Capital Machinery

[Guest]

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[BigSteve]

I am thinking about the long term impact of these loans. I wish more of the loans were for entrepreneurs to buy capital equipment. Sewing machines or something. I mean I want more from kiva's effect after a year to be that there are now 10 more grocery stores with better inventories in a given town. I know I can choose what loans I prefer to fund but it seems that the majority are simply to buy inventory. I'm not an economist but I want the effect to be to uplift the whole country we lend to, not just move things around. It seems so many of the loans are so similar, for inventories of shoes or clothes. Thoughts?

[Sherri]

I've thought about this too. However, I think that the loans for equipment like this would be much larger, and from the perspective of the borrower, would have less immediate pay-off. Ie- the inventory they can buy in bulk, and see immediate returns when they sell it shortly after. That is money they can use right away to improve their lives and their family's lives.

But, if they buy a sewing machine for example, they then have to try and increase their customer volume in order to make use of that new piece of equipment. More difficult and therefor risky. Though, I have seen borrowers who's business is more established, invest in equipment- because they know they are on a pretty solid footing, they can take the risk to buy a new piece of equipment or upgrade existing ones. For example one of my borrowers used the loan to buy a tractor. I do love to jump on those kinds of loans... including ones for renovating shops, buying fridges, shelves, etc.

But, that said, I can understand why so few loans are for these type of capital investments. My hope is that after several short-term pay-off loans, an entrepreneur will then be secure enough to try something that is more geared to long term improvement of the business.

[RichardF]

Hi BigSteve, great topic! 

My first reaction about this was that microfinance is on a continuum of economic development.  It focuses on helping people who do not have much, if any, access to mainstream financial services.  The stronger a business, the more likely it can absorb the costs of capital equipment.  On the other hand, turning over inventory will tend to to have a bigger bang for the buck - the law of diminishing returns hasn't kicked in much yet for low income business owners.  Although relatively inexpensive equipment like looms and sewing machines, or even small vehicles, are not outside the bounds of microfinance, going for much more than that starts steering people toward commercial banks.

I like to go to the CGAP website to track down more background info on topics like this.  Here's an item that speaks more to this continuum and where microfinance tends to put its efforts.  Capital investments are on the high end of the microfinance scale.

Who Are the Clients of Microfinance?

"Microfinance clients are often described according to their poverty level - vulnerable non-poor, upper poor, poor, very poor. This can obscure the fact that microfinance clients are a diverse group of people – and require diverse products..."

[Soriak]

As Sherri mentioned, these types of investment tend to be far more expensive. The loans would take far longer to pay off - maybe up to three years. I don't know if lenders would be willing to dedicate their money for such a long time and assume a higher risk, maybe Kiva could float a few trial loans and see how they do.

The loans would also come with a higher risk though. A sewing machine getting stolen would really hurt the entrepreneur who would still be liable for the loan. Access to micro-insurance would be vital for this to work, but that's probably even harder to find than a loan.

That being said, I'd love it if Kiva could come up with a way to let us offer insurance. They have the connection to MFIs and there's nothing more natural than for them to offer this service on top of the loan.

It could work like a loan with multiple people pitching in to insure the full amount. The money would then be held either by Kiva or the MFI. At the end of the term, we get the money back - like any normal loan - plus maybe a share of the insurance premium.


I'd argue insurance is just as important as a loan - if not more so. It's very hard to plan in advance and decide to make investments when there's no way to protect what you have from fire or theft.

[waywardcats]

Hi BigSteve and welcome,

I think the answers from Sherri and Richard are terrific.  In addition, I would suggest that you read the blog post from Isadora Tang in Cambodia here: http://fellowsblog.kiva.org/2008/06/01/is-impact-impact/
And this one from Felix lamb in Viet Nam:  http://fellowsblog.kiva.org/2007/11/19/from-vietnam-2/

I mean I want more from kiva's effect after a year to be that there are now 10 more grocery stores with better inventories in a given town

At the low end of micro finance, where many of Kiva's borrowers can be found, there are not 10 grocery stores in their "town".  Some are in or near the city, but many are in villages where they have the only store around.  Some of the market places are miles away from many of their customers.  Kiva's effect is real because it provides a leg up to purchase inventory which may already be sought after, but cannot be provided without up front costs.  When a loan provides those extra funds, the resulting profit can make a huge difference in these families lives.  It can be hard for us in the West to really comprehend the level of poverty that these individuals live in every day.  For me personally, I would prefer to lend to someone who's life will be impacted in the way that Duc Lihn's life was improved.

I hope you find the type of loan that touches you.

-Kerry-

[Jan & John]

Terrific subject guys... I have funded a sewing machine and a loom but mostly shoes and food etc...

