A Different Kind of Borrower
9 March 2010 at 05:50 Peter 12 comments
By Peter Marchant, KF10 Azerbaijan
In the Bilasuvar Region of Azerbaijan a number of Kiva borrowers live in semi-permanent settlements for internally displaced persons (IDPs) who fled their homes during the war between Azerbaijan and Armenia that followed the collapse of the Soviet Union.
An IDP settlement in the Bilasuvar Region of Azerbaijan
Many of these borrowers have a principal source of income unrelated to their Kiva loan. They work as teachers and accountants or receive a pension from the government. Incomes ranging from 100 Azerbaijan New Manat (AZN) to 250 AZN per month cover some basic staples, but not much else. For these borrowers, a loan provides a chance not to increase cash flow, but to diversify household consumption.
They purchase cattle, sheep, fertilizer, seeds and other productive assets that require a high initial investment, but provide milk, cheese, yogurt, meat, fresh vegetables and other benefits over an extended period of time.
Because borrowers with another source of income could save to make these purchases rather than borrow, it can be difficult to see how this type of loan makes a borrower better off, so here are some numbers:
A typical borrower might take out a loan of 1,000 Azerbaijan New Manat (AZN) to buy two cows. AqroInvest charges 3% per month on a declining balance basis, resulting in monthly payments of about 85.00 AZN for 15 months. Over the life of the loan, the borrower pays about 275.00 AZN in interest. That is 275.00 AZN more than they would pay if they saved 67.00 AZN every month for 15 months and then purchased the cows.
Dividing 275.00 AZN by 15 months, we find that it works out to about 18.00 AZN per month. In other words, if the net benefit of owning the cows is greater than 18.00 AZN per month, then the borrower is better off taking out the loan. If the benefit is less than 18.00 AZN per month, they would do better saving the money rather than borrowing.
The value any one borrower derives from their livestock depends on a number of factors, but in general, one liter of cow milk sells locally for about 1.00 AZN and a small cow in a bad mood will still produce at least three to five liters of milk per day. Doing the quick math, that is 40 to 75 liters a week, or somewhere between 170.00 AZN and 280.00 AZN per month, far above the 18.00 AZN they need to recover the interest expense. Clearly, the borrower benefits from taking the loan. Even if they aren’t selling the milk, they derive equivalent, or greater, benefit from it (otherwise they would sell it) and thus are better off taking a loan than saving for the large capital purchase of the cows.
While not driving the principal source of household income, these loans increase quality of life and financial and nutritional flexibility for the working poor. Kiva loans don’t need to fund businesses to have an impact on poverty.
Peter Marchant is a Kiva Fellow serving his first placement with AqroInvest in Azerbaijan. Click on Azerbaijan Borrowers for a list of Azeri borrowers currently on Kiva or check out Supporters of Azerbaijan to join the Azerbaijan lending group.
Entry filed under: KF10 (Kiva Fellows 10th Class). Tags: Aqroinvest, AqroInvest Credit Union, Azerbaijan, Azerbaijani microfinance, Azeri, Kiva, kiva microloans, kiva.org, microfinance, Peter Marchant, www.kiva.org.
1. Judy | 8 August 2010 at 16:28
I’m still working in gallons, but a good Holstein will produce 10 gallons of milk daily. Take a look at my comment on the Bovine blog, and you’ll see that cow benefits are about more than milk!
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5. monicahamlett | 10 March 2010 at 07:00
You explain these so clearly, I love reading your blogs.
6. sidetrips | 9 March 2010 at 20:38
Sometimes capital is compared to a catalyst, which spurs profit-making processes while remaining unchanged in order to spur other processes later. In this case, the capital reminds me of an infusion of lifeblood. The capital is also returned (from a salary or other source of income), while the ‘profits’ may be less obvious yet just as desirable in the long run. Is it essentially social entrepreneurship in the home?
Anyway, it’s great to see blogposts like this one, which fills in the micro-lending picture where it’s been sketchy in my mind.
7. Fehmeen | 9 March 2010 at 13:00
the margin is high enough to cover costs of feeding, medicating and housing the cow
8. Doug Muzatko | 9 March 2010 at 09:41
Peter, this piece could replace most Micro-Economics and Money & Banking text books!
Great photo. It conveys either man with an unlimited future (thanks to Kiva), or a man with nothing on the horizon.
9. Antoine Stépane Terjanian | 9 March 2010 at 07:27
Thank you Mr. Marchant for offering a different perspective on Kiva borrowers.
The situation of Internally Displaced Persons (IDP) everywhere in the world is undesirable and I have seen in Armenia some of these 400,000 IDPs : Armenians who survived the Sumgait and Baku pogroms instigated by the Azeri mob before the Soviet Union collapsed. You are to be commended for going into these areas of Azerbaijan, which are obviously left purposely in dire circumstances, while Azerbaijan is an oil and gaz exporter.
I do not dispute that borrowing money to buy a cow to produce milk for household consumption is a beneficial activity. However, I have a problem with your calculations:
1) If as you say the Azeri cows produce 3 to 5 liters per day, even if we take the maximum in that fork, how can they produce 40 litres per week. Do Azeri cows work 8 days per week?
2) You state very correctly:”if the ‘net’ benefit of owning the cows is greater than 18.00 AZN per month, then the borrower is better off taking out the loan”, yet you only seem to compare the imputed value of the ‘gross sales’ (not/NOT the ‘net’ benefit) resulting from the milk production to the 18.00AZN per month. Do Azeri cows live on pure air and false propaganda alone? Or do they also need some feed, veterinaryand housing expenses and labour?
Mr. Marchant, these comments are made tongue-in-cheek, please do not take them personally, no offence is meant. I am grateful that generous souls like you volunteer to go and help the poor in foresaken places around the world. Best wishes and keep it up!
AST
10. Peter | 9 March 2010 at 09:32
Antoine,
Tongue in cheek they may be, but they are good points. My hypothetical here involves two cows and I rounded to 40 liters. There are certainly some other costs that I did not include. However, veternary costs are minimal in comparison (perhaps 10-30 AZN per month) and in the IDP camps, cattle and sheep can graze on public lands for free. In any case, I don’t think any of these borrowers are clearing 280.00 AZN a month from their cows. I just didn’t have the info to go into more depth.
The plight of both the Armenians and the Azerbaijanis affected by the conflict is indeed tragic. Let us hope that the future will be brighter on both sides of the border.
11. Antoine Stépane Terjanian | 9 March 2010 at 10:27
Thank you for correcting me Peter (and doing it so gently). I had not noticed you had written ‘two’ cows in your hyppothetical example. Apologies and thanks for the kindness.
When someone gets the time to do a full analysis, with all the necessary data and technical coefficients, I would be interested to see how someone who borrows at 3% per month can repay the loan.
Best rgds
AST
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