Merry-go-Rounds

Honestly, I shouldn’t be writing this.  Or maybe I should update my personal “Africa” blog immediately after I finish this post – I’ve updated my family once since I got here a month and a half ago.  But I’ve been very busy!

One of those things I’m working on is the website, which is currently “under construction.”  We talked to a professional firm about it, but their base price was around $300 (USD).  When weighing minimum-$300 against maximum-free (me), there was an overwhelming consensus amongst our distinguished staff.  So I hope everyone is excited to see the finished product, I’ve been putting a lot of work into it and should be done in about 2 weeks.

What I wanted to post about today, however, is another project I’ve been working on: the micro-savings program.  One of the ways that Lisha Mtoto plans on raising funds in the future is through the collected interest on micro-savings loans.  We currently have a collection of about a dozen individuals who will be contributing to a micro-savings fund on a bi-weekly basis (200 KSH, or about $2.50).  Micro-savings, or in some cases known as a “merry-go-round,” works by collecting small amounts of money from all members on a regular schedule and pooling it together.  Then, when enough money has been collected, loans are given out to the individuals who have been contributing to the program.  It is known as a merry-go-round because in some systems the loans are given out 1 by 1 until everyone in the group has gotten a turn.  Then the cycle is restarted.

In most western societies, this wouldn’t be a necessary or a particularly worthwhile venture because the numbers are too small.  But in the less developed world, credit is much more difficult to come by.  For those who followed the intricacies of the recent financial crisis, one of the largest problems associated with the “credit crunch” was the inability of small businesses to cover the investments necessary to buy inventory.  Most small businesses live and breathe on the credit necessary to buy their inventories, it’s no different in Africa.

In many cases, this means resorting to very high interest rates from loan sharks (known as shylocks in Kenya).  These morally corrupt “banks” offer loans at rates as high as 10% per day, often taking advantage of uneducated borrowers who don’t understand the contracts that they’re signing.  A micro-savings program provides a legitimate alternative option, allowing individuals to take out relatively low interest loans for whatever it is that they need.  They are a particularly attractive option because many studies have shown exceptionally low default rates because the members of the group all know each other; there is both a contractual obligation to pay the loan back and an obligation to the other members of the group (who may very well tell your mother, or give you dirty looks at the market).

So on the one hand we’re arranging this service for locals who have a bit more money to spend (but still benefit from loans that are relatively small, hence the “micro”), but the kids are benefiting as well.  The pool of money for loans is always increasing because of monthly contributions, but in our system the interest paid goes to the kids.  This is slightly different than most programs, where the interest is paid back into the pool.  That means that the pool will grow less quickly and loans won’t be as large, at least initially, but the members are very supportive of the program.  International support is important, but Kenyans helping Kenyans is a pivotal piece of the puzzle as well.

So everyone wins.  It’s great for the members (which will cap at 20, keeping the “social capital” incentive for paying back loans intact) because they are able to pay for things that are too expensive to normally afford up-front.  Whether that be inventory for a business, a funeral, or a new plow for the farm.  It’s also great for Lisha Mtoto and the kids because they’re raising non-restricted funds for the organization.  Non-restricted means that they were raised with no strings attached, they can be spent on anything the kids need.  These are crucially important for any non-profit, most grants and funds raised are attached to very specific programs and can’t be used for general needs.  We hope that as the program grows, this program can provide a fair amount of money to help fill the gaps.  It will, we hope, be an integral part of Lisha Mtoto’s growth and success in the future.

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