Good Idea, Chap: BRAC’s Microfinance Initiative

As a person who has previously been working in the banking sector, I was quite sorry to hear that Barclays had announced     3, 700 job cuts earlier on today.

This was not because banks are my most favourite institutions but because the above had happened as a result of the £290mln fine imposed on Barclays for admitting to rigging the LIBOR rate; a fine which should have resulted in the dismissal of and punishment to the senior executives responsible for the above rather than that of thousands of unsuspecting and, most probably, innocent employees.

Having said that, thought, the above did not come as a huge surprise to many, mainly because the bank had recently announced that it was getting rid of its entire ‘secret tax avoidance factory’ (see << http://www.guardian.co.uk/business/2013/feb/11/barclays-investment-banking-tax-avoidance >>).

I shan’t waste either time of effort on discussing the above decision or the ludicrous suggestion that the said department has ever been a ‘secret factory’.

What needs to be noted, however, is that public distrust in the banking sector has been growing steadily on a monthly (if not weekly) basis for quite some time now.

On that note, I was listening to a BBC Business Daily podcast featuring an interview with a man from Nigeria who had gone to a bank to borrow some money so that he could expand his business.

As he was telling his story, he reached a point which stopped me in my tracks: he was ‘tricked’ into borrowing the equivalent of $ 1000 from his local bank at an interest rate of 31%; thus, he had his own reason for detesting banks, much different from our own.

A second interview followed whereas a Nigerian economist said that, even though banks should follow the Central Bank’s current interest of 12%, they had not been doing so for some time because, being small local private institutions, they could not afford such low interest rates.

The economist then pointed out that people who could not afford to borrow at such rates should not be borrowing in the first place as they would surely struggle to keep up the repayments and would, most probably, default on the loan, thereby eliminating any future chance of securing any further funding.

Even though the above is, theoretically, quite right, it does not offer an option to young entrepreneurs who want to obtain funding and start their own businesses in developing countries.

Thankfully, however, every cloud has a silver lining; in our case, the BRAC Microfinance.

To begin, it’s worth noting that BRAC is currently the largest development NGO in the world. It was founded by Sir Fazle Hasan Abed in 1972 and has since helped many people in need by providing them with education, healthcare, disaster relief and economic back- up.

For the purposes of today’s article, I shall focus on BRAC’s economic development branch and, more specifically, on its microfinance initiative in Uganda.

The idea behind the said project is to provide funding do people in extreme poverty and to young entrepreneurs who lack the capital to start their own business. The project has recently been backed by the MasterCard foundation and boosted by a further $ 45mln to help towards the long- term sustainability in Uganda.

Both SMEs and individuals can benefit from BRAC’s initiative and can borrow at an interest rate of 17-44%, depending on the sum and the term of the loan.

You might wonder, then, what is it about BRAC that makes it so different and better than a commonplace loan arrangement with a bank?

The mainstream difference is that BRAC is community- based; it’s made up of local people who are willing to help each other and stick together until the very end.

To put simply, the microfinance that they offer is from the people to the people.

‘BRAC microfinance branch offices conduct area surveys and consult with community leaders and local elders in selecting the 20-30 members of each group. The group is then sub-divided into smaller groups of five, each with their own elected leader. The members of the small groups take co-responsibility to solve peer repayment problems’, << http://www.brac.net/content/where-we-work-uganda-microfinance >>

Consequently, when a person cannot cope with the repayments and is struggling, rather than defaulting, he discusses his problems with his group and decides what the best course of action is.

The above is truly amazing because what it has done is transform financial issues into social ones; it has found a way to solve problems using people rather than numbers.

Why have the ‘capitalistic’ countries not thought of that before?

Because they think in numbers; not people.