Imagine you’re living in debt. You may have incurred the debt to get a college education or to cover your living expenses, spreading it out over multiple credit cards. Despite working flat out, you are on the edge every week and miss one bill repayment after the next. And then you’re made redundant. Or you get a divorce, have a baby, or become ill. Soon your mental health deteriorates, too.
Now imagine you live in rural India, where your income is even less secure, investments are higher-risk, and where you are most likely to start off in debt.
There, the debt trap is the real burden. Few banks serve the “extreme poor” — those living on $1.90 or less a day who are at the mercy of local moneylenders charging punitive interest rates. An illness, a crop failure, or simply paying for education to ensure a better future pushes them over what they can afford every day. They are unable to save, but they have social obligations (such as funeral expenses, dowries to pay) and a decreasing ability to repay their loans — the longer their debts are overdue, the more interest they have to pay, and the harder it is for people to keep up repayments. They become desperate. Suicide is not uncommon.
But it doesn’t have to be this way — and I’m not talking about giving hand-outs.
The bigger picture
According to the World Bank, a staggering 2.5 billion people globally are unbanked. Of these, about 700 million live in “extreme” poverty, mostly living in rural areas, being employed in agriculture, and with little or no education. The United Nations identified financial inclusion as a precondition to eradicate extreme poverty by 2030.
Without collateral or credit history, and with relatively small credit requirements, these people have limited — or no — access to banks or microfinance institutions. All too often, local moneylenders are the only option, though their interest rates may be as high as 50% per annum.
Would you be able to repay this kind of interest rate?! I doubt it — but then again, you probably wouldn’t be forced to accept these terms in the first place.
So why should some of the world’s most vulnerable people be forced to? This is the paradox of the poor: the poorer they are, the harder it is for them to get out of poverty.
Breaking this cycle of debt may seem impossible, but it is vital if we are to end extreme poverty. And it is not as impossible as it may seem… We believe that, with your help, we can make it happen.
Starting small: how to make change
Thanks to our years of experience at the World Bank, we’ve seen what does (and doesn’t) work. Together, our team has found a way forward.
Our method builds families’ resistance to financial shocks, strengthens local communities, and provides affordable, high-quality credit — sustainably.
Best of all, it’s not too good to be true! Here’s how we do it, in three key steps…
1. Enabling families through innovative, user-friendly mobile technology
We start from the bottom up. Our innovative technology-enabled data analytics and rating tool enables families to:
- Build their resilience to financial shocks, providing them with the resources and skills to save more and spend less than they earn. We help them improve their financial literacy, increase their propensity to save, analyze their financial situation, change their spending habits, and restructure their finances.
- Formulate sound business plans that are integrated with household financial plans and from which their loan terms will emerge.
- Identify what support they require to implement their financial/business plans. This could be in the form of training, access to a market for their products, bulk purchasing of agricultural inputs (fertilizer, seeds, etc.), insurance for their cattle, and so on.
Who will provide the critical support that families need to implement their plans?
2. Supporting local communities
We want to build local capacity to provide that support, to make sure it does not end when we leave. We partner with membership-based savings and credit organizations that are run by women to build on local systems while strengthening their governance, accountability, social inclusion, and operational effectiveness mechanisms.
These organizations collect savings from their members. Once collected, the savings are recycled through qualified members as small loans. These organizations administer the loans in the field, monitor and collect repayments, verify use of the loans, investigate delays, and ensure that the most vulnerable people are included.
What’s more, these savings and credit organizations don’t just deal with finances; they also provide holistic support and drive social change. Some have mobilized campaigns against domestic abuse, while others have organized mental health campaigns or career fairs for local youth.
3. Providing access to (genuinely) affordable credit
Finally, once all the necessary support is in place, we provide access to low-cost credit — the magic third ingredient!
While savings and credit organizations do provide access to affordable credit, they mostly focus on small emergency loans, due to their limited funds. They are therefore unable to provide business or education loans or refinancing loans — required for transformational change.
This is where our social investors come in to the picture: savers with disposable income they want to invest and earn an income while making a real difference to other people. It sounds like a no-brainer, right?
Are you a winner?
We aim to create a win–win situation for everyone. We operate a crowd-lending platform to cut out financial intermediaries and keep costs to a minimum, which is then reflected in affordable interest rates for borrowers.
Our social impact investors supply low-cost credit and earn interest at a rate that reflects the market rate (and is higher than savings accounts rates). Our borrowers access affordable loans, as well as financial literacy and business training, while our partner savings and credit organizations become stronger, more socially inclusive, more accountable, and more efficient. It doesn’t get better than this!
Your investment is handled by these organizations, and is recycled around their members in the same way as their own loans. This is an effective, prudent way to administer loans: if a repayment is overdue, these organizations can assess the circumstances leading to the delay, thanks to their unique local knowledge, and adapt the repayment plan in a flexible, effective manner. So far, repayment rates stand at over 98%!
Small loans, making a big difference
Our next challenge? To source enough loans to meet all credit demand coming from the unbanked. That’s where you come in: we’re giving you the opportunity to be a change-maker!
Our investors can choose to invest in an individual project or in an entire village through the village’s savings and credit organizations. In both cases, investors’ money will be invested multiple times over the loan duration within the village they have chosen, meaning their money can do more for more people and still come back to them (with interest!).
This isn’t just about us…
This isn’t just about Village Invest. Sure, we think it’s a great approach. In fact, we think it’s disruptive — and we know it works.
But this is about more than self-promotion. If we can change the way microfinance is delivered, if we can use technology to reduce costs, increase transparency, and build local capacity, then, and only then, can we hope to meet the 2030 target.
Does this sound like a good investment opportunity? Are we missing anything?
Let us know in the comments!