FINCA International - How To Get A Business Loan Without Collateral

- 17.05

The Foundation for International Community Assistance (FINCA International) is a non-profit, microfinance organization, founded by John Hatch in 1984. Sometimes referred to as the "World Bank for the Poor" and a "poverty vaccine for the planet", FINCA is the innovator of the village banking methodology in microcredit and is widely regarded as one of the pioneers of modern day microfinance. With its headquarters in Washington, D.C., FINCA has 21 affiliated host-country institutions (affiliates), in Latin America, the Caribbean, Africa, Eastern Europe, the Caucasus and Central Asia. Along with Grameen Bank and Accion International, FINCA is considered to be one of the most influential microfinance organizations in the world.

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Background and history

In 1984, Hatch, a Fulbright-trained economist and international development expert, conceived a new method for delivering assistance to the poor. In an airplane high above the Andes, Hatch was en route to a consultant assignment in Bolivia, when inspiration struck. He grabbed in-flight cocktail napkins, scraps of paper, and a pen and began writing down ideas, equations, and flow charts as fast as he could. By the time he landed in La Paz, he had the outline of a radically different approach to poverty alleviation: a financial services program that put the poor in charge. "Give poor communities the opportunity, and then get out of the way!" he said. He called the idea "village banking". This approach gave the poor the opportunity to obtain loans without collateral-the poor's main obstacle to accessing credit--at market-level interest rates.

Hatch first had to convince a group of USAID officers that his epiphany would pay off--for the rural poor and the government of the United States, whose grant dollars would fund the first projects. Remarkably, the officials liked his innovative idea and provided an initial grant of $1 million. Hatch and his Peruvian business partner, Aquiles Lanao, launched the program in five separate geographical areas of Bolivia and within four weeks, they had created funds in 280 villages serving 14,000 families with loans worth $630,000. Hatch's clients in Bolivia were puzzled at first by village banking because it represented a significant departure from business as usual. They were intrigued enough to try it, however, and it was an immediate success. When Hatch's client in Bolivia changed its in-country team, the new representatives shut the program down. More cautious than the original client team, the new group acknowledged the program's success but still felt that uncollateralized lending to very poor people was too risky. Undeterred, Hatch spent the next few months training others in the village banking methodology, helping open new programs throughout Latin America, and building the institution that would come to be known as FINCA International. FINCA incorporated in 1985.

Its ability to achieve financial sustainability allowed FINCA to make considerable expansions in the 1980s and 1990s in Latin America, the Caribbean, Africa, and the Newly Independent States of the Former Soviet Union. In 1995, FINCA entered the former Soviet Union by establishing a Village Banking program in Kyrgyzstan. In 1997, FINCA co-sponsored the first Microcredit Summit, with over 2,000 policymakers, practitioners, and donors discussing ways to expand microcredit programs. In 2000, FINCA became one of the first economic development organizations to enter Kosovo after the June 1999 cease-fire. In the 2000s, FINCA continued its penetration into the Newly Independent States by establishing new programs in Central Asia. Its most recent programs were launched in Afghanistan, in 2004 (see FINCA Afghanistan), and Jordan in 2007. In April 2009, FINCA Kyrgyzstan became the second program to pass the 100,000 client mark.

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Mission and focus on women

The mission of FINCA International is to provide "financial services to the world's lowest-income entrepreneurs so they can create jobs, build assets, and improve their standard of living". Today, FINCA's reaches over 1.7 million clients worldwide, including borrowers and savers.

The premise of its mission is to have a systematic and generational impact on poverty by making business loans available to poor women on a massive scale. According to Rupert Scofield, FINCA's President and CEO, "women have historically proved to be better credit risks, as they tend to be more responsible, perhaps from having to take care of the children. And frankly, they tend to be more creative and risk-taking than the men. Because they manage the household money, they know where the returns are in the marketplace on any given day."

In the microfinance industry, FINCA is known for reaching the very poorest market segments, particularly women. As of December 2008, women comprised 70 percent of its small loan clients.

