Sahel food crisis: The situation in Burkina Faso

Recipients of an Oxfam Cash-for-Work program in North Burkina Faso wait for their payment. Peter Dörrie photo.

This is part of a series of posts, looking at the state of the Sahel food crisis. You can also find a regional overview and a report on the situation in Chad on this blog so far.

On Tuesday, I was invited by Oxfam to look at one of their projects addressing the current food crisis in the wider region. A car took us from Ouagadougou, the capital, north to Kaya and from there to several surrounding villages.

The dry season has the country in its hot and dusty grip now. Temperatures are above 40°C every day and it hasn’t rained for weeks. The ground is barren and doesn’t look like it could feed anybody, not to speak of the thousands of people who live here dispersed over several villages and small towns.

And indeed, the last agricultural season brought serious shortfalls: officially, the national harvest has been 5% below consumption, but nobody knows if this figure is correct and shortfalls here in the North were greater anyway. One of the beneficiaries of the Oxfam project tells me later, that she only harvested three sacks of millet instead of the normal eight to nine, which she needs to feed her household of nine persons. One sack comes at five kg.

Oxfam reacted early and with money from ECHO started a Cash-for-Work program in the region: The villagers were shown how to enhance their fields with a simple trick; Many small holes dug into the earth would catch and hold more water once the rain comes, increasing the next harvest. Everybody applied the technique on his own field and was now paid for this work.

This creates a theoretical win-win situation. The villagers will have some money to buy food on the market until the next harvest arrives, which will be larger due to the increased productivity of the fields.

To maximise the effect, Oxfam wants the villagers to buy subsidized millet, which the government currently sells as part of its food crisis emergency program. This program has received lots of acclaim by the UN and other donors. Subsidized millet costs 11,000 Franc CFA (ca. 16.5 €)per sack, which is less than half the usual 25,000 FCFA price tag.

Anticipating this price, Oxfam paid the villagers 25,000 FCFA each, enough for two sacks of subsidized millet and some necessary condiments like cooking oil and sugar. Therefore, the consternation was great when the villagers told us that they wouldn’t buy subsidized millet and instead buy the normal stuff at the considerable higher price.

Recipients leave their fingerprints as proof that they received the money. Peter Dörrie photo.

The reason for this is of course not that the Burkinabè hate a bargain or are not aware that one sack of millet won’t bring them over the lean period. But during the last delivery, the government provided only seven sacks of subsidized millet for the village in question, which has over 4,000 inhabitants. Nobody knows when the next delivery will happen, but it is already clear that there won’t be nearly enough for everybody. And the people need the additional food now, so they have little choice.

Once the food runs out again, they will take out a loan to buy more. This way, between NGO relief programs, the government emergency aid and going into dept, there will probably be enough food for everybody to survive the hunger crisis in Burkina this year. But that doesn’t mean that it won’t have very negative effects on many people.

The debt will have to be paid back after the next harvest. If this again fails or only stays average, many people won’t be able to fully pay off their loans and keep enough food to not hunger again next year. To safe money, kids will be taken out of school to work on the gold fields of the region instead. And not dying of hunger of course doesn’t mean that one can’t get ill or malnourished, which has a range of disastrous consequences of its own.

In conclusion, Burkina will be one of the least impacted countries of this year’s hunger crisis. This is due to its geographical advantages, but also the early and relatively comprehensive reaction by the government and NGOs. Still, many people will be off worse after the crisis than they were before. Lets hope that they won’t be forgotten as soon as the crisis is declared over.

Microcredits revisited

In 2008 I entered the microcredit business.That year I discovered the peer-to-peer lending platform MyC4, which lets you lend money to entrepreneurs in various African countries. My initial views on the platform were published in the German weekly “Der Freitag” but for those who don’t speak German or don’t like klicking links, here is a short round-up on MyC4:

Open loans on MyC4

As “investor”* you can open an account with MyC4. The platform then let’s you choose from a number of open loans, which have been vetted by local partner organizations, the so-called “providers”. The lending itself is competitive – it uses the “Dutch” auction system. You can place a bid (say 20 € at 15%) on an open loan. Once the total loan amount has been funded, new bids need to be better than the existing ones. The worst bid of a loan will be kicked out if another investor makes a better offer, thereby reducing the average interest on the loan. Once the interest passes a predetermined threshold (usually between 10 and 15%) the provider can close the loan, but most loans end up several percentage points below the asked interest. This system is supposed to ensure that investors with varying doing good/making profit expectations can participate in the platform.

