TradeRelief is now officially operating in Uganda! It has been a long and arduous journey, but we are proud to say that we have finally opened our second office, bringing affordable credit to deserving entrepreneurs. Meet our first borrower:
Andrew Turyamureba from Jinja is a man on a mission. Despite leaving school when he was just nine years old, he’s not willing to live his life in poverty and misery. Operating a bicycle-taxi, he managed to save enough to buy a small kiosk in a local market in 2009, but had to rent it out since he didn’t have the capital to run it himself. A year later he had saved up enough to start running it himself as well as upgrading his taxi vehicle to a motorbike which brings in more income. His wife, Annette, works every day in the kiosk being the more literate of the two with full primary education. When TradeRelief started looking for applicants he seemed to be an ideal case: Not only does he support his own children and his niece, he also sends money for the education of six other children in his home village as well as supporting his parents in their old age. Andrew applied for a loan of 4,000,000 Ugandan shillings (about £1000) to buy a fridge, a popcorn machine and some other equipment for his shop. Ever entrepreneurial, he’s already making plans for his next loan, once he’s repaid the first.
Local bureaucracy permitting, TradeRelief will open it’s second office in Jinja, Uganda, this week! It has been a long and arduous journey from idea to final execution, but this week we will (hopefully) finally be able to say TradeRelief is operating in Kenya and Uganda. This comes at a time when our funds in Oyugis, Kenya are approaching self-sustainability with new loans being entirely financed by recycling repayments from old ones, allowing TradeRelief to direct our limited funds to this new office.
TradeRelief believes in working through and with local people and this office is no exception. Daudi Mutalya, a bright, young Ugandan, recently returned from working in the UK, has gotten together a group of nine qualified people, all heralding from the area and trained in fields as diverse as finance, engineering, hotel management and NGO management, and who will be overseeing the day-to-day running of TradeRelief in Jinja. They realised early on that sometimes the entrepreneurs with the biggest social impact might not be the most financially literate and put together three ‘modules’ that they offer to applicants, free of charge of course, covering issues such as bookkeeping and risk management. This ensures that not only does the borrowers gain financially from the loans but by becoming more financially literate, they will also be in a better position to deal with the issues that inevitably will arise, making their businesses - and thus the jobs - more sustainable. Needless to say, at TradeRelief we’re very excited about this recent development and keen to see this take off the ground. In Daudi Mutalya’s own words: “It’s not a question of whether we can grow TradeRelief here; it’s a question about how to make it grow in such a way that we can maximise social impact while at the same limiting losses.” Full of ideas, he has talked with other NGOs, local councillors and the like to catch a wider net and learn from others; microfinance institutions are plentiful in Uganda, even though few cater to our target group: existing business with the potential to grow from small to medium sized and create employment in the process.
The first borrowers have already been identified and as soon as the paperwork is in order, they will receive their loan. Hopefully, that’ll be within the week, so be sure to check back to read their story once it’s official.
Most often we hear unemployment statistics used as an indicator of a population’s income levels. In most developing nations, however, it is common to work fewer hours than what is necessary to survive or have a job that pays too little. Both give rise to what is known as underemployment; an un-utilised workforce and negative social consequences. These people do not count towards government statistics - after all they do have a job - but are nonetheless not generating enough income to support a decent standard of living. Underemployment is especially common amongst unskilled labourers; in industries like construction, hotels and restaurants, and commercial agriculture it is hard for workers to find enough work during the whole year. Women are more likely to be underemployed than men, since they are less likely to be employed in formal sectors where wages are relatively higher.
While underemployment can also be caused by over-qualification - workers having higher qualifications than available jobs require - in Western Kenya where TradeRelief works, it’s mainly caused by an unproductive labour force - hiring more people wont increase revenue for businesses and wages reflect that. Especially young people struggle to find meaningful employment - while making up a bit more than third of the population, under-25s make up 60% of the un- or underemployed. With 45% of the population below 15 years, there’s no reason to expect that to change any time soon.