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Village Banking

Pioneered by FINCA, village banking is arguably the world's most widely-imitated microfinance methodology. Among US-based non-profit agencies alone there are at least 31 microfinance institutions (MFIs) that have collectively created over 400 village banking programs in at least 90 countries. And in many of these countries there are host-country MFIs--sometimes dozens--that are village banking practitioners as well.

A village bank is an informal self-help support group of 15-30 members, predominantly female heads-of-household. If the program is "on mission", in a normal village bank about 50% of all new members entering the program will be severely poor--representing families with a daily per-capita expenditure (DPCE) of less than US$1; the rest are moderately poor (DPCE=$1-2/day) or non-poor (DPCE >$2). These women meet once a week to avail themselves of working capital loans, a safe place to save, skill training, mentoring, and motivation. Loans can be as small as $50-$100 and are linked to savings such that the more a client saves the more she can borrow. The normal loan period is four months and is repaid in 16 weekly installments.

As with many other microcredit methodologies, village banking eliminates collateral (the poor man's obstacle to receiving commercial bank loans) as a loan prerequisite. Instead, it relies on a system of cross-guarantees, where each member of a village bank ensures the loan of every other member. This system gives rise to an atmosphere of social pressure within the village bank, where the cost of social embarrassment motivates bank members to repay their loans in full. The admixture of cross-guarantees and social pressure makes it possible for even the poorest people to receive loans. This method has proven very effective for FINCA, yielding a repayment rate of over 97% in its worldwide network.

Market interest rates apply to village bank loans, usually matching what local commercial banks charge their customers but usually only a tiny fraction of the usurious rates charged by local moneylenders. The capital for these loans is provided by FINCA with on-time weekly installment repayments collectively guaranteed by all members--i.e., a shortfall by one member must be covered by other group members. Village banks are highly democratic, self-managed, grassroots organizations. They elect their own leaders, select their own members, create their own bylaws, do their own bookkeeping, manage all funds, disburse and deposit all funds, resolve loan delinquency problems, and levy their own fines on members who come late, miss meetings, or fall behind in their payments.

Worldwide FINCA's 21 affiliates have about 7,000 staff, of which the majority are field staff (credit officers and supervisors), and may include some of the better-educated children of FINCA clients. Each credit officer (CO) attends the weekly meeting of each of her 10-15 village banks to coach its leadership committee and monitor the bank's activities. In addition to motivation and adult education, the CO supervises client attendance, monitors bookkeeping accuracy, checks the accuracy of the current week's loan and savings collections, and checks when the deposit receipt of the previous meeting. In turn, each village bank is managed by its elected officers--a president (who leads the bank's democratic decision-making process), secretary (who takes attendance and keeps minutes) and a treasurer (responsible for accurately handling all cash transactions). Finally, each village banker has her own passbook, and her recorded balances of loan payments and savings deposits must always be the same as those recorded in the treasurer's record for each client.

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How FINCA programs grow

A FINCA program begins in the city center, then in a widening ink-blot fashion expands into the peri-urban communities that surround the city, and finally (once the program's break-even point is reached) expands into rural areas. Normally a new program will establish a single headquarters in the capital city where both administrative and program staff are based.

Then as the program continues to grow it starts to decentralize its operations by creating offices (usually located in the largest market towns) to serve different regions. At the field level each credit officer is expected to grow her own coverage sub-region containing 10-15 village banks. This coverage region should be delimited by a frontier which, from its center, does not exceed one hour's travel in any direction. Within this coverage area the credit officer organizes village banks along specific "routes"--each route corresponding to a different day of the week--and schedules village bank meeting days and times so she can attend several (2-4) meetings each day on the same route.

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Transformation of FINCA programs into microbanks

To expand its access to capital, FINCA is in the process of transforming the majority of its credit-only NGOs into licensed, regulated, micro-deposit taking institutions (i.e. "microbanks"), in order to mobilize savings from its clients. Access to client deposits will afford FINCA programs greater independence from donor and government funding, attract private investment and improve financial sector stability.