Wouldn't it be wonderful to get a journal update that said....'this borrower has reaped a benefit from this loan and enjoyed success in their business.  They now have enough collateral to borrow from xxxxxx bank in the future.  Thank you KivaFriends for the hand up'

I like to dream that this is happening somewhere - we just don't hear about it

I feel my/our job is to help reach to the bottom where folks are daily struggling for their very lives.

jan
oops - Hi Steve 

[redstarr]

Sometimes there are group loans that might be a bit more like what you have in mind.  Like I have one I'm in on that is a group of ladies in Bolivia that used to sell used clothes, but used our loan to band together and buy the machinery and materials needed to start sewing school clothes and backpacks themselves to sell (much higher profit margin than the resale clothing).
 http://www.kiva.org/app.php?page=businesses&action=about&id=44188

Also, I often see some of those types of loans from groups of ladies in Pakistan where the money is going to buying manufacturing equipment for a really interesting variety of products.  

I would definitely try starting my searches by looking at group loans if I were you.  There's going to be a lot more appealing loans for you in those.  And a chance to make a big difference in a lot of people's lives.  Group loans are often a little slow to fund, as some lenders prefer the individual loans (often better pictures and more detailed descriptions, the higher level of feeling of connection, often a lower total loan amount ,etc).  But I think that there are a lot of group loans out there that might actually suit your interests better than the typical individual loans.  

Oh, and Welcome!   

[cpbailey]

I like the equipment loans, but some of them require a skill set.  If the entrepreneur doesn't know how to sew or drive a tractor (heck, they probably need to know maintenance, too), then a small store or restaurant is more accessible.  What I do like about grocery stores is that food is a necessity.  As long as the prices are reasonable and there isn't an oversupply of grocery stores, then there should be a steady business.  My worst case scenario would be to have a WalMart move into say a town in the Yucatan, Mexico.  That would put a huge dent in many area little grocery stores which would then become like a 7-11--for emergency purchases and convenience.  The other considerations are that people can acquire food for their family at wholesale prices, and in emergency the store's inventory can float their budget for food.

I think people go into what they know already.  I guess I know food as many of my loans are for food!

Colette

[waywardcats]

I like the equipment loans, but some of them require a skill set.  If the entrepreneur doesn't know how to sew or drive a tractor (heck, they probably need to know maintenance, too), then a small store or restaurant is more accessible.

Good point Collette.  Also, tractor need gas, which may not be available in all areas.  So many would need to buy a tank set up to provide it themselves.

Here as an example is a nice loan in Senegal for a group to build a restaurant!

http://www.kiva.org/app.php?page=businesses&action=about&id=52259&_tpos=2&_tpg=1

There are definitely loans out there for you BigSteve!

[Sherri]

Here's one of my borrowers, who is using the money to buy a tractor-plow. I call that a great investment!

http://www.kiva.org/app.php?page=businesses&action=about&id=37058

[RichardF]

Of course, it's always fun to do some searching on Kiva loan listings by key words. 

• equipment
• tool
• machine
• sewing machine
• loom
• tractor
• auto
• bicycle
• motorcycle
• oven
• stove
• and on and on... 

[RichardF]

Here's a telling story on the economy of scale.

Ernesto Baez Ernesto comments that he has dedicated to the same activity for 26 years. He sells polyethylene bags of all sizes. These bags are used to carry merchandise at small grocery stores, supermarkets, pharmacies, etc. He told us that first he proposed to manufacture those bags and bought all the machinery and equipment that he was going to used to make them. Nevertheless, it was more feasible to buy and sell them directly from the wholesaler. He decided then to sell all the machinery and equipment that he bought.

[cpbailey]

OK...here is a way to stretch capital equipment concept.  When one buys machinery, it is a large purchase and then used over time.  However, it needs to be maintained!  If we like equipment, then keeping equipment running should be a secondary funding source.  But repairs of vehicles is not particularly popular which doesn't make sense.  Repairs protect the initial investment.   The one time sewing machine purchase may require an annual bulk purchase of material for making school uniforms.  So one sewing machine, and maybe 15 years of material purchases.  The hotdog cart is one time, but bulk hot dogs, buns and fuel may be a couple times a year. 

Soooo here are some loans for you!

Auto-rickshaw in Pakistan
http://www.kiva.org/app.php?page=businesses&action=about&id=51849&_tpos=4&_tpg=1
http://www.kiva.org/app.php?page=businesses&action=about&id=51858&_tpos=6&_tpg=1

Dominican Republic--Repair sewing machine and buy material.  (I am so psychic)  Why buy a new machine if the old one just needs a bit of work?
http://www.kiva.org/app.php?page=businesses&action=about&id=51780&_tpos=11&_tpg=1

Paraguay--convert some of his house to rental rooms.
http://www.kiva.org/app.php?page=businesses&action=about&id=50209&_tpos=12&_tpg=1

Cambodia--repair motorbike for business
http://www.kiva.org/app.php?page=businesses&action=about&id=51660&_tpos=14&_tpg=1
http://www.kiva.org/app.php?page=businesses&action=about&id=51780&_tpos=11&_tpg=1

These are just a few.  Repairing house for occupancy is a major personal capital asset, important to protect that as well, but I think the direction of this is more income producing.

Colette

[waywardcats]

And here is another good one:

Mexico:
http://www.kiva.org/app.php?page=businesses&action=about&id=52894&_tpos=f&_tpg=h

"My business is the sale of food. I have already more than 2 years with the business. This business is the source of income for my family since I am a single mother. Thanks to God the business goes very well in sales. All that I lack is furniture and to have more variety of foods. That it is why I request a loan of $1,000 to buy furniture (chairs and tables and utensils for cooking)."