Leading financial institutions such as the World Bank and the IMF for many years held the belief that what was required was economic growth; once at a high enough level, the Kenyan economy would absorb the currently-unproductive labour. However, despite growing quite well the last decade or so, weathering both the global financial crisis and the Euro crisis well, but the Kenyan economy has seen a jobless growth. One thus cannot rely on prevailing market forces alone to provide meaningful employment to Kenya’s youth and a targeted approach is necessary. One that seeks to create employment that is not only fulltime but also pays a salary people can live off. At TradeRelief, we try as credit-providers to push growth in sectors that create jobs that are fulltime but not exploitative, well-paid, productive jobs that not only give a decent income but also sociologically enriches a person’s life. Follow this blog, like us on Facebook or go to our website www.traderelief.org for more details on our work and to read case studies on some of the businesses we’ve given loans.
The recent World Development Report for 2013 focuses on jobs which are heralded as the cornerstone of development. This is exactly the kind of development TradeRelief has been promoting in rural Kenya, job creation as a means to end poverty.
TradeRelief insists on seeing a positive social impact from its loans. Social impact, however, is a deliberately loose concept, offering local businesses room to interpret the needs of the community themselves. While most applicants opt for employment generation and sponsorships of orphans’ education, some have been more creative. Here are three examples of what businesses are doing on top of employment creation to improve the lives of people in the community:
One Touch Initiatives is the area’s first cyber cafe and its biggest. In an increasingly online world, One Touch offer computer literacy training and helps ordinary community members access the government’s online portal where increasingly access to public services is to be found. One Touch is building a centre specifically for this purpose, where government and other online services are made accessible to a population generally not very computer literate. What is more, One Touch has plans to operate a mobile unit: a van equipped with computers, printers and internet access to go into the rural areas to connect people further afield. The social benefits arising from One Touch’s operations are thus much larger than the nine staff members currently employed.
Imani Catering Group offers catering and decorations for events such as weddings, funerals and other functions. While employing up to 30 people at a time, Imani has already trained and set lose two groups who have started their own catering companies, and is in the process of training a third. This causes a high turnover of staff and the number of people who has passed through their training programme and on to a sustainable business career is well over 60.
Agaja Electricals installs power lines to rural communities. The company increasingly wins contracts offered by the government parastatal Kenyan Power and Electricals Ltd. to connect the region’s secondary schools to the main grid, so that the students can receive training in computer literacy and have electricity in their dormitories (most secondary schools in Kenya are boarding schools). Once all the secondary schools are connected, Kenyan Power will move on to the primary schools and rural government offices, aiming at electricity for all. While the installations are a source of income for Agaja, the benefits from their business operations extends far beyond the 16 young men and women who has received training and employment from the company.
As the above examples show, positive social impact has many guises and comes in many shapes and forms but always emanating from the businesses interpretation of what the community needs. TradeRelief therefore more of a facilitator enabling businesses to reach more people, while it’s the businesses that actually improve people’s lives.
Improving food security by quitting agriculture altogether.
Food insecurity is a common occurrence in western Kenya and this year is no exception. While average plot sizes are shrinking due to population pressures, the main crop grown in the region is maize which also accounts for the majority of caloric intake amongst the poorest part of the population. Easily stored but comprising almost entirely of starch, maize is not a very nutritious diet and farmers rely on the market for their other nutritional needs outside the two annual harvest seasons.Without functioning market mechanisms for storage or futures contracts, however, local prices fluctuate wildly; the price of tomatoes in the dry season is about six times the price at harvest. Since poor people spend upwards of 80% of their incomes on food, food prices matter a lot for their food security and nutritional status.
You’d be forgiven for thinking that high prices in the dry season reflect low supply and that the solution involves increasing production. However, this kind of approach misses the point: Food security has very little to do with food production and everything to do with incomes. The food is produced, it is there. If high local prices reflected unmet demand, being a market economy with near-free trade with its neighbours and relatively good infrastructure, someone would transport food to the region. But that’s exactly the problem: Western Kenya is poorer than other parts of the country and prices are high in the dry season not because of low overall supply but because of low demand for food stuffs due to high incidence of poverty. People do not have money to buy food and without money in the hands of consumers there is no incentive for others to transport food to western Kenya when demand is both higher and more stable in Nairobi, Coastal, Central and Rift Valley Provinces. Malnutrition thus occurs not because there is no food available in the country, but because people cannot afford to buy the ingredients of a healthy and balanced diet all year round. To improve food security in the region, the emphasis therefore needs to be on getting money in the hands of poor people - raising incomes, rather than increasing production on already small and crowded plots (That’s not to say that there are no supply side constraints: there are, but improved storage facilities for agricultural products would be a better investment than increased production, but that is another issue).
