Show Me The Money – Where Do The Profits Go

13 03 2009
Some of the borrowers I have met in the field

Some of the borrowers I have met in the field

As I was visiting the MFI clients in the field, the borrower would often proudly annnounce that he or she was on their 5th loan… or their 7th loan… or even on the 9th one. Although this does show an impressive credit history, something about it was bothering me.

Before coming here, I had a few assumptions about what a business loan is all about. I pictured a budding entrepreneur who borrows money to purchase supplies or to expand inventory. They pay a relatively high interest rate (say, over 30%+ per year), but it’s worth it because it gives them a boost in their business. Without that loan, they’d either never have an opportunity to grow or it would simply take a very long time.

When the entrepreneur is done paying off the loan, he or she – hopefully – has a higher revenue stream, along with a bigger take-home profit. So far, so good – this is what I’ve been seeing among the borrowers.

But then, I imagined that they take the extra profit and plow it back into their business in order to take it to the next level. However, the reality on the ground was quite different than I expected.

Instead, many borrowers were using the increased profits they made as a result of a loan for personal purposes. One client fixed up their house. Another one used the money for a wedding. A third decided to put in a row of gold teeth. All valid uses. After all, the whole purpose of micro-finance is to help people increase their standard of living and all of these things do that.

But the thing that wasn’t adding up was that the entrepreneur was going right back to the MFI to take out an even larger loan and continue to pay the 30%+ annual interest on that money.

The big question that I’m struggling to answer is why aren’t the borrowers using the profits – that are interest-free – and putting it back into their business first? Granted, this would mean postponing the immediate benefit of using the money for consumption. But over the long haul, it would yield them a much better return and more opportunities to improve their standard of living, as they would avoid paying the interest. At 30% per year, that’s a significant amount in savings.

It’s difficult to put oneself in somebody else’s shoes and make a decision on what’s more important – a roof that doesn’t leak and a loaf of bread today or a two-story house and three loaves and a kilogram of beef next week. I don’t have the answer to that.

But there is even another caveat to the story that made me think. As I spoke to the borrowers, it turned out that most of them rarely kept any sort of a financial document where they’d record how much they made, how much they spent, and so on. All of this was kept in their heads.

While that may be sufficient for day-to-day operations, without a historical record, it becomes very difficult to project how much money one could make by funding the business using the profits rather than debt. As Bob Parsons, a self-made millionaire, once said – “everything that’s measured, grows.” Perhaps, the opposite is also true.

What do you think?




12 responses

14 03 2009

Boba, if you ever answer that questions, you’d find a solution to all problems of modern capitalism. Why doesn’t an assembly line worker get some training in marketing? Why are kitchen workers in a Chinese takeout place not going to a culinary school to move up in life? Why doesn’t the bazaar stand owner try to turn it into a supermarket chain?

Some British explorer traveling through India or China 150 years ago would give you the answer right away – because these people are not as clever as we are and not as industrious. He would put some sand into a skull of a black man and declare that his brain is clearly smaller. Thus, we, the Europeans, as a better ones have the right to exploit the rest.

If you think things have changed drastically since then, you are only partially correct. We no longer come to the conclusion that people around the world should be exploited just because we are stronger. Modern science has helped us see that our brains are pretty much the same size. However, the supporting premise is still the same. We are doing much better (clearly, just look at our GDP, PPP, two cars in the driveway, big screen tvs, etc) and thus we have some secret sauce for success. If only the rest of the world could learn to be more like us, everyone would be so much better of. Isn’t that the premise behind economic development? Bringing undisputed benefits of global capitalism to all corners of the world. For micro finance, it’s the idea of bringing the undisputed benefits of financial capitalism. Ultimately, an attempt to remake the rest of the world after our own image.

There is just one problem. Not everyone thinks in the same way you do. In fact, most people around the globe, and to a lesser extend in the West, don’t think like you. They are not interested in growing their capital or having 5 cows instead of 1. In fact, it takes a pretty twisted mind to even come up with the concept of infinite accumulation, something we accept as a given.

As I said, come up with the answer to your question and you’ll save capitalists all over the world from their sleepless nights.

14 03 2009

I think you may have gone off a bit off topic here.

Whether the spread of capitalism is the right think to shove down other people’s throats is a whole other question.

When a person takes out a micro-loan, he is already indicating his desire to be included in the market economy. So, in this instance, he wants it.

Furthermore, by taking out a loan, I think we can safely assume that he’s interested in increasing his material possessions and well-being.

But yes, I do often wonder the answer to this question: ” Why doesn’t the bazaar stand owner try to turn it into a supermarket chain?”. Maybe not to that degree, but I have a similar train of thought.

