THERE WAS disappointment this week for eight microfinance loan clients in Uganda, who could not meet the Duke of Edinburgh because they lacked security clearance.
The meeting was to have been an endorsement of an initiative supported by the not-for-profit organisation Five Talents. The eight were due to meet Prince Philip at Mweya Safari Lodge near Kasese in the Queen Elizabeth National Park, Uganda, today, said the head of Five Talents UK on Tuesday, Tom Sanderson.
The eight are typical examples of how the growing microfinance market works. Each had received a small loan of up to £500 to develop his or her business (often her: microfinance companies work on the principle that women are more reliable than men). Normal banking schemes, which demand collateral as security, will not normally provide the money they need.
Instead of meeting the clients, Prince Philip was due to meet a Five Talents volunteer from London and three members of the Ugandan staff.
Five Talents in Uganda worked by encouraging individuals to form themselves into groups of five, who then apply together for small loans to provide themselves with tools, seeds, or other things they needed, Mr Sanderson said. The peer pressure from the other members of the group ensured that they each repaid these loans, so that new loans would be forthcoming.
The interest rate of three per cent a month “can seem high to people in the UK, but in a developing country it is very reasonable”. The loan schemes, when fully operational, would lend to between 1000 and 2000 people. They were self-sustaining in the long run, but they needed between £50,000 to £100,000 start-up finance.
The high rate of interest was now attracting leading financial institutions. New lenders were often risk-averse, however, and enforced loan repayments, or lent mainly to the middle classes. There was a danger of “drift”.
“This is a drift that the not-for-profit microfinance sector tries very hard to avoid. It is a constant tension between running a sustainable microfinance operation (where interest recovered on the small loans must be sufficient to pay for all local running costs) and staying true to our original ‘calling’ to serve the poor, offering them access to finance (both savings and loan products) — which means taking risks and loaning to people that banks shun.”
Five Talents worked with a mix of 20 per cent middle-class clients, 20 per cent clients who were “desperately poor and want to start their first ever micro-business — the risky ones”, and 60 per cent “active poor” who wanted to expand. “We also provide a lot of training and support.”
The finance group JP Morgan launched its own microfinance unit last week. Christina Leijonhufvud, head of the group’s newly created Social Sector Finance Unit, told The Financial Times that she aimed to achieve “a double bottom line of social benefit and financial returns”.