Tied-Finance Auction

It’s been a while since my last blog post, it has been busy, and then agonizingly slow, often in the same day. So, I haven’t been able to sit down and write something until this past weekend. I will try to upload more pictures later, but our internet has been slow lately and so I’ve only got a few for now.

We began my development project Friday, and I’m very excited about it. After much thought, I’ve decided to post my idea on this blog. It’s going to take some trial and error before I’m really proud of it, but if it can help someone else searching for development ideas, then I need to share it. I wouldn’t have come up with this without the guidance of others, so hopefully people can learn from my ideas as well. It’ll be a while before we see if it “works” or not, and the measurement for success is anything but concrete. Either way, we’re trying to open up ways for people to get out of poverty, and I think this is a step in the right direction.

Tied-Financing, an Auction Approach

Intro:

Many of you are familiar with micro-financing, which is essentially small loans, to poor people with no collateral. They often group these loans, so that you can’t get another loan until everyone in your group has paid back the loan. There are a lot of problems with this; many of the best borrowers don’t borrow because they’re credit is tied to other people, the lender decides the winners/losers, the interest rate is arbitrary, and you don’t really know what they’re going to use the money for.

The Idea:

In order to avoid handing over actual money, I’ve decided to hand over the asset in exchange for debt. Sort of like a car loan, you get $5,000, but it’s to buy a car. This is an example of tied-financing. The people here would therefore get something like a goat, and then owe us money for the goat, and we would avoid handing them cash. To solve the other problems listed above, we instituted an auction, that way the borrowers themselves would decide what the item was worth, and subsequently, what the interest rate is.  We don’t pick who the winners and losers are, we don’t hand them cash, and we can establish credit history with small amounts, and later offer more expensive items to people who successfully paid us back.

Examples from our First Auction:

We had 6 cases of bottled water that went for 51,000 Fc (about $55) for each borrower. It cost us 45,000 Fc to buy. So, since all the loans were for a 2 month period, the borrower is paying an interest of 3,000 Fc/ month to buy the water.

At the same time, we had 5 people buy goats for 20,000 Fc (about $22) the market price was actually around 55,000Fc. So, we lost money on the deal, but the idea is that next time we have an auction people will realize that they can take that goat to the market, sell it for 55,000Fc, pay us back, and keep the rest. Because it’s so easy to do (buy it from us, take it to the market, sell it, pay us back), then people should start to figure out that it pays off to take risks, and that they can be businessmen/women if they want to.

Goals for the Day:

We wanted to teach people how to do some forward planning. For context, these people didn’t really start farming until a few years ago; they would just mine for gold and then import food, even though it rains nearly every day! At the auction, people didn’t want to bid on items because they didn’t need it at the time, even though they could sell that item for 10x as much as the price was in the auction. We’re trying to teach the community something as simple as, if you buy something now for less than you know you can sell it for, maybe you should buy it, and sell it, to buy whatever you want with the profit.

Also, by getting borrowers, we can show that whoever pays us back will be eligible to get more valuable items, and that it is in your best interest to repay your debt. If 5 people pay us back, and 1 person gets a refrigerator for 50,000Fc, and it’s worth 150,000 Fc, maybe the other 45 people should have paid us back, instead of pocking the 30,000 Fc, or whatever it was that they failed to repay.

Conclusion:

                The auction was absolutely fascinating. Items that we bought for roughly the same price, auctioned off for vastly different amounts. We asked, even pleaded with some of them, to just buy an item for cheap, and then go sell it in the market, and they just sat there… It was bizarre. My hope is though, that next auction will be much different, and that after seeing their neighbors making money off of the program, that the community will drive the price up, and the whole program will become sustainable.

Eventually I’d like to introduce other things like mosquito nets, scholarships for school fees/uniforms, etc. Once we’ve seen if it’s effective.

Well, that’s my idea. If you have any questions about how it works, feel free to leave a comment with your e-mail, and I will touch base with you. If any of you have connections to development agencies, micro-finance outfits, etc. Don’t hesitate to share so that I can get some insight from them as well, because if this works like I think it can, it could be the start of something really exciting.

People gathered for the auction

Lining up to see the items on offer

All the items on offer

Items in storage

I learned a lot about people today, and about the community I work with in particular. We’ll see how the second one goes in late April.

Thanks for the support.

Preston

• Auction Approach
• International Development
• Micro-Finance
• New Techniques in Poverty Alleviation
• New Techniques in Third World Development
• Poverty Alleviation
• Third World Development
• Tied-Finance