I really like seeing a loan description in the first person!!

-Kerry-

[BigSteve]

Appreciate all the replies and perspective. As suggested above, if we look at one individual, and their family, the results are delightful. The other perspective is, looking at a longer term and the whole country, have we simply created a country with better inventories of shoes and clothes. I agree though that if a village can create a local grocery store then they avoid having everyone have to spend time money and energy travelling. Just somehow trying to improve the long term

Good point about the cost and term of capital equipment. Need to think of more examples of some kind of micro-capital equipment. Sewing machines. Maybe, sacks of special hybrid seeds. Farming or food processing tools. Maybe someone can have a water purification business. Or perhaps there are new building technologies that make buildings that last longer. Perhaps its asking a lot for an investment to be payed back quickly and simultaneously give benefits for 10 or 20 years. I just want to leave also a legacy of efficiency and durability for the entire country.

My take is kiva is putting an emphasis on establishing the foundation of a high current repayment rate, and this seems reasonable. Maybe the other long term perspective is that as entrepreneurs create a strong micro-credit-history the kind of expansion I contemplate becomes possible.

I will follow up on the suggestions and contribute to some of those loans you mention (if they aren't already fully subscribed).

[redstarr]

Here's one that's still funding for buying computerized equipment for making dairy products
http://www.kiva.org/app.php?page=businesses&action=about&id=51665&_tpos=17&_tpg=1

[cpbailey]

BigSteve,

I like to think that the biggest investment microloans affords is the investment in the next generation's education.  Almost every family in every country seems to voice a goal of educating their children.  After food, shelter and medical care comes education.  It is hard to see or quantify what education does because the results are seen so much later.  The ultimate capital investment for the future is children...

If the way to educate a family's children is a small grocery store so that maybe the next generation can teach or be a doctor, that is a fine thing in my mind. 

Colette

[waywardcats]

Here's another one that might appeal to you BigSteve...

http://www.kiva.org/app.php?page=businesses&action=about&id=50513&_tpos=7&_tpg=1

The description reads in part:

Lending to poor women creates a cascading effect that brings social and economic benefits to a whole family, and thus to the entire community. What is more, the sense of belonging to a group gives these poor women the energy and motivation to reach success.

[RichardF]

Don't forget Sero Lease and Finance Limited (SELFINA)!

"SELFINA has taken a lead role as a pioneer of micro-credit in Tanzania through Micro-Leasing, with particular attention to widows and young girls. Customs and traditions in Tanzania normally make it difficult for women to own land and assets.

PRODUCTS AND SERVICES

• Financial lease which feature is to enable borrowers even without credit history and collateral (as is the case with women) to access the use of capital equipment or other items.
  Examples of lease equipment offered by SELFINA:
  Agricultural Equipment: power tillers, maize milling machines, animal feed mixers, sunflower oil extraction machines.
  Catering equipment: coolers, freezers, refrigerators, cookers, etc.
  Tailoring equipment: manual and electrical sewing machines, embroidery sewing machines, overlocks, chain stitch machines, handlooms, etc.
  Secretarial equipment: photocopiers, computers and printers, typewriters, etc.
  Other equipment for nursery schools, carpentry, handicrafts, water pumping, office cleaning, transportation, etc.
• Sale and leaseback facility
• Social Security facility"

[ericmtl]

(first post, hi there ! English is not my main language)

Both go hand in hand.

Machinery without material bought wholesale (at a sufficiently low price) to feed it will result in razor thin margins and ultimately business failure.

The goal of microfinancing loans might not be to finance 10 groceries in the same place, but a way to bootstrap 1 or 2 that will then be strong enough to do business *without* the need for microfinance, that's one way our action can have lasting results.

Buying wholesale is even more important in remote areas, where entrepreneurs often have to repeatedly travel quite far to buy a small amount at a high price. When all costs are added, they end up paying way more, and that directly hurts the bottom line, and final outcome of their business.
Here is a good example of this :
http://www.kiva.org/app.php?page=businesses&action=about&id=52229

When I fund capital investment, it's usually to support and enhance an existing activity. A good example is Ali Al Jaafil from Lebanon:
http://www.kiva.org/app.php?page=businesses&action=about&id=44411

Since there are frequent electricity brown outs (that can destroy freezer/fridge compressors) and cut-offs (background: http://www.irinnews.org/Report.aspx?ReportId=76455 ), buying a generator makes perfect sense, establishes a more solid foundation for his business and will give him peace of mind as he won't be at constant risk of losing his stock whenever there is a few hours power loss.

In the end, the person(s) making the loan, guided by the Kiva Partner who accepts the loan are the most able to know exactly his/her needs, and since we're willing to trust them with our money, we should trust their judgment.

[cpbailey]

Eric,

Your English is great.  No need to apologize in advance for English which is at least as good as many who only speak English!

Great post!  It is well thought out.  Oh, yeah.  Welcome to this forum...

Colette

[wthepoo]

  to KF, Eric!

Take care,
Wolfgang.