A common characteristic amongst employees of TradeRelief-funded businesses in Oyugis in western Kenya, is that they have recently left the rural areas. Young and semi-educated, they know that they can improve their lives and food security not by producing more food but instead by getting a job and buying food from others. Of course that’s a gamble - getting a job is by no means guaranteed, but the associated increase in welfare from employment is so much higher that many find the gamble worthwhile and as people leave subsistence agriculture and enter the labour force, those remaining in the rural areas will find that the payoffs to farming increase, increasing their incomes and hence food security too. And the employment does increase welfare significantly: Pre-employment, about 75% lived below the poverty line, today that figure is about 30%, most of whom are recent employees.
So what is the takeaway message? If you want to improve people’s food security, the focus should be on providing meaningful alternatives to subsistence agriculture. This is the philosophy being TradeRelief’s work; we provide affordable and tailored financing to businesses that improve employment prospects in the region. You can learn more about our work and read case studies of the businesses we work with here on this blog, on www.traderelief.org or by finding us on Facebook.
Kenyan Banking Practises - how TradeRelief compares.
While perhaps not the most intriguing of subjects, the lending behaviour of Kenyan banks should interest anyone interested in development. The implications for poverty reduction in this context may well be applied to other developing country banking systems - that is, if they exist at all, Kenya has one the region’s most well-developed financial systems; neighbouring countries struggle to even bring bank branches to their people. But despite being one the most sophisticated in the region, the Kenyan banking system has inbuilt mechanisms designed to ensure the banks’ survival, but work to create a number of barriers that keep small and medium-sized entrepreneurs with potential for reducing poverty from accessing meaningful capital:
Firstly, formal banks tend to be exactly that: formal. This means bureaucracy, forms to fill out, procedures to be adhered to, people in suits behind desks and teller windows using difficult vocabulary, detailed information to be provided, verified by records and promises about future behaviour to be kept, all of which can intimidate even the strongest businessperson with little or no education, and whose business and personal life is typically characterised by high unpredictability of income flows and generally bad experiences dealing with formal bureaucracies - corruption is daily occurrence in any Kenyan bureaucracy. That is not to say, however, that poor and lowly educated people do not use financial services, they do, perhaps even more so than the rest of us: Kenyan villages and towns are lousy with communal savings and loan provision setups such as merry-go-rounds, communal saving schemes, table banking, revolving funds, mutual insurance systems, credit extensions to family and friends and widespread sharing of unexpected income. What these grassroots-institutions have in common is that they rely on social ties and trust to enforce behaviour. What they also have in common is that they are small, highly vulnerable to opportunism and theft and will never leave the village setting. Not much help if you are looking for a loan of a certain size to grow a business. The formality and intimidation of the banks thus force many people to rely on inefficient and small-scale financing options which in turn limits the size of the business and its potential positive impact on the community.
Secondly, if a small- or medium-scale entrepreneur does manage to overcome the formalities and intimidation of bank bureaucracies, the conditions placed on loans are strict and largely impossible for such entrepreneurs to fulfil. It is common practise for Kenyan banks to demand at least one guarantor, collateral worth 1.5x the loan amount, offer loan durations of maximum one year with no grace period and hence high monthly repayments, charge hefty fees and interest rates, require additional savings and most importantly, to not tailor the loan to the individual business; the bank dictates the loan conditions, take it or leave it. Effectively this means that unless you have a rich friend or relative willing to back your business, title deeds of some property and enough cash to pay fees, interest (often charged upfront) and the first instalments before the investment starts to pay off, you wont qualify for a loan. Under these circumstances, if an entrepreneur is able to repay such a loan of a meaningful size - i.e. big enough to increase the revenue generating capacity of his/her business - it is questionable whether he or she needed the loan in the first place or if the capital could have been acquired through savings within a reasonably short period of time. What is more, small and medium-sized businesses are characterised by highly volatile income flows, and therefore especially need space in their budgets to have a bad month without being delinquent or defaulting. High and inflexible instalments are the opposite of that and can drive poor people on the edge into poverty. This kind of loan is not the financial service that will reduce poverty in Kenya, and they certainly won’t help the economy grow. Furthermore, the way interest rates in Kenya are quoted are incredibly misleading to anyone without a degree accounting and finance. While in most countries like the United Kingdom, US and Canada, there are strict rules for how interest rates should be stated - to enable consumers to compare like with like - there is no such thing in Kenya. Banks generally understate the interest charged on a loan by not accounting for management and account fees, savings deposits and the fact that the loan is paid back throughout the loan period but continue to calculate interest as though the full amount is still outstanding. A quoted interest rate of 20% is therefore, when all this is accounted for, easily an effective rate of easily more than 50%! Unless you know you way around the jungles of paperwork, you wont realise that you are in fact paying a lot more that the figure quoted.
