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Microfinance: Lending where a little can go a long way Microfinance: Lending where a little can go a long way As part of the International Youth Foundation's Tsunami Reconstruction Initiative, supported by Nokia, more than 4,400 young people are being given access not only to job placement and life skills training, but also to small start-up loans and microfinance. The decision to offer loans through the programme is part of a growing recognition of the power of microfinance as a tool that helps not only women entrepreneurs or small farmers to improve their lives, but also young people. Credit where it is due: YouthWorks finds reliable customers among young Filipinos After having created the Philippine Youth Employment Network to train and prepare young people to enter business, Audrey Codera was disappointed to find that few commercial banks, government financing agencies or microfinance institutions were prepared to give them loans to start businesses. So she decided to fill the gap and offer the loans herself. Raising funds through family and friends, Ms Codera pulled together enough money to offer loans to three young people. These loans were repaid within three months. "There's one thing that can be learned by everyone from our experience," she says. "That young people can be trusted with money and they will do well with it." In 2005, Ms Codera won a Youth & ICT award of $500 prize from the Global Knowledge Partnership and later a Youth Social Enterprise Initiative programme grant of $15,000. As a result, what is now YouthWorks, the first microfinance institution for young people in the Philippines, has given loans to more than 20 young people aged between 13 and 20 with loans ranging from $100 to $400, with a 3 per cent interest rate. Ms Codera stresses the continuing importance of the mission of the other organisation she founded. "The Philippine Employment Network provides the training and we provide the money," she says. "Because, before loaning money to anyone, you have to give them basic training on how to use that money." In addition to discovering that young people are reliable when it comes to repaying loans, Ms Codera has found that, because they often do not have dependants of their own, the money is more likely to be spent on the project for which the loan was taken out than is the case with older borrowers, who may spend the funds on supporting their families. Moreover, she says, young people often use their loans to create enterprises that generate social and environmental benefit. She cites the example of a small enterprise that is making fashion bags and wallets by recycling the tarpaulin used in the Philippines for advertising hoardings. The bags are now being exported to Europe and the US, and the project has created work for about 300 people. "There are a lot of people who want to do good things," says Ms Codera. "To tap into the creative and risk-taking sides of young people, you need resources - that's where microfinance comes in." Microfinance institutions (MFIs) generally use the group-lending methodology pioneered by Muhammad Yunus, a Bangladeshi banker and economist, to loan extremely small amounts of money to individuals living in difficult economic circumstances. However, microfinance experts point out that a different approach may be needed when it comes to making loans to the younger segment of the population. Elizabeth Littlefield, chief executive of the Consultative Group to Assist the Poor (CGAP), a consortium of public and private development agencies, points out that young micro-borrowers - highly mobile, urban and technologically savvy - are very different from existing microfinance clients. She believes some may not be satisfied with staying at home running a small family business while, in areas of high unemployment, many may look for jobs overseas, which means they will be sending money home from abroad. "If remittances are going to rise, this raises the importance of banks designing products that are suitable for that population," she says. "So if the clients of the future are going to look different that means adopting [appropriate] products and methodologies." Others question whether the traditional high-interest rate group-loan model that has characterised microfinance to date is appropriate for young people. "If you're unemployed and young, then maybe a loan may not be the right instrument," says Martin Holtmann, head of microfinance at the International Finance Corporation, part of the World Bank Group. Nevertheless, Mr Holtmann and others believe microfinance institutions have more to offer young people than just loans. "Microfinance institutions have a huge role to play through financial education and by making available super-low cost savings accounts," he says. Research conducted in Uganda for the US Agency for International Development supports this view. The researchers found that young people valued savings and other financial services more highly than credit. And while young people did not see lack of capital as holding them back from starting businesses, USAid concluded that they did need lump sums of money to do so. In some countries, legislation is an obstacle. In India, for example, microfinance institutions are restricted by banking regulations from offering products such as savings accounts. However, in places where regulations allow it, institutions are starting to offer these accounts. In Sri Lanka, Hatton Bank has started a school banking programme that allows school children between the ages of six and 18 to bring their savings to school to deposit in formal bank accounts. Establishing such practices at an early stage in people's lives is crucial - "the earlier the better," says Mr Holtmann, "because it teaches kids responsible use of money and the value of putting money aside for future consumption". The fact that microfinance institutions are expanding their branch networks and banking services are increasingly being delivered via mobile phone in many developing countries should also help young people gain access to financial services. "Young people are generally more mobile so MFIs often don't want to lend to them," says Evelyn Stark, a microfinance specialist at CGAP. "But with branchless banking and multiple branches there are some great opportunities for keeping someone in the system." She believes that the savings model holds great potential. "Just putting your money into a bank is an empowerment issue," she says. "And it's better than having the first interaction with a financial institution come when you're 36 and want to open a stall in the market." For banks and microfinance institutions, offering savings and lending possibilities to young people is also good business. Hatton Bank has found its school banking programme generates loyalty among users, many of whom stay with the bank into adulthood. "From a strategic point of view it makes total sense to target these kinds of customers early on," says Mr Holtmann. "Because they may become lifetime customers."
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