places as possible, particularly in sites where there are Peace Corps Volunteers involved.