Heh – it’s funny. I kind of realized that most of my posts on MF has been pretty critical of it. Most other fellows on the official Kiva blog have been singing praises. That’s your influence, my friend.

14 03 2009

Well, I disagree about my points being irrelevant. Just because these services are used doesn’t mean they are necessarily automatically a good thing. Subprime mortgages were widely used. Does it make them a good idea? Does it mean that people brought the current issues on themselves for applies for these mortgages? Just because a bazaar stand owner applied for a small loan, doesn’t mean she automatically subscribes to a capitalist ideology or the principles of financial economics. I’m pretty sure she’s not even aware of them.

Capitalist theories of economic development are predominant today but that doesn’t make them right just because most people believe in them. Once all people believed the Earth was flat. Then they believed in mercantilism and the fact that monopolies were a good idea.

In economic development, the World Bank and the IMF change their policies every time there is a crisis. They did so in the 70s and they are doing so now. Prior to the crisis in the 70s, the focus was on full employment and industrialization by the government. Since then we had the Structural Adjustment Programs and the need to open up markets, no matter the social impact.

And I don’t think there is anything wrong with being critical and thinking for yourself. You should make up your own mind based on what you see on the ground, not on the praises you hear from other people.

14 03 2009

Boys, boys, boys … you are both missing the point to some degree … life isn’t always or only about economics, and in these cases, it may not be about economics at all. Let me try to explain what I mean.

Boba … you said that “When a person takes out a micro-loan, he is already indicating his desire to be included in the market economy. Furthermore, by taking out a loan, I think we can safely assume that he’s interested in increasing his material possessions and well-being.” … wrong. You cannot presume that taking out a microloan means someone wants to be included in the market economy — they just want to buy another friggin’ cow! The market economy side of things may not factor into it — they just want another cow to make money for that upcoming wedding.

What needs to be considered is the fact that cultural forces are almost always going to trump economic forces for people in this situation. They may secretly want to become the largest seller of sneakers in town, but if they pursue this goal and don’t sponsor their daughter’s wedding the way their culture expects, they will suffer in ways that have little to do with money. It is cultural imperialism and snobbery at its worst to assume that your clients are missing the point by using the proceeds from the increase in business (that the microloan has made possible) to fix the leaky roof or pay for the wedding INSTEAD of plowing it back into the business. One thing I learned once I left the comfortable Western world is that one cannot judge another culture’s choices on the basis of what a Western capitalist would do. Even if we agree that people would be better off in the long run by doing what we consider the “right” thing, it may destroy centuries of cultural traditions that are responsible for keeping the fabric of society together during times of trouble as well as wealth. Economic systems come and go, but cultural traditions last much, much longer, for some very good reasons.

My final point — surely even in the most capitalist parts of America you find businessmen who do not automatically plow back any profits into the business. In fact, most probably don’t. Not everyone, even if they are good capitalists, is driven to always keep expanding … some are content with the success that lets them enjoy a certain standard of living and they concentrate their efforts on maintaining that level of security while also enjoying the fruits of their labor. And I’m almost positive that there are an awful lot of women in the US who would be pretty pissed off if their husbands told them they had to live with pots and pans catching water from their leaky ceiling because he needs to put every last penny of profit into building up his Weiners-R-Us hot dog stand. Not to mention his daughter when told there is no money for her dream wedding because he needs to complete this incredible deal on bulk mustard that will last until the year 2050. At least, I wouldn’t want to live next door to him if that was the case. Plus, people pay almost 30% in credit card interest as a matter of course in America … so how can we assume that the high rate of interest should be resulting in different choices when we ourselves don’t adhere to such lofty standards?

Of course, I am overwhelmingly not economics-minded and I’m sure there are many economic theories to counter my ideas on how culture may trump the entrepreneurial spirit. But just as Andrey gives good advice when he suggests making up one’s own mind and not worrying about sounding critical if the situation demands it, I advise not to close your mind to the importance of factors other than just economics influencing how people live their lives and how they choose to use the resources they have — money is not always the most important thing. After all, you can’t eat it and it won’t keep you warm at night …

15 03 2009

Good point, Frances. Besides culture, another factor worth keeping in mind is history. Our ideas on investment and entrepreneurship have been shaped by simple factors you take for granted, namely unprecedented peace, stability and the rule of law. Given the recent history of Tajikistan, with the collapse of the USSR and the 5 years of civil war (which I’m sure is still fresh in most people’s minds), do you think an average person there will have the same views on his/her long-term perspectives? My guess would be no.

Look at what is happening in the States now. Who is thinking about the long-term growth these days? Millions are worried about what they will put on their family table tomorrow and the rest are likewise worried about getting their pink slips come Monday morning. As a result, there is no investment, not thinking about the long-term. There is just now since the future is uncertain. In my opinion, this is probably as close as Americans have come to feeling what much of the world is feeling every day, at least this generation.