FINCA International, which is a nonprofit organization, will retain majority ownership of these transformed institutions, to ensure that the banks remain focused on FINCA's mission to serve the world's poor. Already, several of FINCA's programs have successfully transformed into microbanks, including Ecuador, Uganda, and Kyrgyzstan.

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Funding

Nearly all FINCA programs begin as nonprofit institutions rather than regulated commercial finance institutions. As such they can not legally collect the savings of their clients for financing their loan portfolio (as a conventional bank would do). Thus, FINCA usually finances its start-up programs with grants or soft loans. FINCA estimates that for a typical country program to reach its break-even point requires (1) three years, (2) a minimum of 7,000 clients, and (3) about $2 million in funding--where half is for loan capital and the other half subsidizes a declining share of its operating costs over a period of three years. Historically, FINCA has raised most of this start-up money from USAID. But in recent years, FINCA has financed an increasing share of its program start-up costs from private sector donors (corporations, foundations, and individuals). Once a FINCA program reaches break-even it can continue to grow its portfolio by re-investing its net operating surplus. It also becomes "bankable", i.e. eligible to borrow from local commercial banks for re-lending to its clients. These loans are guaranteed by means of a dollar-denominated letter of credit from FINCA International's Village Bank Capital Fund (VBCF). Today some 20% of FINCA's global lending is financed by borrowed capital from host-country commercial banks.

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Innovations and partnerships

While the original village bank credit and savings program remains the core product in the African programs, FINCA has partnered with leading insurance companies to offer health and life insurance products, health care, and business-interruption coverage in response to the AIDS crisis occurring in Africa. FINCA Uganda, which is a world pioneer in microinsurance, has partnered with AIG to provide life insurance, to ensure that the death of a village bank member does not result in hardship for the other village bank members or the family of the deceased as the client's loan is paid off. Generous funding from the Bill and Melinda Gates Foundation is making it possible for FINCA and the Johns Hopkins University Bloomberg School of Public Health's Center for Communication Programs to provide HIV/AIDS prevention education by using FINCA Malawi's established network of village bank groups.

In the Newly Independent States (countries of the former USSR), FINCA's product offerings have expanded to include larger, individual loans, collateralized by office or specialized equipment, vehicles, or property.

Three of FINCA's most successful programs, Ecuador, Uganda, and Kyrgyzstan have transformed into regulated deposit-taking institutions (MDIs). MDIs can accept savings from the public and then lend those savings to fuel much faster program outreach.

On January 24, 2004, USAID, FINCA and Visa International launched a major public-private partnership that aims to bring new efficiency and security to microfinance clients in the developing world utilizing electronic payment products. The partnership has tested how Visa solutions can provide FINCA and its clients both cost- and time-saving processes, allowing FINCA to expand its outreach to more of the world's poor by minimizing loan transaction times for both clients and microfinance providers; lowering transaction costs for processing loans; providing microfinance clients more secure access to their loan capital; reducing the possibility of cash theft; expanding the variety of financial service products available to FINCA's clients; and introducing a new market segment to participating commercial banks.

In November 2006, FINCA Afghanistan received a $10 million grant from USAID as part of an $80 million rural microfinance project to promote development and stability in Afghanistan. The project, the Agriculture, Rural Investment and Enterprise Strengthening (ARIES) Program, will also complement USAID's existing Alternative Livelihoods Program and will help establish a market-based, wholesale Rural Investment Fund to provide financing to cooperatives, farmers' associations, and small and midsize enterprises throughout the country, in a push to eradicate the cultivation of opium poppies.

Since establishing its program in Afghanistan, FINCA has offered a line of sharia-compliant microfinance products, developed after careful vetting with local religious leaders, and confirmed through a fatwa acquired from Al-Azhar University in Cairo, Egypt (the world's most respected Islamic institution of higher learning). Its current line of murabaha loan products is based on an agreement where the seller (FINCA) expressly mentions the cost he has incurred on the commodities to be sold and sells it to another person (the client) by adding a markup on the original cost, which is known to the buyer. It is one of the most popular modes of exchange used by banks in Islamic countries, such as Afghanistan, to promote interest-free transactions (interest being forbidden by Islamic law. Aside from being Afghanistan's first sharia-compliant microfinance organization, FINCA Afghanistan can perhaps claim to have created the world's first murabaha group-lending products.

