• Background and Trouble Shooters Guide
• Micro-credit
• Skills training
• Leakage of benefits
• Excessive benefits
• Basic criteria for success

Micro-credit

Many projects for OVC support revenue-generating activities for older OVC and families that foster OVC through micro-credit. The usual reasons for financing through micro-credit rather than grant are to support more revenue-generating activities by establishing a revolving fund and to hold the foster families responsible for use of the funds. While well intentioned, many of these projects ignore more than 30 years of experience of the microfinance movement. These are the key lessons:

Many foster families & OVC cannot benefit from micro-credit. That’s because they lack a profitable micro-project, any other source of stable income, or experience with building savings. In this case, extension of micro-credit and the effort to repay will just push then further into debt and poverty!

Groups that serve OVC should not provide micro-credit. The reason is that microfinance is about building permanent local financial institutions able to mobilize and recycle domestic savings, extend credit, and provide a range of services. Groups that serve OVC are usually social service and charity-oriented organizations. These groups should not provide micro-credit because they will not be able to manage the credits and maintain the value of the micro-credit fund. In short, micro-credit should be left to micro-finance institutions.

Don’t limit interest rates. Most projects for older OVC and families that foster OVC keep interest rates low on the argument that the borrowers are poor. Yet, it costs more to make many-micro credits than a few large credits. Unless micro-lenders can charge rates that are well above bank credit rates, they cannot cover their costs. The result is usually shrinkage and eventual closure of the micro-credit revolving fund.

The Micro-finance Gateway web site summarizes these points as follows:

“Credit requires a 98% ‘hit’ rate to be successful. This means that 98% of recent vocational school graduates or returning refugees would need to be successful in establishing a micro enterprise for repayment rates to be high enough to allow for a program's overall sustainability. This is simply unrealistic.”

“Running a program with substantial default rates undermines the very notion of credit and destroys credit discipline among those who could repay promptly but who look foolish given that many do not.”

 

Conclusions

• Micro-credit targeted to foster families and OVC is often a poor idea.
• Any micro-credits should be targeted to foster families with good proposals for a microenterprise-project and a history of savings.
• Therefore, most support to OVC & foster families for microenterprise-projects should be in the form of a grant.

Web links on micro-finance:
CGAP - building financial systems for the poor
Microfinance Gateway
Micro Finance Management Institute