Doña Yamilette taking care of a calf whose mother she purchased with a loan, and who died giving birth. Yamilette is paying off the loan with help from her family, instead of from the intended milk sale from the cow.

As I hope is clear to all of us, micro-credit is not a panacea for ending poverty but an economic tool designed to be appropriate for small business and to help individuals with scarce resources jump-start their businesses or farms.  Or as the case may be in Nicaragua at the moment, if not help them grow than at least help keep small businesses and farms from folding in hard times.  When we read Muhammed Yunis or see the large glossy photo of a smiling farmer and his oxen from one of the large international micro-credit NGOs, it’s hard not to become enamored with the model.  However, as with business in general (and certainly with regards to any lending), responsibility and transparency are absolutely essential to high quality micro-lending, and should never be sacrificed for the charitable possibility of helping someone in need.  And by quality I mean two things – fiscally smart lending that leads to high recuperation rates, and lending in social and geographic sectors where financing for individuals is hard to find and necessary.

I recently sat down with a loan officer here and went through, step-by-step, the whole process of soliciting, approving, and managing an agricultural micro-loan here in Nicaragua.  Of course the process varies in other organizations and countries, but this gives one example of a micro-credit methodology that is thorough, transparent, and appropriate.

The requirements for applying for a micro-credit loan for ranching or farming is two years minimum experience with the relevant crop or livestock, and to not be already heavily indebted with the same or any other financial institution.  Within the last 5 years several credit-rating systems have been established in Nicaragua, which means “credit history” is a relatively new concept.  Instead of relying on honesty, credit institutions can now run background checks on any borrower to see, within a network of companies, other micro-credit institutions, and private banks, whether the solicitor has debts and what status they are in.

The cah-flow analysis filled out with the farmer also helps farmers to see their farm as a business instead of just a subsistence, and teaches good financial practices.

For farmers, the loan solicitation consists of two documents and an on-farm visit.  The first document is a study of the crop for which the loan is needed.  If the farmer wants a loan to plant sesame for example, a complete cash-flow analysis is devised, using information specific to the farmer for determining the cost of seed, fertilizer, labor, renting land, and selling.  If the cash-flow analysis predicts a profit, a sort of whole-farm business plan is created in order to ensure that the size of the loan is adequate for the farmer.  The other sources of income for a farm are sketched out, to ensure that there is are secondary forms of payment in the event of crop failure, and a farmer will not be left indebted with zero income.  The market prices and costs for items are cross referenced to make sure they are appropriate.  The lending institution I work with for example, keeps a reference document for each office that has an example of one loan from the previous year for every crop.  That document is referenced by every loan officer if they want to compare the time-frame or costs of a solicited loan.  Each office needs to keep it’s own updated reference document, because the cost of renting land, for example, could change drastically from one region to another.  Putting together the two analyses can take over three hours, and the on-farm visit may be over an hour away from the main office by motorcyle, which means that each loan solicitation is already an investment, both on the part of the farmer and the micro-credit institution.

Storing and skillfully marketing product are essential skills for any farmer in any part of the world.

If the analyses are approved by the institution, the farmer needs to provide the necessary legal information – photograph of his identification, proof of ownership of his animals and/or land, a co-signer, and a collateral for the loan.  Then his loan is fully approved and he can access the funding. But not all at once – agricultural loans tend to be larger and operate on longer time-frames than commercial loans.  And it’s not just unpredictable weather and markets that make agricultural loans risky; the long time-frames coupled with the every-day necessities of poorer families make it tempting to spend that money today instead of waiting it to spend on the farm later.  So agricultural loans are accessed in disbursements.  A crop that matures over three months for example, would be divided into the costs of activities by month.  The first month – plowing, ground prep, seeds and fertilizer.  The second month, labor for weeding or successive fertilizing, etc.  The third month, labor for harvesting and processing.

Each disbursement needs to be approved by a loan officer by a visit to the farm to see the status of the crop.  If there is no need for the disbursement, for example the crop is not a weedy as expected, has been destroyed by flooding, or maybe has never even been planted, the money is not given out even though the full loan was initially approved.  The disbursements are to the clear advantage of the farmer.  He only pays interest on the amount he has actually withdrawn, not the full approved amount.  And so if he never uses the part of the loan for hiring weeding labor because miraculously his sons arrive from out of town and do it for him, he just never takes it out and doesn’t pay interest on it either.

Another advantage for the farmer is a grace period after the anticipated harvest date during which he has no obligation to begin making payments.  Any money disbursed accumulates interest, but the grace-period functions as a kind of storage financing, relieving the farmer of some selling pressure and allowing him to wait for prices to go up if there is a glut on the market at the moment.

Ideally, agricultural micro-loan officers are farmers or agronomists themselves, and can provide borrowers with sound technical advice in addition to access to financing.

If the crop fails or the market falls drastically, the farmer may need to dip into his income from other activities on the farm, ask for help from his co-signer, or re-finance the loan to avoid the higher bad-debt interest rates.  Hopefully by this time, the farmer has developed a good rapport with the loan officer, who knows enough about the business to help the farmer figure out a payment plan that works for him.

After two years here, I can honestly say that I think providing quality micro-credit to individual business owners and farmers makes a difference in the world.  The numbers show it, and the testimonies back it.  But it’s not all feel-good helping the poor, and it’s certainly no excuse to make a profit or lend irresponsibly.  It’s a business that if it’s taken seriously by all involved from investor to lending institution to borrower, can really work.