Practitioners
We have much to learn from each other, as practitioners, about how to deliver comprehensive, ethical and transparent microfinance programs in Canada. And better we learn from each other, than each learn individually from the painful mistakes with our members and clients. This microfinance wiki is a place to share those lessons and build a community of practice. It could also be a resource centre to aggregate or point to other material, already developed and being implemented. Please use this section to point to other resources out there!
What We’ve Learned the Hard Way
The Community First Development Fund of Saskatoon started in 2000 as a venture among churches, business, labour unions and nonprofit social activist groups to reduce poverty in the city of Saskatoon. We support other non profit groups, scholarship activities, and assist individual entrepreneurs to start sustainable businesses that create employment and economic development to the community. To date we have leveraged more than $4 million for various businesses and assisted with business planning, and making connections for some 80 clients in various ways. We have directly supported the startup of eight businesses that were ineligible for regular bank loans for lack of collateral, by providing loan guarantees. And this is where we’ve learned some hard lessons.
Lessons from the dark side of micro finance
Dark as in defaults on loans we’ve guaranteed. Three of the eight projects we guaranteed failed. That left the organization to pay a total of $96,000 out of our loan loss reserve to the credit union that had lent the money based on our backing. Let’s explore cases A, B and C and note the lessons learned from them.
Case A. This was CF’s first project. A man who wanted to set up a video production business came to us. He was from a marginalized group in the city and was persuasive. We backed a loan of $17,000 which he used to buy new video equipment including camera, software and an editing machine. We did little monitoring but when he stopped making payments on his loan, we started to help him find filming assignments. He kept promising to go but never did. After chasing him down a few times (he was never in contact with us and often was unavailable by phone) we asked the credit union’s collection people to assist us. The CU staff person suggested checking pawn shops for the equipment. We did and there it was. But before we could get the collections department out to seize the equipment, the pawn shop sold it on eBay. We were left having to pay out the loan, by now risen to over $23,000. It turned out that the individual had pawned the equipment pretty soon after acquiring it.
Lesson 1 - Character is an important part of the lending puzzle, perhaps the most important. While CF wanted to work with the disadvantaged in our city, we didn’t take the matter of trust seriously enough. Our naivete cost us.
While we knew our clients would have spotty records in terms of borrowing and paying back, we should also ask for character references and probe more into their personal history of honesty. Charming people can be a problem.
Case B. A man from an ethnic group wanted to open a grocery store selling spices and specialties from his cultural group. We guaranteed a start-up loan, and then more loans. He moved locations twice, without letting us know. He received huge amounts of mentoring, including from professionals we obtained for him, and used up a lot of staff time in our attempts to help him succeed. But he was inconsistent in opening the store. He didn’t keep regular hours and customers became discouraged when they would return and find the place locked. He had a nonprofessional approach to his business. He would have his wife and her newborn baby at the store to run it, even though she was originally not part of the business loan or plan. He was always threatening to default and used this as a club to get a direct loan from CF to help buy more inventory and to have us intervene with his landlord when he wouldn’t pay the rent. Eventually he was closed more often than open and became hard to reach, using his wife as a communication buffer between CF and him. Community First’s loan loss on this business amounted to over $43,000
Lesson 2 - Mentoring the correct way. CF wanted to keep a close eye on this business in view of our failure from the year before. But in so doing we started to do the entrepreneur’s work. We took responsibility for things he should have done. We helped organize the grand opening and media events, suggested new sales avenues and where to advertise, ran interference for him with the credit union and his landlord. Again, character was part of the problem since people from his ethnic group later told us they would not shop at his store. But also CF created a monster as step by step he turned the responsibility back onto us. He was like a willful child who knows how to dress himself yet convinces the parent to do up the buttons and tie his shoes. As his wife became a bigger part of the business, CF did not adjust or require her name on the loan or her presence in meetings between us and them.
We weren’t the only ones fooled by them. After his grocery store failed he had his wife take out a loan and they opened a video store, which also failed after a year.
Case C CF’s recent loan loss of $30,000 came with someone we knew and with whom we had worked on a successful project the year before. The project planned to train at-risk youth from marginalized groups in trades and computer skills. The loan applicant had big plans and applied for money from the federal government, a slow process. To keep momentum going during the four months before the federal money arrived, he applied for a line of credit. While he said $25,000 was the minimum he needed, CF’s board enthusiastically raised the line to $50,000. For the first 6 months things went well. CF had a person with a financial background who kept in regular contact. Then the main person in the project took his eye off the ball and started working on other projects and was often away. His staff was left responsible for running the trades training project and they lacked his experience. They misspent money putting it into sideline projects that weren’t in the business plan and that lost money. Also, the federal government refused to pay for certain things that he expected it would. When the project ended its run there were some big debts. CF worked for years making arrangements to ensure repayment. The business struggled and eventually folded, but the entrepreneur personally guaranteed he would pay back the line of credit. He ceased making payments, while still assuring he would repay. After eight months of promises, he finally defaulted. Meanwhile the interest was building on the line of credit and CF paid $9,000 extra because the board believed the man would pay when he was just dithering.
Lesson 3 - With a volunteer, community-based board, inertia becomes a problem. While CF had set up a monthly meeting and visited the project often, we did not intervene when the key man started to disappear and left underlings in charge. When we felt uneasy with the situation we should have moved sooner and harder, pressing for more oversight. Then when the payments on the line of credit stopped coming, CF was cozied into believing this person. If we had let less time build and had immediately marked this as a loss, we would have lost less money. We needed to trust our gut on this.
Lesson 4 - Be careful with government funding situations. The government was calling the shots and micromanaging months after the fact in this project. Items had been pre-approved, purchased, such as screws to build tables, and weeks later the federal bureaucrat disallowed them and refused reimbursement. CF was also in the position of taking federal money under the Western Economic Diversification iniative. It required us to start up a certain number of businesses and in our haste to meet that mark we wanted to believe that this project would succeed when the danger signs were there in the entrepreneur’s absence.
Lesson 5 - A lot rides on the main individual, the entrepreneur. If he or she starts being absent, hard to get hold of or falls ill, then the business can be doomed. In another business we ensured the entrepreneur bought insurance which carried loan payments when the person was injured and unable to carry on as before.
Lesson 6 - Board makeup. It is important to have some level-headed people on the board, the skeptics who will ask questions and temper the enthusiasm of others. Businesspeople can really help here since they can see problems before they arise and suggest solutions or different ways of trying things. It also helps to have someone with accounting skills either on the board or willing to assist. Other useful skills are a legal expert, someone who knows politicians and someone skilled in computers.
