New at PlusPlus: lending to farmers through a microcredit institution
Written by Peter Heijen on 13 July 2022
PlusPlus has something new. This month you can lend money to farmers via a local microcredit partner. An indirect loan, so to speak. Why is this different from a direct loan? And what are the advantages and disadvantages? Our CEO Peter Heijen explains....
Until now people could only give direct loans on PlusPlus.nl. In other words, a loan transferred directly to the company of your choice. So why does PlusPlus now also offer loans via a microcredit partner?
Peter: "PlusPlus wants to create jobs in developing countries, that's our mission. In those countries there is a lot of poverty, especially in rural areas. Employment there comes from the agricultural sector, but most farms are very small-scale, with less than 1 hectare of land. These farmers need small loans, for example of 1,000 euros or even less. For PlusPlus this is not possible to finance, the amounts are too small. But small loans like these are important, they make a direct difference for the farmer and his or her family. That is why PlusPlus supports many cooperatives in which groups of farmers have joined forces. Through such a cooperative, the member farmers can have access to finance after all.
But you can also reach small-scale farmers through a microcredit institution, a so-called MFI (micro finance institution). They specialize in providing small loans to their individual clients. Because they have sufficient scale they can do this in a cost-efficient way. For farmers who are not members of a cooperative, that is their best - and usually only - option for financing. For PlusPlus, though, it has to be an MFI for the agricultural sector, that services farmers. Now, we have found that."
What other requirements does a microcredit partner have to meet in order to work with PlusPlus?
Peter: "In order to work with PlusPlus, the MFI must in any case operate 100% in rural areas. They also must have a clear social objective. We don't want to work with commercial MFIs that ask their clients for high interest rates in order to make a lot of profit. In certain countries there are MFIs that charge interest rates of more than 50% to their clients. We do not want any of that. Their profit motive must be zero or very limited.
With microcredit, the costs are high. All those small loans need to be managed, records kept and repayments monitored. That costs money. But with enough scale, a microcredit institution can do this cost-effectively and keep interest rates low for their clients.
Moreover, many MFIs have a social business structure. This means that it is legally stipulated that profits are shared with the target group. Our new partner CLECAM is a good example of this. This microcredit institution was set up by 2 farmers' cooperatives and their members, the farmers themselves, are all shareholders. When CLECAM makes a profit, that profit goes back to the farmers.
Finally, the MFI must have financial stability. It must be an experienced institution that has proven that they can do this. If a microcredit institution meets these conditions, then for PlusPlus it is a very efficient way to reach many rural farmers. It fits well with our mission."
A loan through a microcredit partner is an indirect loan. What are the main differences between a direct and an indirect loan?
Peter: "The disadvantage of an indirect loan is that it is more expensive, because there is an organization in between. But sometimes that is the best way to reach more people. Often, it’s actually the only way. Just ask a farmer in, say, Uganda how they can borrow money. If they can borrow money at all, it is not from a bank, but from a local microcredit institution.
The advantage is that with an indirect loan the risks are spread more. With a direct loan, you choose who you lend money to. If that person is unable to fully repay the loan, you lose money. Because an MFI has several outstanding loans, they can spread their risks and better absorb any losses. This also applies to losses due to exchange rate differences. Sometimes, as with CLECAM, the risk of exchange rate loss is borne by a large donor. If the exchange rate is unfavorable, the costs are not borne by CLECAM or their clients, but the donor compensates the difference. That offers extra security. For the partner itself, for the farmers who borrow from them, but also for PlusPlus investors who support the project."
Does this mean that PlusPlus is going to offer this kind of indirect loan more often?
Peter: "Yes that is possible, but only if the microcredit partner meets our conditions. If that is the case, then it is a nice, additional way for PlusPlus to make even more impact."