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10 Questions

with Linda Hanyková
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February 27th, 2008 issue

JAN PŘEROVSKÝ/THE PRAGUE POST
The goal of the microfinance industry is to render itself unnecessary, Hanyková says.
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THE HANYKOVÁ FILE

Job title: Executive director, Microfinance a.s.
Age: 32
Nationality: Czech
Previous position: Consultant, Ariba
Education: B.A. in international relations, American University in Paris; M.A. in diplomacy, Westminster University of London

Microfinance, through which investors from wealthy countries fund small projects in developing regions, is a new concept in the Czech Republic. This February, MyELEN.com graduated from its pilot stage to become the country’s first portal for the sector, in collaboration with the Mexican microfinance institution FIPS. Linda Hanyková, the executive director of myELEN.com and Microfinance a.s., talks to The Prague Post about the need to avoid handouts, high interest rates on microloans and whether there is an end to poverty.
ČžŠ Why do you feel microfinance is a needed supplement to, or replacement for, typically charitable aid?
I’ve traveled a lot in developing countries — Africa, Asia. I saw how charity projects work and I’ve been disappointed. Of course, it’s normal that the full amount of money doesn’t get to its intended recipients, because there are costs to be covered. People need to understand that. But I was shocked in Africa how it’s really so little that gets through.
And the aid projects don’t educate the poor. They don’t teach them to think about what they need to do to survive tomorrow. So instead the needy just hold out their hands. They’re used to it. For decades, we’ve been giving medicine and education free of charge. Our community — developed nations — has educated the poor to expect free help.
When I understood microfinance, I was amazed. It builds people’s minds. It builds communities. It changes their perception of the world. They know they need to survive and they have to pay for it, so they want to stand on their own feet and do something for themselves.
Čž? How does the lending model on your portal work?
Our portal employs a peer-to-peer lending model. Every applicant on the portal is part of a group, which are clients of a microfinance institution (MFI). The loans to these communities come in cycles: For a
first-time loan, the MFI would never go to one person and say, “Okay, show me your project. Okay, you want to buy animals. Here’s the money.” The process prior to awarding a loan is complex and costly for the MFI.
The loans typically go toward a group’s common goal: establishing a hair salon in a town, buying seeds for growing grains or buying animals. The projects typically involve day-to-day survival, like grocery stores or farming.
Čž? What are the repayment periods of these loans?
We offer a 12-month repayment period. It’s simple interest because the administrative and operational costs are high. However, the lender can choose to be repaid quarterly or at the end of the interest period.
Locally, in Mexico, it works differently. MFIs like FIPS cannot wait a year to see if someone can repay or not. It works in shorter terms, especially in the first cycle. The first time they get a loan, people usually need to repay every second day. Then it expands to every week and so on. The first loan might need to be repaid in a few weeks, the second after four months and so on.
Čž? Are there no banks that can grant these loans locally?
Usually the clients are not educated. They can’t write. They have no past experience with financial statements or anything that they would use to prove to the bank that they’d be able to repay loans. They’re not attractive clients for commercial banks. Beyond that, the clients usually live in places where there are no banks. The closest city could be five hours, 12 hours or a day of travel away. Commercial banks don’t have the presence needed.
Čž?ř You’ve mentioned that only 2 percent of microloans go unpaid — an exceptionally low rate. How is this possible from clients on such shaky financial footing?
This is the beauty of microfinance. In developed countries, many commercial loans are not fully repaid. But for microfinance, the repayment rate is almost 100 percent. The clients have usually been
through difficult times: civil wars, natural disasters. During these times, they’ve learned they cannot look to the government, to charities. They have to count on each other and the community. This is the main principle of microfinance: collective liability.
When an MFI comes to places where the demand for capital is high, it first creates a community group with an elected president, secretary and treasurer. Then the group is awarded the microloan. Prior to the loan being awarded, the MFI might require a certain obligatory amount to be saved by every member of the group. So it might take an additional period of weeks or months, during which the group saves little by little, before they can be awarded a loan. If there’s a problem in the future, these savings are used to pay for anyone who defaults.
The first loan is a small amount, dozens of dollars. Further loans are higher depending on the final business plan. The groups need to build the MFI’s trust. In reality, it means that although the group needs hundreds or even thousands of dollars to carry out their business plan, at the beginning they might receive only a small loan to train them.
That’s why if one person can’t pay because things are difficult that week, your neighbor will pay. It’s one for all, all for one.
Čž? Microfinance has drawn criticism for the high interest rates often associated with its loans. How do you justify these high rates?
I love this question. MFIs vary in the different regions in which they operate — Latin America, Asia, Eastern Europe, Africa. For example, in Bangladesh, microfinance is developed, the competition is high. There are a lot of MFIs and so interest rates can be low. In Latin America and Mexico, the unsatisfied demand for capital is still high and there are not as many MFIs. The interest rate in Latin America can reach up to 100 percent, in some circumstances.
Some MFIs are supported with government funds. They get the money backing their loans free of interest or at a low interest rate. So their rates don’t have to be as high. Others use private funds or a combination of both. There’s more demand for microloans than there is low-interest funding. So the loans become more expensive.
It’s important to realize how this works in reality. There are MFIs that lend money in cities, which is cheaper. In rural areas, you need good cars to get there, because there is no infrastructure. You need to make
multiple visits before you can actually award the loan to someone. The first loan cycle is not profitable for MFIs at all.
Čž? Is there any tension between private firms investing in microfinance and government-sponsored nonprofits?
I’m not aware of anything like that. Everyone working in microfinance, whether it’s in real investment funds or nonprofits, has the mission to help. They feel they are doing something good.
I don’t believe in socialism. I’m more for capitalism. For instance, if a microloan were free, it wouldn’t force the poor to become responsible and independent.
Čž' What returns should your investors expect?
In our project, it’s from 5 percent to 10 percent. It depends on the amount and structure of the loan. You sign an agreement with the MFI directly. The MFI is responsible for the returns. And the loan agreement is based on Czech law.
Čž' How sustainable is microfinance as an industry?
We’re an industry that is basically working to destroy itself. As more private funding happens and more bridges to developing countries are built, there will be more competition. Interest rates will go down, down, down. These communities will become stronger and more interesting to commercial banks. And then the MFIs will disappear.
Čž" Do you think of poverty as a problem that can be solved?
Poverty? I don’t think it has a solution. You can see in your community. There are people who are hard workers generating income, and there are people who are not willing to put energy into the market. The same is true in developing countries.
Once, when I was in Japan, I went to a temple. It had a two-section door that was hundreds of years old. On the door, there were two dragons flying upward. You could see that one dragon was straining to fly, its skin and muscles tense. The other dragon wasn’t trying as much. A monk came to me and said, “You see these two. What is the difference? This one is really trying its hardest. See? He needs to get there. The same is true in life. Work hard and your chances to get where you want are higher.”
It’s the same with poverty. Microfinance gives the poorest a chance they wouldn’t otehrwise have. If they take that chance and work hard, they can get out of poverty.
Want your manager to answer our 10 Questions? Contact Paul Voosen at pvoosen@praguepost.com


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