> Posted by Danielle Piskadlo and Jeffrey Riecke, Senior Program Specialist and Communications Associate, CFI
In Iraq and Afghanistan, about 23 and 35 percent of people live below the poverty line. Both countries have microfinance industries, though they’re small and financial inclusion rates are low. In the effort to combat these low levels of inclusion, an unlikely financial service player, the U.S. military, is using the principles of microfinance to optimize fund dispersal by local ground commanders in order to strengthen communities in conflict areas.
Charkh, Afghanistan
We recently become aware of this military effort when contacted by a group of West Point cadets interested in learning more about microfinance. In the conversation we learned that U.S. military ground commanders in Iraq and Afghanistan each receive about five thousand dollars a month to allocate as they see fit toward development projects in the local communities where they are posted. The money can go towards public roads, schools, medical clinics – projects contributing to community rebuilding and reconstruction. These allotments from ground commanders are part of the Commander’s Emergency Response Program (CERP) developed in 2008. Currently, ground commanders don’t have specific guidance on how they should allocate these funds so they often rely on suggestions from village elders, who the cadets recognized are sometimes biased and self-interested in the projects they recommend.
The cadets are therefore working to develop a portfolio optimization template – based on the principles of microfinance – to guide ground commanders on how to allocate their CERP funds as microgrants to help raise the standard of living within local communities. The project objective is to enable ground commanders to allocate their funds as loans to small-businesses, entrepreneurs, and individuals, facilitating income growth, economic development, and community strengthening. The template is modeled after microfinance practices because of similarities in distribution methods found between microcredit loans and the financial aid provided by ground commanders through CERP funds.
The cadets identified economic development and stability as important goals for the military that in impoverished regions help to reduce the number of people attracted to extremist behavior. Ideally, utilizing this financial support in the form of microgrants to start and grow businesses would help mitigate the extremism that often results in regions of conflict, violence, poverty, and instability. Using CERP funds to provide microgrants is a grassroots way of helping to kick-start economic development in areas where the microfinance sector is otherwise nascent.
To design the tool, the team is utilizing historical microfinance loan data on dimensions including return on investment, loan size, and intended versus actual loan use, and reaching out to members of the microfinance community.
According to the MIX, Iraq’s lending portfolio is about US$ 143 million across 66,566 borrowers. Afghanistan’s US $136 million across 251,846 borrowers. For comparison, the nearby Azerbaijan microfinance industry has US$ 3.2 billion in loans and 792,666 borrowers. Iraq and Afghanistan have populations of roughly 33 million and 30 million, while Azerbaijan is about 9 million. Financial inclusion in Iraq is at about 11 percent, and in Afghanistan 9 percent.
There is a need for available capital in many conflict countries where U.S. military ground commanders have capital and microfinance providers are scarce. Whether the military is in a position to act effectively as grantors is a question that remains to be seen. Regardless, if ground commanders continue dispersing funds within impoverished and unstable communities where MFIs are not present, and employ the principles of microfinance in doing so, that seems to be an advance for both the military and microfinance communities.
Image credit: isafmedia
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April 4, 2014 at 2:26 pm
erhyne
It is a terrible idea for the military to give out loans. This is not an economic development strategy; it is a “make them like us” strategy, and recipients will see it for what it is.
Loans are the worst because a loan from the military puts the military in the awkward position of collector, or is patently understood by the recipient not to need to be paid back. Grants are not quite as bad because they don’t involve collections apparatus.
A much better strategy is for the military to support reputable microfinance institutions who are building solid operations that are run on a businesslike basis, with the financial role of the military as far in the background as possible. There are a number of good candidates in Afghanistan, which have been supported by the U.S. government over the past decade.
April 4, 2014 at 4:37 pm
Susy Cheston
I agree! My husband’s cousin has served several tours in Iraq and was most proud of the work his unit did building a well in a village that sorely needed one. It was a great morale booster for the troops and a good PR move with the local community. However, this gets into longstanding questions of the role of the Defense Dept in development (a political issue in the United States). When dealing with microfinance, it gets even more complicated by issues of who can appropriately give out loans. Organizations that run into conflicts of interest include not only the military but also churches and other religious institutions and governments.
April 5, 2014 at 9:52 am
John Gitau
This post is difficult to understand. What I have understood is that the US millitary is borrowing from the principles of microfinance to optimize funds dispersal by local ground commanders in order to strengthen communities in conflict areas. The military is not in any way intentionally trying to combat low level of inclusion. Borrowing a knife to cut meat doesn’t make one a butcher.
It is clear that the military’s objective is to allocate microgrants to development projects. Then the post proceeds to state again that the project objective is to enable the ground commanders to allocate funds as loans to small businesses, entrepreneurs and individuals. Is it an attempt to convert the microgrants into microloans? Are we trying our luck too much to recruit military into financial inclusion? I wonder how bees tell plastic flowers from live ones. Oh, it is smell just like people in conflict areas can tell that the military are killers involved in live saving efforts. Until guns start to shower!
April 5, 2014 at 10:55 am
Susy Cheston
John, as usual, your comments and questions are right on target, and your analogies make the issues come to life. Note that this is not a case of the financial inclusion community seeking the military’s involvement, but rather the military seeing that microfinance is a good thing and wanting to use it as a tool. I don’t fault them for that and it’s certainly appropriate for them to turn to experts to learn more. I don’t think the people behind this have nefarious intentions. I am certain they want to do good and since they are smart they want to learn how to do it right. But it’s still a bad idea for them to do it on their own rather than partnering with a local MFI.
