Lessons from a Microcredit Lender #2

Lessons Learned Along the Way #2

Last month, we looked at some macro-issues which need to be considered from the outset to ensure that you are prepare as best as you can be for future unforeseen big changes. While my experience is in micro-credit, the information in these articles has application to pretty much every not-for-profit or charity (often lumped into the term “non-governmental organizations”, or “NGOs”) that venture into the developing world.

The lesson from the first article is “be prepared”. Now its time to “Get Ready”!

The lesson from the first article is “be prepared”. Now its time to “Get Ready”! Lessons from a Microcredit Lender

Preliminary Q’s and A’s

What is your area of focus going to be (micro-credit, health, education, children, etc.)? Keep it narrow and specific. In our case, we chose to micro-provide loans to the poorest segment of women with small businesses in Central America.

In what country will your activities be located? All things being equal, it may be better to select a country where you have some connections operating there, either in your focus area or in business or government. We had several connections on the ground in Nicaragua – a consultant who helped us find our international partner; a lawyer who introduced us to the country and to several key individuals, and one of our directors who operated a business there. If there is a Canadian consulate in the country, that can also be a useful connection. While political upheaval (a “big change”) resulted in our starting in Guatemala, we have now been in Nicaragua doing our thing for the last two years.

Lesson II – Getting Ready

I’m thinking a lead-time of 6-12 months may be needed. It was for us. Read on and you will see why.

There are a lot of things to consider and do before you are ready to meet potential NGO partners in your selected country and to start to raise funds.

Do Your Homework!

You don’t need to re-invent the wheel. When we started Open to Grow, our approach was a repeat of the approach we took with the Kensington Riverside Inn, a commercial venture.

Study and research pays off, big time! I read everything that I could put my hands on that dealt with micro-credit. I hit the Internet big time! I spoke with and cold called anyone that I could find who knew something about this subject. One of these individuals was Steve Rickard, at that time President of the Rotary Action Group on Microcredit (or RAGM). Steve will turn up later in this story.

Go there and ask questions! I volunteered with a charity in Calgary, helping them with research on micro-finance institutions in Central America. During this time, I encountered Dr. Barquero, one of the best micro-finance experts in Nicaragua. Following research done on the Internet, I went to Nicaragua and met with four micro-finance institutions (MFIs), a law firm, several government officials, the association for MFIs in Nicaragua (ASOMIF), and two Canadian businesses. The objectives were to determine whether Nicaragua was a good place for us to start (it wasn’t, initially, but we are there now!) and to see first hand how micro-credit worked. This effort in turn helped when we reached the point where we were looking for donors. We had a pretty good story to tell! This was the same process we went through in starting the Kensington Riverside Inn. While we ended up in Guatemala as a result of a referral from Steve Rickard to Kiva, we are now working in Nicaragua!

Selecting Your Board of Directors

Once I had a good idea of what we were going to do and where we were going to do it, I started looking for Board members. What we learned was that the skills and knowledge needed for a charity or not-for-profit were the same as those needed in a business. We also recognized that our board should have both men and women on it. The areas covered by our Board included business and investment, legal and tax, and accounting and financial. In addition, we added Dr. Barquero as an Advisor to the Board, to provide expertise in micro-credit.

Registered Charity vs. Not-for-Profit

A registered charity is able to issue charitable donation receipts that, in simple terms, allow donors to deduct their donation for income tax purposes. Donations to a not-for-profit are not deductible to the donor for tax purposes. In essence, the donor receives (roughly) 50 cents for each dollar donated. Thus, all things being equal (they never are), a registered charity is the better option due to the tax deductibility of the donation. Donors are also comforted by the fact that Canada Revenue Agency has blessed the charity.

Unfortunately, you will need to retain a tax lawyer knowledgeable in obtaining advance income tax rulings from Canada Revenue Agency. Having such a person on your Board is a great help! Otherwise this can be time-consuming (think at least six months) and expensive. But…as noted above, it has its advantages!

Goal – KIS

It is essential that you have a goal that is short, simple and clear. The simpler the better! The shorter, the better! The KIS principle, “keep it simple”, applies in spades! Ours is pretty short: “Increasing women’s incomes”. This sounds easy to do but it takes time to get it right.

A goal keeps everyone on the same bus and moving in the same direction – employees, board members, advisors, and volunteers. It also makes future decisions a lot easier to make as they must be in synch with the established goal.

A clear goal is even more important where two parties are in a “collaboration” arrangement. This is more often than not the way most charities start – a charity or not-for-profit in Canada working wit an international partner in the selected country of operation. The organizations entering into a collaboration will have different ways of approaching problems, different ways of arriving at decisions (e.g., top down vs. bottom up). If you can agree on the principal goal of the collaboration, a lot of problems can be avoided in terms of how the goal can be achieved. There are many roads to the top of the mountain.

An example. When we started in Guatemala working with Namaste Direct, our goal was the efficient delivery of micro-loans to poor women micro-entrepreneurs. Namaste’s goal was increasing women’s incomes through business training and micro-loans, with the emphasis on training. It took us some time to recognize that while lending results were important to us, what was most important overall was the goal of the collaboration, being ‘increasing women’s incomes”. Life became a lot easier once we understood this!

In Part III, we will deal with being open to all possibilities, differentiating your charity from others, forecasting your revenue and expenses, change, creative fund-raising, and reality in the developing world.

Open to Grow (O2G)

Bob Brown is Founder and CEO of Open to Grow (O2G) which funds micro-finance institutions (MFIs) that focus on women with “micro and small sized enterprises”. We provide loan capital to these MFIs who use our funds to make small loans to their clients in the poorest segment of micro-finance. The clients use these small loans to grow their businesses or, as my mentor Bob Graham says, to “make more money”. Over time, increased business income provides better health, education (e.g., payment of school fees) and housing for clients and their family members as well as contributing to their local economy.

During the past nine years, O2G has made over $2.2 million in small loans to 5,400 women micro-entrepreneurs in Guatemala and Nicaragua, positively impacting the lives of 27,000 people if we include family members.

Bob Brown, Founder & CEO Open to Grow
16 Windsor Crescent SW Calgary, Alberta Canada T2V 1V3 C.
403 804 1120
E. bob@opentogrow.org
W. www.opentogrow.org

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