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Teen Loan Programs Can Do More Damage Than Good

Microfinance might be a panacea for women’s poverty, as many claim, but concern is growing in the non-governmental community about such loans made available to teenagers. Several in the field warn that microfinance loans to teenage girls could actually increase their vulnerability.

Since the 1980s, microfinance has grown and spread to become a major tool in fighting poverty across the globe. Grameen Bank, a community development bank established by microfinance godfather and Nobel Prize winner Mohammed Yunus in 1983, has loaned money to over seven million women in Bangladesh.

Kiva, a microlending website headquartered in San Francisco, USA, has loaned over $100 million through the Internet to small entrepreneurs since it started four years ago. Its interest rates vary locally. Kiva works with 134 field partners who disburse the loans, rather than financing individuals directly.

According to Connie Lindsey, executive vice-president at Northern Trust, a Chicago-based financial holding company, “The concept of microfinance is very popular. It brings finance to a level that makes it a little more understandable and real for individuals – that ripple effect of a small effort having a much larger impact.”

However, the explosion of microfinancing means this credit is not only reaching women, but also female teens. In some cases that worries Judith Bruce, a senior associate of the New York-based Population Council. “If we use the conventional economic approaches and drive them at poor girls, they won’t be successful at the very least,” feels Bruce. “At the very worst, they’ll do more damage than good.”

No microfinance programme focuses solely on teenagers. In most countries, it is illegal to set up a contractual loan agreement with anyone under 18, though some microfinance organisations still lend to teenagers under the radar. This means that, in practice, many microlending and credit programmes include a segment of borrowers between the ages of 16 and 24.

Bruce says microfinancing can draw vulnerable female teenagers into assuming financial risk. She gives this example: “Like a girl who may sleep with her boyfriend without a condom to get the money to attend weekly microfinance meetings.” In this case, the girl may use sex to get money to repay her loans and earn the group’s social support in the process.

Such a view stems from the organisation’s experiences working in Kibera, the largest slum in Nairobi, Kenya’s capital, and home to almost a million people. Kibera is also one of the most studied slums in Africa, due to its proximity to U.N. agencies, as well as its location in Nairobi, the centre of business in East Africa.

When the Population Council decided in 1999 to launch a trial programme that would test giving loans to female teens, they believed Kibera would be a good place to start. Here unemployed men and male guardians often harass female teenagers. Six girls to every one boy here are HIV-positive and forced early marriage is common.

The programme hoped adolescent girls could start businesses that would generate an income for themselves and help them become financially independent. Partnering with a Kenyan microfinance institution called K-Rep, the Population Council’s Tap and Reposition Youth, or TRY, programme offered female teenagers loans at an interest rate of 15 per cent. To receive a loan, they were required to provide four per cent of the loan to the programme as collateral. It also encouraged them to apply peer pressure to ensure members of the borrowing group paid back the loan. In order to borrow, the teenagers formed ‘watanos’, or groups of five, who helped each other to keep up with payments.

Less than 20 per cent of the participants lived with their parents or said they had friends they could turn to for support. Most lived transient lives, often staying with boyfriends or male friends. The programme started out well, but most of the teenagers were soon unable to pay back their loans and lost their collateral. Starting hairdressing salons, food outlets and other small businesses was very challenging. An emergency would come up in their personal lives losing their shelter or getting ill which required more cash than they had and participants would fall behind on repayments. The youngsters told TRY that they disliked the pressure they were under to both take out and pay back the loans.

But because of the pressure which also took the form of social support, they kept borrowing even when they could not manage the repayments or were not that interested in starting businesses. Some girls, for instance, wanted to save money for school, rather than open a hairdressing salon.

Bruce believes young women who are married, have children and have started their own businesses often benefit and fare well with microfinancing. But teenagers with no business experience may not be able to tell the difference between a loan and a grant, which does not have to be paid back.

Caitlin Weaver, deputy managing director of the Financial Access Initiative, a New York-based consortium of development economists, agrees that there can be a big difference among teens’ qualifications for lending programmes.

“In a lot of developing countries, where you have more informal nongovernmental organisations and microfinance institutions, a lot of their clients are young women but they are not classified that way,” says Weaver. “A 17-year-old running a family and married with a business [in Africa] is much different than a 17-year-old in the Dominican Republic who is still in high school.”

TRY has since ended its teen loan programme. Now it concentrates on savings programmes, where participants deposit savings in a larger microfinance account from which they can withdraw money at any time. The account is meant to give girls a safe place to keep their money and a cash cushion against emergencies. The programme offers social support that ranges from livelihood trainings to nutrition seminars, without the pressure of loan repayment. Local banks would require formal employment and-or significant savings to open an account, as well as opening fees.

Such savings programmes for teens in developing countries are relatively new, partly because few people thought they had any money to save. “Most teen girls have a livelihood, but it’s not what people typically consider,” says Karen Austrian, a staff associate at the Population Council’s Nairobi office. “A lot of them get pocket money that they save or they do chores like washing utensils and clothes, fetching water. Some help out at salons and make small amounts of money. A lot of girls like to save for emergencies.”

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