15 03 2009

“Not everyone, even if they are good capitalists, is driven to always keep expanding” – but if that’s the case, why do they keep taking out additional loans? These entrepreneur do want to make more money – they may have enough to survive, but I strongly feel that most of them have a desire to make more.

“They may secretly want to become the largest seller of sneakers in town, but if they pursue this goal and don’t sponsor their daughter’s wedding the way their culture expects, they will suffer in ways that have little to do with money.” – that one is actually quite true. A good example of it would be the weddings to which people had to invite (and pay for) hundreds of guests. It could put the family in debt for years, but it would’ve been worse to have your neighbors talk behind your back about having a small wedding.

“It is cultural imperialism and snobbery at its worst to assume that your clients are missing the point by using the proceeds from the increase in business (that the microloan has made possible) to fix the leaky roof or pay for the wedding INSTEAD of plowing it back into the business.” – well, I never claimed that fixing the roof is wrong. Quite the opposite. But since they often go right back for a new loan, it just seems that they are leaving a lot of potential money on the table by thinking short-term.

But Andrey, I think, was correct in saying that our own ideas of long-term are shaped by our own environment. The civil war and uncertainty is definitely fresh in everybody’s minds, so their view of long-term is different. Plus, I also agree that what’s happening in the States is a good example of how the perception/viewpoint can change.

16 03 2009

Boris, please don’t get the idea that we’re ganging up on you (well, Andrey MIGHT be). I know I came on a little strong there with the “cultural imperialism and snobbery” crack — which wasn’t directed at you personally but at a whole mindset that Westerners have always found it easy to fall into. I could say work is making me crabby, but it’s really this damn toothache I have. I kept trying to come up with nicer words to say what I meant, but failed.

I wonder what would happen if the loans were conditional upon increased profits being plowed back into the business? I know that would be impossible to document in reality, but I wonder if the number of repeat loans would drop if that were the case? May be a way to test the strength of cultural traditions versus the entrepreneurial spirit. Of course, then some poor girls would have a half-assed wedding, others would be up all night emptying pots full of dripping rainwater, while the men would just say, “leave me alone, let me drink my beer, I have to work 15 hours tomorrow to pay back the MF(in’) loan.” Doesn’t sound too different from life in western capitalism 🙂

16 03 2009

hey boris! don’t worry, i had the exact same question. I don’t believe it’s economically rational to take out multiple loans, given the very high interest rate that MFIs charge. that said, it’s sort of like maxing out your credit card to pay for an extra pair of shoes — plenty of Americans have done it. that doesn’t make it a fiscally sound decision, though, and even if we don’t want to be culturally imperialistic and assume that every business should be profit maximizing, i do agree in the basic premise that if someone was going to be in business at all, that they should be loss-minimizing.

Here in Senegal, some women take out multiple loans even when they have a decent savings cushion. THAT I don’t get.

I always like your posts — yes, lots of the other fellows posts are strictly pro microfinance, but i suspect that will change somewhat over time as people get more field experience and the honeymoon period ends, though the heartwarming stories are the ones that keep the lenders comin’ back. But I’m with you. My next blog post is going to be called “Porter’s Five Forces NOT at Work” — I think you’ll appreciate it 😉

– Liz (KF7)

16 03 2009

Boba, don’t argue with the woman who can speak Aztec, or was it Maya, Frances? 🙂 Whatever the case may be, we can all learn a thing or two about the dangers of Eurocentrism. If you understand the point of view of the people you are trying to help, instead of prescribing them your own economic solutions, you’ll be well on your way to actually helping them in a tangible, meaningful way.

As John Stewart Mill, the imperialist $#%^ that he was, once wrote: “Mankind are greater gainers by suffering each other to live as seems good to themselves, than by compelling each to live as seems good to the rest.”

16 03 2009

John Stewart said that? 🙂

17 03 2009

Borya, do they pay tax on their profits? ))

18 03 2009

Yes, I know Aztec, which BTW is the first language of about 1 million people living in Mexico, and for many of those, it’s their only language. My spoken Aztec is a little rusty as we don’t have much call for that on Vancouver Island 🙂

It’s great that you are getting to know some people outside of the MFI. Just tell me, please, that Andrey’s reading material doesn’t have anything to do with the topic of the second discussion group you attended … ha ha

Surprisingly, I easily found this bike tour of Tajikistan scheduled for later this year …. a little pricey but maybe you could take out a microloan for it? Just kidding … about the microloan that is. Here’s the link — looks kinda interesting and starts right where you’re at, but I know you’re off to another posting before you’ll have time for this kind of adventure (

Jon Stewart = John Stewart Mills? Someone is turning over in his grave!

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