Over the years, I dedicated a total of 1000 € from my savings to MyC4. My objective was to make a modest profit, which would render my investment sustainable. Sometimes during the last year I realized that my approach was not working out and I stopped reinvesting. Now almost all my loans are either paid back or defaulted and I can try to draw a conclusion.

The good

As of today, I have invested a total of 2070.12 € through the platform. This is double the amount of money I actually put into it. This is possible, as MyC4 loans are repaid on a monthly schedule, thereby opening the door for rapid reinvestments. From a social perspective, I think this is far better than donating money, as this way I can give again and again and again, all while leaving a maximum of responsibility with the borrower, who after all knows best what he needs the money for.

The bad

While the social aspect of the experiment certainly worked out, the idea of making a profit sure didn’t. 17 of the 97 loans I participated in defaulted (an unacceptable  20% default rate), which resulted in a total loss of ca. 200 €. Worse, even the 73 loans that were fully repaid only barely broke even, because of massive currency deprecation.**

This criticism has to be qualified though. First of all, 73 hard-working entrepreneurs honored their contracts and repaid loans that asked for interest rates far higher than those common in the EU or USA. They deserve applause. Of those who didn’t repay in full (the average defaulted loan resulted in a 50% loss of the invested capital) we don’t know the stories and it may well be that some of them are not personally responsible for what happened.

Also, a part of these losses is due to beginner mistakes made by myself. Especially in the beginning, I did not spread the investments over enough borrowers, providers, countries and industries. I also didn’t calculate currency risk correctly, which resulted in the bad result for the repaid loans.

Most importantly though, a huge part of the losses is due to a Ponzi Scheme run by one of the providers, which gave rise to huge criticism on how MyC4 was run:

The ugly

I don’t want to examine the whole story, but fact is that one of MyC4’s Kenyan providers put up fake loans on the platform, raked in the money of the lenders and subsequently made off with it. MyC4 itself did not participate in this criminal behavior, but  they certainly neglected their duty to check on their business partners and ensure compliance to transparency standarts.

I guess at least half of my losses are due to this racket. As far as I know, there are still court proceedings going on in Kenya relating to this case, but I doubt that I will see any of the money I lost again.

MyC4 has made several changes to its procedures as a consequence, but I doubt that anything safe of a total makeover of the legal framework in the respective countries could fully mitigate the risk of such a thing happening again.

The long and the short of it

Investing in MyC4 has been a mixed experience. While it was certainly more effective than simply buying a goat through a donation to a large NGO in terms of “helping”, the promised profits have not materialized. As I said, I have transfered practically all of my remaining investment as a consequence of this.

But I will return! I am still convinced that micro-lending is a great way to combine supporting entrepreneurs in the developing world and making a small profit. While MyC4 had to fight many problems over the last few years, the changes they have made seem to result in a much more stable platform which reduces (though not eliminates) the risk of defaults and outright theft. Also, countries like Uganda and Ghana will join the ranks of oil-exporting nations this year, which will likely reduce the volatility of their currencies.

My new investment in MyC4 will reflect my experiences. I will adhere religiously to a doctrine of spreading my loans over various countries, providers and industries. I will limit the value of a single investment to a maximum of 20 €. And I will be more rigorous in calculating my asked interest rate to make sure that I ideally realize a profit around 3%.

Are you investing in microloans, either thorugh MyC4, kiva or other organizations? Which experiences have you made?

 

  • While competing platforms like kiva focus on the “giving” aspect of microcredits, the approach of MyC4 focusses on “profit” for both the borrower and the lender.

** The main culprit for this one was the weakness of the East Africa Shilling currencies over the last years. This seems to be normalizing now.