Thirdly, banks do not look at social impact, i.e. how many people are actually affected by the loans in a positive - or negative - way. In order to benefit the wider community and reduce poverty, the loan must to be invested in such a way that jobs are created, new services provided and backward linkages to suppliers strengthened. There is nothing guaranteeing that a loan to a business entrepreneur, regardless of the size of the business’ size. will change this person’s life or that of others for that matter. If poverty reduction is the objective of the loan, financial soundness is only one of two criterion said loan must fulfil, the other being verifiable and positive social impact. The formality and inflexibility of bank loans in Kenya thus ensure that the very entrepreneurs who need their capital the most - and who could have the biggest social impact - cannot readily access it, and that therefore much poverty reduction potential is not realised.
What about other microfinance institutions (MFIs) you might ask? Surely they are more flexible and concerned with poverty reduction. In Oyugis where most of TradeRelief’s clients run their businesses, there are two other MFIs: Kenyan Women Finance Trust and Adok Timo. While both officially MFIs, both have similar loan conditions and charge similar fees and interest rates to the banks - and quote them in similar, misleading ways. The main difference is that they do not have the strict collateral requirements that banks do, but in terms of the loan conditions there is not much difference: Loan duration is still a maximum of one year, there is no grace period given, interest is usually charged upfront, loan sizes are restricted to typically three times size that of existing savings, new saving accounts must be opened and paid for and monthly deposits made - which in effect increases the monthly instalments even if they can withdraw that money later. Furthermore, Oyugis has seen its fair share of MFIs opening, accepting deposits with the promise of future access to loans, only to suspend loaning operations, ever increase requirements or outright disappearing with depositors’ money. Entrepreneurs are, understandably, wary of engaging with MFIs that require savings over long periods time before credit is made available.
At TradeRelief we pride ourselves in tailoring the loan conditions to the individual business to have the biggest possible social impact. Looking at each business’ historic and predicted future revenue, cost of doing business and fixed expenditures, we create loans for sound businesses according to what the businesses can manage. We do not require savings deposits nor collateral and charge minimal interest, hence we take on most of the risk from any given loan. We minimise this risk by selecting loans that are financially sound and used to acquire tangible, revenue generating assets while at the same time have demonstrable social impacts. Not that it’s a big deal really, it makes good sense if you are trying to reduce poverty through business finance to make loans big enough to be meaningful and to set conditions so that the loans actually boost and not hinder the businesses’ growth. The businesses will do the rest.
In Kenya public school is free up to primary standard 8, that is 8th grade. Post-primary education, however, can be prohibitively expensive for many poor families for whom annual tuition fees of Ksh 12,000 (£90) are out of reach. With limited education, job opportunities for young men and women are few and competition fierce. Many young people, boys in particular, leave the rural areas for the bright lights of the big cities, but although slightly better, the chances of landing a job there are still slim.
Isaiah Omomsi Oiiemd, 47 years old and himself a standard 8-leaver, is improving the chances for such young people within their communities. A trained carpenter, he started Lamisa Furniture and Fittings in a small town in Western Kenya in 2006, and assisted by a loan from TradeRelief in 2011, he has been able to employ three young men with no post-primary education, train them as carpenters and give them a decent salary. When time allows, he also trains two other youngsters free of charge. In the long run he hopes to start a workshop-cum-training centre for school dropouts: “[when I] finish this loan, I’m thinking to apply for 500,000 shillings [£3800], have a good, very big workshop, a complete workshop with the machines and whatever… Then I can try to train some of the school drop-outs, because there are some drop-outs who are not able to go to secondary [school], they can’t go to high technical schools, but you can train them locally then they get a future. That’s my vision.”
