Capitalism or Charity?
Monday, 26 July 2010 18:04
Say you are a poor rural subsistence farmer in Zambia just inches away from serious hunger. You know what you need and you know charity does not work, but charity is all you can get. What do you do?
You wind up accepting charity. Along with charity comes it serious side effects. Charity destroys personal incentive, since no matter what you do, you wind up accepting free something or other. Charity distorts local markets, since instead of purchasing items from your local economy, those items come for free to you, purchased from a distant location by the charity. Worst, charity relieves the consciences of distant donors even though they do nothing in the long term to address the real problems of the people on the ground.
Time and again I heard subsistence farmers telling us they do not want charity, they want investment. The people in Zambia are probably the most industrious entrepreneurs on the planet. We saw them creating and selling items, even miniscule amounts, to the local economy from makeshift mini-stores (emphasis on mini) along the rutted roads. Some of these little markets had only one or two items. Yet, the Zambians marketed them with the enthusiasm of a Cadillac salesman.
Even in the smallest villages, local leaders told us they needed “start up” capital. Zambia has many commercial farms, vast enterprises with irrigation and sophisticated machinery. Local farmers are trying to compete against them with small plots, less than ¼ acre, worked by hand. The commercial farms have access to foreign capital. Not surprisingly, most are owned by Whites, Indians, or Asians. Locals have no access to capital. The villagers complained that without collateral (yes, that is the word they used) they could not secure a loan. Even micro-loans are inaccessible.
We talked with one of the micro-loan organizations to understand the challenge. Micro-loan groups charge very high interest rates because they have to borrow the capital themselves, originate the loans, and service the loans. They demand that payment starts within a month or so of the loan origination. This might work for someone who wants to buy some goods to sell at the market or a sewing machine to tailor for neighbors. But what about a farmer who wants to plant Moringa trees, which take two years to mature. The leaves of the Moringa tree are sources of vitamin A, a chronic deficiency in Zambia, as well as other important nutrients. They would not only provide a great source of income for the farmer, but needed nutrition for the Zambian public. Yet, no micro-loan loan organization would wait two years to start getting repaid. In other words, the reality of loans locks Zambian villagers into a marginal life.
But we also found a solution. The Micro Bankers Trust consults with local village cooperatives to set up a village bank, which is a modification of the Grameen bank model. In the Zambian model, the cooperative sets the rules for repayment because they are the ones accepting the risk. During the training phase, the cooperative members have to set up a savings plan in which each member deposits funds into the village bank each month. The deposits are whatever they can afford, no matter how small. After 6 months, they have completed the training, which includes financial management, financial reporting, and long range financial planning. At that point, they can start making loans. They can also accept outside contributions to their working capital, as long as it is not so much that loaners feel they do not have to repay. $1000 seems to be about right.
This small amount kick starts a local economy, allowing long term investment into their village enterprises. As the capital in the village bank increases, the bank expands its lending to non-members, and even develops other local banks in surrounding villages into a consortium of sorts. In other words, it develops a local economy that is sustainable. Once started, it does not need any more outside input.
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