In 2001, Cinthia Maribel Larreatigue Herrera was living in the province of San Ignacio in northern Peru, surrounded by poverty. For coffee farming families like hers, and the rest of the world, the coffee crisis proved a desperate time, when prices were less than half what they are today. Larreatigue’s family, who had grown coffee for 30 years, relied on a dwindling harvest income to pay for her schooling. “My dad had to save some money from the crop to pay for my school supplies and repaid the debt by exchanging coffee to a broker,” she says. Eventually, when the debts became unbearable, Larreatigue’s education came to an end. “I had to leave school for two years. We all had to economise, we bought only what was really necessary or urgent,” she says. “We tried to save money to last us all season when there was no income. It was a very difficult time.” While coffee prices may have risen since then, more than 60 per cent of Peru’s population still lives below the poverty line, according to United States-based not-for-profit Coffee Kids. In the Aprocassi (Asociación Provincial de Cafetaleros Solidarios San Ignacio) cooperative, in which the Larreatigue family is a member, the average farming income is still just US$1450 per year. While Larreatigue was able to finish high school, this limited income, along with a fluctuating economy, made it difficult to further her education. The opportunity only came when Coffee Kids introduced the Microcredit Education Program to her cooperative. “We were told us it would be the best opportunity we would have to study, so we did our best to apply,” she says. “If it wasn’t for this credit, I wouldn’t have the opportunity for a career.” The Coffee Kids microcredit program provides low-interest loans of US$750 a year to 20 university and technical school students aged 15 to 22 years. The loans cover education-related expenses such as food, transportation, clothing, fees, tuition and materials. The recipients must be children of cooperative members with low incomes and no history of debt. The individual farmers then have a one-year period to repay the loan in cash to Approcredi, a specific credit arm of the cooperative. Microcredits are officially defined as extensions of small loans and other financial services to the very poor, according to the Microcredit Summit campaign, a network linking different actors in the microfinance sector. Just as the Coffee Kids programs targets education, microcredit loans can be used to pursue any entrepreneurial projects that generate extra income and improve living conditions. Models of microcredit differ according to country and organisation. One of the most popular forms of microcredit, similar to what Coffee Kids has adopted, is known as the Grameen Bank model. The important differentiation with commercial loans is that the Grameen Bank model requires no collateral. The loans are usually repaid within six months to a year, and are recycled as other loans. Just as APROCASSI manages the funds though a credit arm, the Grameen Bank model keeps the money in the hands of borrowers. The concept of microfinance and access to savings and credit groups has operated for centuries, according to Consultative Group to Assist the Poor (CGAP), an independent policy and research center. Such models include the Susus of Ghana, Chit funds in India, Arisan in Indonesia and Pasanaku in Bolivia. One of the early forms of microcredit was the Irish Loan Fund system. In the early 1700s, founder Jonathan Swift provided small loans for short periods to rural poor with no collateral. By the 1840s, Swift’s microcredit model became a widespread institution of around 300 funds in Ireland. Throughout the 1800s, larger and more formal savings and credit institutions emerged in Europe. Experimental programs in Brazil and Bangladesh in the 1970s soon followed, as did the emergence of government assistance that focused on providing agricultural credits to farmers in the hope of increasing productivity. Throughout the 1990s, microcredit became a popular tool for economic development, with hundreds of institutions using microcredits as a strategy to alleviate poverty. “Microcredits [today] are so varied that their sufficiency actually depends on how well it suits the needs of the community,” Dr Anuja Cabraal says, a researcher at the Graduate School of Business and Law at RMIT University in Melbourne, Australia. “The top-down approach, where things are imposed on the community or people, tends to be less sustainable. People need to understand their options, why it can be a benefit to them and understand how they can use it.” According to the 2012 State of the Microcredit Report, over the last 13 years the number of poor families with a microcredit loan has grown more than 18-fold, from 7.6 million in 1997 to 137.5 million in 2010. These loans have helped more than 687 million family members. Of loan recipients, 82 per cent were women. At the time of the report, around 1.6 billion working-age poor people lived on less than $2 a day. Around 180 million people had a microenterprise to support themselves. In her doctorate on the social and financial impacts of microfinance programs, Cabraal found that effective dialogue between the two parties is key to achieving an effective microcredit model. “I’m a real advocate for a community development approach,” she says. “This involves working on the ground with the communities to find what the best solutions are for them, how they manage their money and then building a model around that.” For the most part, Cabraal recognises that microcredit programs have proven to be an effective tool in providing an income to poverty-stricken – empowering them with choices and increasing their participation in mainstream economic communities. “In today’s society, we emphasise the need and there’s a real sense of pride and empowerment around social and financial