Three jobs might not seem to make much of a difference, when thousands are needed in that district alone. Three jobs, however, touches the lives of many more people indirectly. Take Joseph, 17 years old and the youngest of Lamisa’s employees. He lives at home with his parents and two older and three younger siblings. His father is a boda-boda-driver (a sort of bicycle taxi, where the passenger sits on the rack), his mother is a subsistence farmer and his two older brothers work as brick-makers. Joseph left school after standard 8 because his parents could not afford the tuition fees for secondary school. He now earns 3500 shillings a month, sometimes more when business is good. The rest of his family brings home less than 7000 shillings a month, so through employing Joseph, Lamisa has increased the whole family’s income by more than 50% and Joseph’s 16-year-old brother now attends secondary school. The impact is also not just financially. Equally as important is the sense of pride and self-worth Joseph gets to take home every day. With a huge smile on his face, he explained how he had been able to buy two chickens for the family; “I am the one that bought them.”
Isaiah (right) with two of his three employees in front of his workshop in Sikri in Western Kenya. Joseph on the left.
Past decades have seen microfinance heralded as the answer to global poverty. Capital constraints was believed to be what’s holding poor people back; all natural entrepreneurs, give a poor person a loan and they’ll not only start and grow their business exponentially and repay your loan plus interests, they’ll also never need your assistance again since they now have a sustainable source of income. The reality however, is not so simple. While shown to have tremendous potential in some settings (Professor Yunus of Grameen Bank fame reports his clients lift themselves out of poverty after an average of 10 years from receiving loans), others have found that microfinance has at best no effect on the incidence of poverty and at worst, drive poor farmers to suicide. Lately, critique has come from a new angle: not all poor are entrepreneurs, able and willing to run a business. While credit restraints are real and severe in developing countries, insisting that everyone start a business might not be the way forward because frankly, not all have what it takes to run a business. Many microentrepreneurs in poor countries are so not out of love for their work or special talent within a certain trade, but due to lack of other options. Blindly extending credit to every business owner, therefore cannot be the most effective way of reducing poverty regardless of repayment rates. In fact, surveys have shown that many poor people dream of being ‘Employed’: the ticket out of poverty is often believed by the poor themselves to be the elusive, steady 9-5 job with a predictable and secure income, a pension and maybe even a health insurance. The problem, for the majority of the people living on less than $1.25 a day - the international poverty rate - is that these jobs are very hard to come by.
This is the rationale behind TradeRelief’s approach to poverty reduction: Microfinance has potential but the emphasis should be on job and not business creation, and we target our loans to businesses with large social impacts. We believe that the naturally talented entrepreneurs will manage to set up their businesses despite the obstacles and that capital injections will have the biggest social impacts when given at a time when a business is looking to expand on a proven concept. This also means that we tailor the loan to the individual business in terms of repayment schedule, interest rate and grace period. Since starting operations in 2006 in Oyugis in Western Kenya, more than 15 such loans have been given, creating more than 40 jobs in an area where employment opportunities are few and far between. And the impact doesn’t stop there. For every job created, children, wives, husbands and parents also benefit from the increase in household income. 40 jobs can thus easily impact 200 lives. That’s not even counting the time and money most businesses receiving loans from TradeRelief voluntarily donate to charitable causes within their community: many sponsor widows and the education of orphans, provide free vocational training to youths or donate to churches and orphanages.
TradeRelief is run entirely by volunteers and can therefore keep operating expenses at a minimum. This ensures that interest rates are kept low, normally the loans just about break even when accounting for inflation. Loans sizes are typically less than £3000 ($4800 or €3800) and are recycled within the country indefinitely. TradeRelief operates through local community based organisations to ensure that the loan receivers are genuine and that repayments are regular. We require accurate and detailed records for a year prior to loan disbursement and expect the business owners to be financially literate enough to come up with a sound business plan as well as sending monthly business reports. While many business owners in the region have the option of going to a commercial bank or another microfinance institution, TradeRelief is unique in its insistence on social impact and job creation as well as financial soundness. Since we set our interest rates to only cover loss from inflation, TradeRelief relies entirely on donations to expand its operations and fund the increasing number of applications in Kenya and other countries (new offices opening soon, watch this space!). Should you wish to make a donation to TradeRelief, you can do so here.
If you’re interested in learning more about TradeRelief and our approach to poverty reduction, have questions or wish to start a partnership with us, please visit our website, find us on Facebook or send us an email at firstname.lastname@example.org .