The Columns

New W&L Microfinance Club to Give Small Loans in Developing Countries

— by on February 11th, 2010

Spurred by a course on development economics, three students and a faculty member are turning theory into practice by starting a microfinance club called The General Development Initiative at Washington and Lee University.

“Microfinance is basically private development assistance that provides small loans – hence the word ‘micro’ – for people in developing countries who don’t have access to credit,” said Jim Casey, associate professor of economics in the Williams School of Commerce, Economics, and Politics. “With as little as $25, for example, you could invest in someone buying a pig and that, in turn, could have an enormous impact on the person’s community. At the same time you can expect a return on your investment, so it is not charity.” The usual rate of return for investors in microfinance projects is between four and six percent.

At first the new club will raise donations that will be invested directly in microfinance projects they have identified, concentrating on helping communities in Central and South America. When the investment returns, usually after one year, the club will reinvest its profits and the original donation in another suitable recipient.

“We will be looking to build credibility and establish a small financial record,” said Ben Ersing ’12, an international politics major with a minor in Latin American studies. Helping him to establish the club are Cailin Slattery ’11, a math and economics major and Jarrett Brotzman ’11, recent winner of the Schlegel Prize for International Studies.

Ersing said that once the club has shown that it has continually re-invested the money it raises, “then we can use that success as a platform from which to pursue large scale donations from foundation grants and private individuals.”
Fundraising won’t be the club’s only activity. It will also have committees that focus on promotions, grant research, writing grant proposals as well as managerial positions that focus on short- and long-term goals.

The aim is to attract students from multiple disciplines, including business, finance, accounting, environmental studies, Latin American Studies, the Shepherd Poverty Program and women’s studies, to name a few. Ersing’s interest is research and development. “You have to find out which communities could be potential recipients of microfinance loans. That involves a lot of background information on the economics, politics and climate of the region. How could we impact them and are they a viable option or not?” he said.

Ersing said that once the club has a large enough capital base, the long-term goal will be to create a non-profit microfinance corporation of the same name. “That will evolve over time,” he said. The corporation would set the interest rate and time period for both recipients and investors, and would be open to all individuals to invest.”

What will separate W&L’s corporation from a typical for-profit microfinance bank will be the educational component. The aim is to create an experiential learning tool that is created, owned and operated primarily by W&L students. This, in turn, will drastically reduce the overhead costs of running the corporation and, since the staff will be non-paid students, the lack of salaries will make up for any potential financial shortfalls.

Ersing has already started work on the corporation, which will be legally responsible to the state of Virginia, but there’s still a long way to go before that ultimate dream can be realized.

The idea for the General Development Initiative began in Professor Jim Casey’s development economics class. He had always included a service-learning element in the class, but in 2008 decided to expand that to include microfinance. Initially, it was to be a theoretical experiment whereby the students would learn about microfinance, go online and hypothetically choose to whom they would make their loans.

But the students had other ideas.

“They amazed me,” said Casey. “They went online and found families and entrepreneurs in developing countries and gave them some money. They did a presentation on the last day of class and said, ‘Here’s the family I invested in. I loaned them $50 to buy a bicycle or some farm animals.’ I think the students did it because they became passionate about the idea and were moved by the power of how little things can change someone’s life, and how that can lead to other massive changes. It was a small part of their grade, so from that standpoint there wasn’t a huge incentive. I think it says a tremendous amount about their character.”

In 2008 the class made 30 loans totaling approximately $1,200 to people in 13 different countries. In 2009 they raised $800, which they will distribute soon.

Casey explained that, strictly based on the literature and empirical evidence, women with children are the best recipients of microloans. They are more likely to invest money in children and the overall welfare of their household and this is particularly true for women who have stated that they want to keep their children in school rather than working in the fields.
Ersing is sure to bear that in mind during his research into potential loan recipients. “Microfinance provides individuals with a means to an end and prevents lack of finances from being a hindrance to personal development,” he said. “It’s definitely something that allows people to make a better life for themselves and their family.”

For further information about development economics, read Casey’s blog General Development at http://generaldevelopment.blogspot.com/