April 6, 2014 at 5:14 pm
liz
The article does not really explain the business model of this program. But, it does clearly state that the US military is giving GRANTS, and not loans. Community grants have been a part of reconstruction efforts for a long time, within the US military and other countries’ militaries. The cadets should be applauded for wanting to better their community grants program by understanding what else is going in in the world. I find this very interesting.
April 7, 2014 at 3:08 am
John Gitau
Thanks Susy for your comment and coming to the sitting room. What I would say is that, just like the village elders lobby for the projects of their interest to get grants(of course to benefit their people and better their territories), the microfinance elders should lobby for their entrepreneurs, small businesses and individuals facilitating income growth to get the same grants. I am wondering why microfinance elders(ourselves) should suggest that the grants be converted into loans and offered to our people. It doesn’t sound wise. Sample this: The cadets have come to us and with humility are saying, ” Esteemed elders of microfinance industry, we have been watching your distribution of microloans and we think your distribution model is perfect. We want to borrow a leaf from your industry to help us distribute our microgrants better and more efficiently. Please teach us how you do it” And we, the microfinance elders in our wisdom respond to the cadets ” Thank you for your compliment young men and women. We are humbled by your interest in how we do things. What we suggest you do is convert those grants into microloans and give to our people. You see, our people are small business owners, individuals and some are good entrepreneurs. If you give them the microloans, they will help in achieving the objective you have of faster development. Don’t worry about the conversion as we shall teach you how to calculate interest, return on investment, loans sizes and how to detect those who want to borrow to do business and those who want to borrow for consumption”
You can imagine the shock on the cadets’ faces wondering why the microfinance elders want their people to be charged for what is free. They are trying to figure out in their military heads why loans would accelerate development faster than grants. They are wondering whether there is an assumption on our part, that grants amounts will increase when converted into loans. They know for sure that under CERP, each general is entitled to $5,000 a month.
Imagine after the session, when the cadets are going back to base, who they will think is wiser; the selfish elders who want their projects favoured or the microfinance elders who want their people charged for the grants?
To the cadets I would say ” young people, your desire to innovate is admirable. You are doing a good job bringing the old generals up to speed in the digital era. But, don’t be foolish to assume that the pipeline that microfinance uses to distribute water to its people can be used to distribute your milk. It doesn’t matter if it is to the same people. Unlike water, milk has a finite self life(liquidity notwithstanding), not unless part of your mandate is to sell milk and yoghurt at the same time. Converting grants into loans is poisoning the chalice. You don’t want to be caught in the Dimaragana straight in the incident where he told his knife borrowers” I cannot give you my knife to cut dog meat because dog meat is taboo for me. But if you want, I can cut the dog with my teeth.( Chinua Achebe, may your soul rest in eternal peace) Finally, let me tell you something in the language you understand my dear cadets. A grant is like an empty gun. It Can’t kill. Loading it with bullets changes its capabilities. It can kill. Converting grants into microloans is like loading a gun and being on the ready at the trigger. I didn’t say killing is bad; It protects the innocent from the harmful. But I didn’t say it is good either as two wrongs don’t make a right.
I now understand, so two years later( I must be daft) why Beth was uncomfortable with my suggestion to use religion as a channel for financial literacy. I now understand even in this case, she is still uncomfortable to even imagine partnering with the military for financial inclusion. For your giraffe like panoramic view, Beth, respect!
April 7, 2014 at 3:44 am
John Gitau
You are right Susy that it is not us microfinance elders proposing to the military to convert the microgrants into microloans. It is their own initiative. In which case, Danielle and Jeff owe us a clarification. The following paragraph is not clear:
“The cadets are therefore working to develop a portfolio optimization template based on the principles of microfinance-to guide ground commanders on how to allocate their CERP funds as microgrants to help raise the standard of living within local communities. The project objective is to enable ground commanders to allocate their funds as loans to small businesses, entrepreneurs and individuals facilitating income growth, economic development and community strengthening. The template is modeled after microfinance practices because of similarities in distribution methods found between microcredit loans and the financial aid provided by ground commanders through CERP funds”
On one hand, the portfolio optimization template is meant to help allocate the CERP funds as microgrants, yet on the other hand the objective is outlined as enabling ground commanders to allocate the same funds as loans. Which is which?
April 7, 2014 at 10:22 am
erhyne
To clarify my views, the military can use this CERP money in different ways, with very different effects. Some are ok, others are not.
Good: In my view, it is appropriate for the military to use these CERP funds for a community-based infrastructure project, like a well or road repairs or a school. This is a good-will gesture that may also have broad benefits for local residents.
Bad: When these funds start to be used for small business, this brings in individual benefit and generates a different dynamic, because individuals will scheme to get favor and others will resent such favors, creating a swirl of bad blood connected to the military.
Worst of the worst: Then if these funds start to be used to create loan funds, the challenges intensify, with people scheming to get loans and the added difficulty of collections. And in addition, more formal microfinance is undermined.
April 7, 2014 at 11:03 am
John Gitau
I agree with your views fully considering that military is government. The role of government is to provide social services using taxes and it can use any of its arms ( such as military) to extend these services. The cadets’ efforts, though with good intentions, is stretching innovativeness too far. This idea is still born.