SOMALILAND: Micro-finance

CASE STUDY: The experiences of DoH in Somaliland

By Fadomo Alin, B.A., Chairperson

 BACKGROUND

Somalia has suffered 20 years of conflict and anarchy. Somaliland, a relatively small area in the Northwest, became independent in 1991. Since then, it has managed to restore many aspects of normal society. However it has lost many citizens, people who fled to safe countries and took another nationality. Doses of Hope (DoH) is an NGO that works in Somaliland. It was started by three refugees in the Netherlands. It now has two main activities, micro credit and a second section that assists disabled children and adults. Many disabilities are the result of the Civil War.

GETTING STARTED

At the start, raising money in the Netherlands was a major problem. The three Somalis were newcomers. They were setting up an NGO in the heart of Europe to benefit a seemingly chaotic African country. They started knocking on doors and encountered many obstacles and rejections - one reply said, "we have received your letter and understood its contents but unfortunately we think neither our organisation nor any other organisation in the Netherlands would support your initiative". But after some time they succeeded in finding a partner; the Foundation of the Rabo Bank agreed to fund them. They hope that this will be a lesson for any discouraged fundraiser – to remember the three Ps: Persistence, Patience and Pursuit.

OVERVIEW

The project started in 1999 helping 100 women through a Rural Credit programme. Now over 4,000 people are being helped, one-third of them women. The amount of turnover in 1999 was $15,000; in 2004 it was $272,000.

SOURCES OF FUNDING

The main sources of funding were originally UNHCR, CARE and UNDP,  DoH. Other funders have included the Danish government and the Foundation of the Netherlands RABO bank. Now (2008) NOVIB-OXFAM & CEBEMO are helping. Before the initial payment NOVIB arranged an independent financial audit which was satisfactory.

ADMINISTRATION

A Programme Coordinator is based in Hargeisha, the capital of Somaliland. There are eleven staff members working under him. Perhaps the key workers are the Loan Officers who are involved during the whole process of loan and repayment.

THE TRADITIONAL TYPE OF SAVINGS AND LOANS

Traditional ROSCAs (rotating savings and credit associations) called hagbads have existed for centuries in Somalia, mainly among women. In English-speaking countries they are known as merry-go-rounds; in French speaking countries they are tontines. A group of women join together to save small amounts each month. These sums are pooled and the money handed over to one group member. She then has a sum slightly larger than normal and can make one purchase that for her is large. The next month another group member gets the funds and so on round the group. When everyone has received a payment the group may start the process again, or change its members, or disband. People who have been in such a group have already learnt the basics of money transactions and obligations.

THE STAGES OF DOH LOAN PROVISION

The first stage of DoH income-generation activities involved making individual loans. The second stage was to loan to hagbad-type groups. Each group decided itself on its maximum membership, mostly between thirty to fifty women. Then it decided on the members who will receive the first loans, five to ten people. Each received a loan. Repayment was in equal monthly instalments. The group met monthly for repayments and other business. As the first loans were repaid, the money was paid out immediately to one or more other members, depending on the total amount collected. Once every member has received and repaid their first loan, the whole cycle could start again, with second or more loans to its members.

The third stage was to loan to groups too poor to save even the small amounts involved in the traditional hagbad.

With the current stage of activities, over 4,000 people are now being helped, one-third of them women. When an individual applies for a loan s/he has to produce a business plan with the help of one of the Loan Officers. Borrowers have to organise themselves into groups of about seven, the group members being responsible for the repayments of any one of them. Each individual has also to find an elder to stand as guarantor.

The story of one Beneficiary
Amina Saleh is a woman living in Hargeisha, the capital. In 2000 she approached DoH as an individual. She was asked to form a group and she found five other would-be borrowers. Her idea was to start baking bread in a pit oven. She worked out a business plan and received $200 minus $20 for administrative costs. She used the money for ingredients, tools and also for the renting of space in a neighbour’s lock-up where she could store things. She baked bread each morning before it was light and then took it to the market to sell. Her profits have allowed her to repay the loan, build a proper oven, and provide work for her husband and two paid employees. She has built two more rooms on to her one-room hut. They were needed; she has five children. And now the children can go to school.

CULTURAL ASPECTS OF LENDING AND BORROWING

From the point of view of the lender a serious issue is this: how to ensure repayment in a culture that does not take a loan agreement very seriously. Borrowers like to borrow as individuals because defaulting is easier. They know that in any case the money came from a rich government or business overseas that will never miss the kind of sum borrowed individually. This is why DoH now insists that borrowing is done in the context of a group in which each member is responsible for the others. It also insists that each borrower has an Elder as a guarantor. The Elders are the male heads of the borrowers’ extended families or clans. They are involved in decisions affecting the borrowers all through their lives, for example their marriages. A promise to an elder to repay is not lightly made and elders do not lightly stand guarantor. The honour of the individual and the family is at stake.

Another issue for the lending agency is the importance of encouraging groups to build the kind of membership that suits them. And perhaps the other important skill is to be patient. Western timetables cannot be imposed on this type of development activity.

INTEREST AND ADMINISTRATIVE COSTS

Somaliland is an Islamic country and Islam has serious reservations against the charging of interest. But a micro-finance project that only gets back what it loans will soon run out of money, given inflation and the costs of running the project. There had to be a stage when interest or an alternative is introduced. Doses of Hope does not charge interest; it charges administrative costs. These are deducted at source: someone borrowing $200 will be given $180 with $20 kept back for administrative costs.

Some community members, particularly borrowers who have trouble repaying or who just do not want to repay, complain about the administrative costs, claiming that they are non-Islamic.

REPAYMENT

Effective measures have to be in place to ensure repayment. If it becomes known that defaulting is possible, it could become common. The measures are as follows:

  • Loans are only made for business purposes, with an approved business plan.
  • The borrower has to find an Elder as guarantor.
  • Administrative costs are deducted before money is handed over.
  • Repayment is made in five segments.
  • A reluctant repayer is firstly the responsibility of the group of seven who borrow with responsibility for each other.
  • If this fails, the Loan Officer will chase up the non-payer, look at whether the business is failing and see how it can be got back on track.
  • If this also fails, the guarantor ensures that Doses of Hope will be repayed but the process takes time and trouble. A few defaulters, perhaps 5-10%, will still need to be taken to court.
  • It is said that Somali women repay loans but Somali men do not. The DoH records show 100% of women and most men repay without trouble.

The repayment figures noted by the external auditors are now between 87% and 92.4%.

BUILDING THE SAVING HABIT

Borrowers are required to put 3$ a month into a DoH fund for which they hold passbooks. Through this activity, the project is acting as a small bank.

PLANS FOR END STAGE

Doses of Hope are considering a number of strategies for the future. One is to help the small groups to become co-operatives. In the long-term, perhaps fifteen years, they would like to be similar to the Gramin bank in Bangladesh.

The story of a second beneficiary
Hawah Ali Mohammed also borrowed $200. With $180 in hand she started to buy one sheep a day. She slaughtered it and sold the meat in the market. Now she slaughters six sheep each day and sells to small-scale meat-sellers. She can save more than other women because she is a widow whose children have grown up and left home. On the basis of her savings she is applying for a second, larger loan to enable her to rent a shop and hire a fridge.

 

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