I attended two meetings of rural associations in Chacraseca, Nicaragua, an 8,000 person collection of rural communities outside of Leon. I have only just started to scratch the surface of microlending, but have a few questions. At first, I thought that business lending in a community association is a tricky business. The interplay between economics and wanting to help your community members proves to be a delicate balance. The associations charge only 2% interest per annum on their loans to community farmers and business owners. This rate is great for those getting the loans. They want to help more farmers. But with such a low interest rate, they miss out on several opportunities.
But I don’t think that is an accurate picture. I was talking with Justin Trezza, a Director of Sustainable Harvest International, a non-profit that helps set up sustainable farms in developing countries. We realized that microlending to farmers is much different than microlending to, say, someone who runs a stand in the market. The repayment period is much longer in the case of the farmer. The upfront costs are more substantial and income generation takes months, if not years, from the time the loan is closed.
My question is, how does a rural lending association grow its capital base when involved in low-interest lending? Are there other lending activities the association can pursue both to diversify their portfolio and to grow their capital base?