Solidarity Lending Helps Women in Paraguay Achieve Autonomy

Sources: Jameel Jaffer, Microfinance and the Mechanics of Solidarity Lending: Improving Access to Credit through Innovations in Contract Structure; Solidarity Lending Bolsters Community Development

Influenced by recent Nobel Prize winner Muhammad Yunus’s concept of micro credit, the Paraguayan non-governmental organization CAMSAT (Health for All Mutual Aid Center) organized the Área de Créditos Solidarios (ACRE) credit program, a solidarity lending program, in 2000. Catholic priest Pedro Velasco established CAMSAT, which has operated for 17 years in Bañado Tacumbó, one of the poorest neighborhoods of the Paraguayan capital of Asunción, in order to provide training and organize activities aimed at the elimination of poverty in this community. Though the official rate of poverty in Paraguay is 38%, CAMSAT’s 2006 census indicates that at least 85% of the more than ten thousand residents of Bañado Tacumbó are unemployed. Among the residents employed in the formal economy, only one-tenth earn the official minimum wage of US$ 240 per month.

Currently, approximately 750 families are members of CAMSAT. In exchange for their monthly membership fee equivalent to three U.S. cents, family members are entitled to medical care including low cost pharmaceuticals, tutors for children, a soup kitchen for children, and skills training for adults. In addition, CAMSAT offers micro credit through ACRE to 650 local individuals. ACRE loans carry an annual interest rate of 1.6%. In contrast, loan interest rates in Paraguay are generally regulated by the country’s Central Bank, which sets annual rates in the range of 20% to 25% for banks and 25% to 30% for finance companies. Moreover, other types of loans available to the poor in Asunción sometimes charge predatory interest rates of up to 30% a week, effectively precluding repayment.

Typically, banks and other financial institutions do not offer loans to the very poor, or they require collateral, guarantors, and paperwork the poor cannot supply. ACRE, however, neither demands specific requirements nor expects signed documents from its loan applicants. Father Velasco explains that the only prerequisite for an ACRE client is personal commitment. Even with this approach, ACRE enjoys a 97% repayment rate. Quotas are paid off weekly, according to what each borrower can afford. As the initial loan is paid off and the borrower builds a strong repayment history, the line of credit can grow.

ACRE uses a solidarity group lending model. Under this approach, the initial micro credit loan of US$ 60 is dispensed to groups consisting of five borrowers. Each member of the group gets a discrete loan over which s/he exercises exclusive control, but the group structure affords various incentives. Co-members may exert peer pressure on one another or may feel yoked to one another through collective group responsibility and shared social, moral, religious or cultural values and norms, thereby ensuring repayments. Members of the group are from the same neighborhood, may have personal ties, and are familiar with one another’s financial situation, not to mention the idiosyncrasies of the local economy and the future prospects of their co-beneficiaries’ respective projects. They are in a unique position to screen and monitor one another. In addition to these financial incentives, the group structure may also serve as a sort of broadcasting mechanism through which health and other information of relevance to the poor may be disseminated.

One initiative to come out of the ACRE program is the Bañado Poty bakery. Run by a local women’s organization, the bakery was initially set up with a US$ 100 loan to purchase raw materials. Now, the bakery has 19 employees, most of them women, and produces between 600 and 800 kilograms of baked products per day, supplying more than 90% of Bañado Tacumbó food stores, with revenues of US$ 8000 per month. Because the women employees work in their own neighborhood, they are able to care for their respective children. The bakery’s coordinator reports that the initiative has had other positive impacts on the lives of these women: the women are more aware of their rights and of gender equality.

ACRE has grown from 30 solidarity loan groups to 130 groups, and currently moves about US$ 60,000 per year. The program has developed thus fair without any outside aid, covering its own administrative costs, maintaining the flow of credit, and absorbing any unpaid loans through the funds derived from the 1.6% interest rate. If an institution were to provide ACRE with money so that it could loan US$ 200,000 per year (equivalent to more than 1 billion guaraníes) to 300 solidarity loan groups, CAMSAT projects it could use the profits earned to expand into housing programs for the poor.

For discussion: Should governments in developing countries create incentives for commercial banks and financial institutions to make donations to solidarity lending programs like ACRE? Should governments allocate parts of their budgets to such programs?