IST Part 2 - Micro Finance

So, what was the training actually about? Well, it covered a variety of topics, some was the normal HR stuff about discrimination and diversity and then some country specific security topics. Most was programmatic, however and we talked a lot about implementation of possible projects in our communities. We discussed micro finance and working with local development associations to develop local economies.

I’m going to pause to explain this for a sec because micro finance (also known as micro credit) is a pretty cool concept. Bear with me as I try to explain this concept in a couple of paragraphs. In the US, people take out loans all the time, for example, they get loans for houses, businesses and cars. They also get money for every day things. A credit card is a little device that facilitates loans all the time. Little loans, like $15 for a DVD. All of which needs to be paid back eventually.

Now, why would anyone lend someone money for nothing? Well, they normally don’t, they charge interest, which is a percentage of the money you borrowed to be paid back in addition to the principle, or original amount borrowed. For example, if I borrow $100 dollars and need to pay 5% interest, my interest will be $5 and my principle will be $100. So, I pay back $105 dollars to my lender and my lender profits the extra $5. (This is a very basic description; I’m keeping it simple on purpose.)

Basically, because small, rural communities don’t have access to credit cards or banks, they need someone to loan them money to start or improve businesses. This is where micro finance comes in. In Costa Rica community credit businesses are called Empresas de Crédito Comunal, or ECCs. They lend small amounts of money to businesses in rural communities so that those businesses can make money and eventually pay back their loans.

So, for another example, this time I’m borrowing $100 for a cow. I buy the cow and make cheese from her milk. After 6 months at 2% monthly interest, I need to pay back $12 in interest (interest = 6 months x 2% of 100 OR 6 x (.02 x 100) = $12) PLUS my principle, $100. So I would owe the ECC $112 after 6 months.
During those 6 months, I sold enough cheese to make $120. So I pay back my $112 and I still have $8 left.

Why did I do all that for $8? Because after I pay back my loan, I get all the future money I will make from the cow. So, if I make another $120 dollars in the next 6 months, I get to keep it OR I can buy another cow.

This is how businesses grow from micro finance.

The best part about setting up ECCs is that none of the money comes from outside the community. The community buys shares, or pieces of ownership in the ECC, much like stock and receives dividends at the end of the year. (Dividends being a percentage of the ECC’s profits divided among all the shares. Example: at the end of the year, the ECC profited $1000 and will pay half of that to dividends. So $500 is divided among the 50 shares. $500/50 = $10 So ever share receives $10. The other $500 is loaned out to make more money!)

To learn more about ECCs, micro finance or credit in general, you can feel free to write question to me or check out Kiva to see what kind of projects get done with micro finance.

PLEASE send me questions about this if you’re interested. I studied this in university, so it makes sense to me, but I can’t tell if I explained this very well.