PIONEERS IN MICROFINANCE: Village Banking Innovator Dr. John Hatch of FINCA (Foundation for International Community Assistance)

Dr. John Hatch is currently the Board Secretary and Historian at FINCA (Foundation for International Community Assistance).

MicroCapital: Was there something in your upbringing that sparked your passion for social finance that you might share with our readers?

JH: My mother was born in Costa Rica, and I learned Spanish as a kid and then went into the Peace Corps and became fluent. This draw to Latin America is where I began. So, it was family background and a Spanish-speaking mother and an early experience with the Peace Corps of seeing the poorest of the poor….

I’d been to Latin America a couple times in the summer working for uncles in Costa Rica…. My Costa Rican uncle was a representative for American products, so I’d go door-to-door selling those things. Getting people to buy a typewriter…that’s how I picked up my Spanish, and I was kind of a novelty in those days. My first sale was a Royal typewriter to the madam of a house of prostitution!

As a Fulbright scholar, I did research in northern Peru. My project was hiring myself out as a laborer to thirty peasant farmers and, basically, I worked a different farming task each day. I just rationed my time to these guys and, little by little, got two and three and four opportunities to do each kind of agricultural task with different people. So, it was that sensitivity to and experience with poor people: number one.

Secondly: this really great admiration for what they do. You know, they live on virtually nothing, they don’t get loans, they’re capital-starved, but they just make do with what they have. They subsist, they survive, they use this very, very old technology inherited from generations past in water management and conservation of water in the soil. Their only tool, virtually, is a shovel. That gave me a profound respect for them and their technology. I knew, from that point on, that economic development, if it would ever succeed, would have to include their voices – giving them participation in the design, management and evaluation of the projects intended to benefit them.

It was my real graduate school, and I took that learning and that respect into the next ten years as a consultant for the US Agency for International Development (AID) and other clients, and it was the frustration of working with AID… the frustration of finding nobody out there who would resonate with what I was calling “participatory development”… bottom-up development. Nobody wanted to hear it, and so I finally said, “If this is going to happen in my lifetime, I’ve got to create my own institution and do it my way.” That was the seed bed.

MC: How did this relate to your studies in graduate school?

JH: My thesis was called, “The Corn Farmers of Motupe: A Study of Traditional Agricultural Practices,” and its merit was that I went into it totally non-judgmentally. It was not appraising them for their scientific validity or whether they were superstitious or anything. It was simply, “Tell me what you do. Why do you do it that way?”

So, I was there literally at the creation, as crops went into the ground, watching, and my deal with the peasants was this: “I will give you a full day of my labor for this particular task.” And they said, “Great!”. I said, “You don’t have to pay me. Just put an extra plate of food on the table of whatever your family is going to be eating that day, and that’ll be my payment.” The second thing was, “And I need the male head-of-household out there in the field with me for that day. I’d like to do the task with him, so I’ve got somebody to tell me about it.” So, that was how I did it, and I just kept repeating that with the thirty peasant farmers over a period of two crop cycles.

I’m somewhat of an artist, and it was so hard to describe this narratively that I began to do pen-and-ink drawings of different tasks and illustrations of how they did their procedures and stuff. So eventually this thesis had about eighty pen-and-ink drawings in it. So, I called it my Picture Book for Academicians.

I had a committee of five professors and two of the five hated what I had done. Hated it…they thought it was an atrocity. And the other three loved it. Subsequently, it was used as a textbook for economics at the University of Wisconsin for years and years. This methodology would later be known as “village banking.”

After my Peace Corps volunteering and graduate school, I supervised a group of fifty volunteers in cooperatives. It was that experience in the principles of cooperatives that I had integrated mentally, and that’s why I was probably thinking in terms of savings, credit and the whole village banking methodology, which today is like an informal form of credit unionism.