inclusion,” Cabraal says. “Small microfinance groups give you a sense of belonging based on social interaction. It actually takes the emphasis away from commercialisation and you develop a type of community around you instead. That’s a kind of wealth in itself.” Dr. Asadul Islam, Senior Lecturer at the Department of Economics at Monash University in Melbourne, Australia, says that a well-thought-out microcredit program is key, as history has proven the dire consequences of badly set-up models. He points to the most famous example in India, known as the microfinance crisis of Andhra Pradesh. The model took an aggressive approach to loan repayments, leading many loan recipients to plummet further into debt. “People think microfinance is the answer to eliminating poverty. But there are so many varieties of microfinance in the world and they don’t all follow the same objectives,” Islam says. “The term microfinance is used too loosely by [monetary financial institutions] who want to be seen as socially responsible. But if a business’s sole focus is to make money, than that’s the problem.” To ensure microcredits benefit the borrowers and not the lenders, Islam says a solid program of development around the loans is paramount. “A credit loan is not enough, it’s not solution. We need to plant mechanisms that will complement the loans,” he says. Islam suggests that organisations have an independent set of guidelines and policies without affiliation of government control. He says proper training, in addition to larger value amounts of loans and a more flexible installment system, is necessary to improve current models. Most importantly, he says borrowers need to understand exactly what they are receiving and what they are entitled to do with it. Today the microcredit industry serves about 200 million people in developing countries, according to CGAP. However, 2.5 billion people still have no access to a formal loan or savings account. Jeanette Thomas, Knowledge Products and Communications Officer at CGAP, says in order to expand access to financial services to the poor, practitioners and policy makers need to create an environment in which full financial access for the poor is properly supported. “A key challenge is how to create a broader interconnected ecosystem of market actors and infrastructure needed for safe and efficient product delivery to the poor,” says Thomas. “Finding viable ways to deliver a full range of low cost services is still very much needed. People living in poverty, like everyone else, need a diverse range of financial services to run their businesses, build assets, smooth consumption, and manage risks.” Thomas says a growing body of empirical evidence shows that access to the right financial service at the right time helps households to do just that, as well as generate income and protect themselves from risk. “Therefore, under the right conditions and given the right context, microfinance in general and microcredit in particular can be valuable tools for the poor to access formal channels of finance.” Thomas says to achieve more financial access to the poor, other services beyond microcredit are necessary including savings services, remittances, insurance and pensions. With the majority of coffee produced in smallholder farms, microfinance lends itself well to coffee projects. In addition to the Coffee Kids program, not-for-profit Whole Planet Foundation funds microcredit to the very poor in communities where Whole Foods Market suppliers source their products. Allegro Coffee Company and many other suppliers source from coffee-growing regions, including Bolivia, Guatemala, Costa Rica, Kenya, Uganda and the Dominican Republic, where poverty conditions can be serious. “Microcredit empowers a woman to change her own life using her own creativity and energy so that she can lift herself and her family out of poverty,” says Lauren Evans, Outreach Specialist for Whole Planet Foundation. “When microcredit loans are repaid, they are re-loaned and repaid again and again, creating even more opportunity for a better life.” Currently, Whole Planet Foundation supports microlending projects in 52 countries in the developing world and the United States. The average loan size supported by MFI grants from Whole Planet Foundation is US$239, and loans are used to start or expand home-based businesses. Whole Planet Foundation has committed US$29.3 million to fund microcredit and supports 212,102 microcredit clients through worldwide partners, helping more than one million people worldwide. Ninety per cent of all microcredit clients supported through Whole Planet Foundation are women. “While microcredit is not the silver bullet to end poverty, it is a way to bring sustainable change to our global communities,” Evans says.
José Luis Zárate, Coffee Kids Program Director, says that microcredit loans are a welcome service for many Peruvian coffee farmers, who have limited access to formal financial institutions. “Most people living in coffee growing areas have to diversify their incomes, and microcredit is one option available to them,” Zárate says. He adds that savings are a very important component of microcredit. “It is not enough when a woman has the money to pay back her credit. We believe that the best impact indicator is the amount of money that she was able to save after making a good investment in a micro-business,” he says. Thanks to Coffee Kids Microcredit Education program, which started in Mexico in 1995 and in Peru in 2010, Zárate says families like Larreatigue’s can now plan for their future, send their children to school, and make savings. “The cooperative members are aware they pay a 2 per cent interest on top of their loan, but they know that the loan is actually their money,” Zárate says. “It’ll stay in their hands and they have control of it.” GCR
Coffee economics
Microcredit’s impact in coffee growing communities
