A Different Kind of Borrower

By Peter Marchant, KF10 Azerbaijan

In the Bilasuvar Region of Azerbaijan a number of Kiva borrowers live in semi-permanent settlements for internally displaced persons (IDPs) who fled their homes during the war between Azerbaijan and Armenia that followed the collapse of the Soviet Union.

Many of these borrowers have a principal source of income unrelated to their Kiva loan. They work as teachers and accountants or receive a pension from the government. Incomes ranging from 100 Azerbaijan New Manat (AZN) to 250 AZN per month cover some basic staples, but not much else. For these borrowers, a loan provides a chance not to increase cash flow, but to diversify household consumption.

They purchase cattle, sheep, fertilizer, seeds and other productive assets that require a high initial investment, but provide milk, cheese, yogurt, meat, fresh vegetables and other benefits over an extended period of time.

Because borrowers with another source of income could save to make these purchases rather than borrow, it can be difficult to see how this type of loan makes a borrower better off, so here are some numbers:

A typical borrower might take out a loan of 1,000 Azerbaijan New Manat (AZN) to buy two cows. AqroInvest charges 3% per month on a declining balance basis, resulting in monthly payments of about 85.00 AZN for 15 months. Over the life of the loan, the borrower pays about 275.00 AZN in interest. That is 275.00 AZN more than they would pay if they saved 67.00 AZN every month for 15 months and then purchased the cows.

Dividing 275.00 AZN by 15 months, we find that it works out to about 18.00 AZN per month. In other words, if the net benefit of owning the cows is greater than 18.00 AZN per month, then the borrower is better off taking out the loan. If the benefit is less than 18.00 AZN per month, they would do better saving the money rather than borrowing.

The value any one borrower derives from their livestock depends on a number of factors, but in general, one liter of cow milk sells locally for about 1.00 AZN and a small cow in a bad mood will still produce at least three to five liters of milk per day. Doing the quick math, that is 40 to 75 liters a week, or somewhere between 170.00 AZN and 280.00 AZN per month, far above the 18.00 AZN they need to recover the interest expense. Clearly, the borrower benefits from taking the loan. Even if they aren’t selling the milk, they derive equivalent, or greater, benefit from it (otherwise they would sell it) and thus are better off taking a loan than saving for the large capital purchase of the cows.

While not driving the principal source of household income, these loans increase quality of life and financial and nutritional flexibility for the working poor. Kiva loans don’t need to fund businesses to have an impact on poverty.

Peter Marchant is a Kiva Fellow serving his first placement with AqroInvest in Azerbaijan. Click on Azerbaijan Borrowers for a list of Azeri borrowers currently on Kiva or check out Supporters of Azerbaijan to join the Azerbaijan lending group.