[Years later] on a flight to Bolivia for a consultancy – on my second double bourbon – this idea dropped into my head: the idea of creating a bank that would be run by poor people. It was that village banking experience – that idea. I walked it into AID the next day, and I said, “I’m not going to do the consultancy you invited me down here to do. I think it’s a horrible idea, and I’m willing to pay my way home. But I do come with a better idea, and I’d like you to listen to it.” They did, they liked it, and they said, “Let’s try it!”

They gave me USD 1 million in local currency to launch it in Bolivia, and I didn’t even have a nonprofit; this was my consulting firm. It was kind of unheard of for them to give USD 1 million to a consulting firm. But, we took that money and we organized teams in five regions of the country. In the whole country, we reached 433 communities with this project and 17,000 borrowers in our first year. That was 1984.

The project in Bolivia was a massive success. AID loved it. It was so unique. And then all those people left, and a whole bunch of newcomers came, and they didn’t like the project. In 1986 AID actually closed it down. So, I went back to my consulting work and became, at the same time, somewhat of a Johnny Appleseed preaching this doctrine of village banking to anyone who would listen. As an adjunct to my consultancies in different places, I would just teach a little weekend workshop on how to start village banks. I started with Save the Children, then Foster Parents Plan (now Plan Canada), CARE (Cooperative for Assistance and Relief Everywhere)….

I was in no position to go expand this country-to-country, so I said, “Well, I’ll share this with organizations that do have the resources.” So, that’s why I began to deliberately do these workshops, and over the course of the next four to five years I had the participation of every US-based nonprofit that today does village banking around the world. It was open-sourcing. I didn’t realize I was doing open-sourcing. My colleagues at FINCA have, for years, criticized me for having given away the technology and having created the competition that FINCA now has today. Now, worldwide, there are an estimated 800 village banking programs that have basically used the FINCA methodology of village banking that I taught as their starting point. They’ve all adapted it extensively too, but I’m saying that, “What a way to massify! Give it away!”

MC: What do you see as your greatest failure?

JH: In the early days of a program in El Salvador – in its third year – there was a massive default. That reverberated, not only throughout the FINCA empire, but to all the people who were coming in to look at this. We were totally upfront about it, and as a result we won a lot of respect. That taught FINCA to get seriously into the design of management – mechanized management information systems – and really put more strict control on loan repayments. That became FINCA’s passion starting the second ten years of our existence. We have been one of the strongest institutions in the microfinance movement in terms of very strict controls on every single bank and the monitoring of delinquency on a weekly basis. Managerially, I think FINCA has created a paradigm that has gone through the movement of microfinance and had as much of an impact as even the methodology itself.

MC: So, what is the next challenge for the movement?

JH: There are a number of them. I think the larger part of the movement is not targeting the poorest of the poor, but the next level up – people living on one to two dollars per day – instead of those living on less than a dollar per day…. You’d do the same thing if you were a field officer and being paid a bonus for the number of clients you supervise…. That’ll be the first major challenge, and then the second area of challenge has to do with youth. We’re finding that we’ve totally overblown the benefits of microfinance. We talk about brave mothers keeping their kids in school and feeding their families better… and that’s happening. We may have won the first battle in this war against poverty by getting the mothers cranked up, and they did what they had to do, but once they get their businesses rolling, they’re not creating jobs either. These are mostly owner-operated businesses. So, where are the young people going to have a chance?

I have two specific recommendations that I think every MFI can do that will help alleviate this question of youth unemployment. The first is that they should have censuses of all their borrowers so they know how many of the borrowers have children who’ve completed high school. With that, we should be hiring those kids to become our credit officers…. And the second one is that we need to start expanding the focus from the mothers to the children with larger loans for a business that can create multiple jobs and that targets the children. If they’ve been a great client, then their oldest unemployed child gets preferred for a loan. But, the mothers themselves should be used as co-signors on the loans of their children. We can work from our strengths: keep lending to the mothers, but at the same time expanding it to the next generation.

This is the third in our “Pioneers In Microfinance” series, recognizing early innovators in social finance, which is generously underwritten by the Deutsche Bank Microcredit Development Fund.