In May 2009, FINCA, in partnership with HSBC, launched an innovative, prepaid card in Mexico. As part of that initiative, FINCA has presented two case studies on the development and implementation of new products, strategies, technologies, and other innovations in the provision of financial services for microfinance clients in the developing world.

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Celebrity support

In 2003, Her Majesty Queen Rania of Jordan accepted an invitation from FINCA International to join its board of directors, formalizing a relationship of support and advocacy that began in 2000. In accepting the invitation, the Queen reaffirmed her belief in FINCA's vision that microfinance institutions offer a tangible means of providing large numbers of the world's poorest a real stake in their societies. On February 25, 2008, Queen Rania officially inaugurated the FINCA Jordan program and personally visited its clients.

International film actress Natalie Portman joined FINCA as its "Ambassador of Hope" in 2003, following a meeting with Queen Rania. About the meeting, she explains, "Because I'm Israeli and Queen Rania is probably the most high-profile Palestinian woman in the world, I had this dream of meeting with her and doing something that would promote peace and working together between Israeli and Palestinian women. She talked to me a lot about what she calls the 'hope gap' that exists between the one third of the world that has and the two thirds that do not. I wasn't even aware that two thirds of the world population are extremely poor, living on less than a dollar a day, and that 70 percent of those people are women and children. It's not something they teach you in school in the States". Since then, Portman has visited FINCA field projects in Mexico, Guatemala, Uganda, and Ecuador, and met with several members of Congress to argue for more government funding for microfinance ventures. Portman appeared in the documentary "FINCA Mexico: Stories of Hope", chronicling her visit to the FINCA program in Mexico. The film was directed by Sundance Film Festival Grand Jury Prize-winner documentary director Juan Carlos Rulfo. Portman created the film to provide FINCA supporters a more in-depth view of the program and to showcase the lives of FINCA clients.

Of her trip to Uganda, Portman recalls, "...in Uganda I met a woman named Efuwa who was one of the first clients of FINCA in Uganda 11 years ago and she--when she started she had 10 children. Her husband was beating her, she was on 80-cents a day and she was--she was telling us how she would borrow dirty laundry water from her neighbors to--to clean her clothes because--and her children's clothes because she couldn't even afford a little bit of soap. Now 11 years later, she's opened up a restaurant. Her loans are up to $2,000 now because she's been such a--you know reliable client. She hired seven other women. She sends all of her daughters to school. One of them is in University now; they like all pooled their money together to--to send the smartest one to University and it's just amazing the--the amount of responsibility and pride that these women who have no education and virtually no hope can take with themselves with just a little bit of input."



Countries where FINCA operates

  • Latin America and the Caribbean: Ecuador (Founded in 1994), El Salvador (Founded in 1990), Guatemala (Founded in 1998), Haiti (Founded in 1989), Honduras (Founded in 1989), Mexico (Founded in 1989), Nicaragua (Founded in 1992)
  • Newly Independent States (Eurasia) : Armenia (Founded in 1999), Azerbaijan (Founded in 1998), Georgia (Founded in 1998), Kosovo (Founded in 2000), Kyrgyzstan (Founded in 1995), Russia (Founded in 1999), Tajikistan (Founded in 2003)
  • Africa: DR Congo (Founded in 2003), Malawi (Founded in 1994), Tanzania (Founded in 1998), Uganda (Founded in 1992), Zambia (Founded in 2001), Nigeria (Founded in 2014)
  • Middle East and South Asia: Afghanistan (Founded in 2003), Jordan (Founded in 2007), Pakistan (Founded in 2013)
  • FINCA also maintains an administrative presence in Ukraine


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