The other day I was talking to a Bolivian banker, Pedro Méndez, the head of the largest bank in Cochabamba. Two years ago, his bank had begun to make micro-loans to smallholders. Bolivian society is becoming more inclusive, more farmer-friendly in many ways.

These are small loans: on average $3000, and some families borrow as little as $500. Over twenty agents are managing a portfolio of about $500,000 each, and in two years, no farmers have defaulted on the loans.

“Why not?� I asked.

For one reason, the loan officers in this case are really agronomists who get some training in finance. “It’s easier to teach banking to agronomists than to teach agriculture to bankers,� Mr. Méndez explained. (We have had a similar experience: it is easier to teach agronomists to make videos than to teach filmmakers about farming).

And second, new software makes this possible. The bank agronomists have a questionnaire on a tablet which they take to the field. As the farmer supplies the answers, the bank agent types them in, and they are analyzed immediately. The agent asks the farmers in seven different ways how much produce they sell. One would have to be a genius to invent answers consistently in each different format. A built-in GPS helps the agronomist quickly measure the field that is to be financed, which helps determine the amounts of inputs the farmer will need, and to estimate the harvest.

I appreciated how much work it could be to administer that questionnaire. I once spent all day on a Bolivian tomato farm, collecting what is called a “partial budget,� asking the smallholder farmer about each task his family did, how much it cost, how many days they labored at it, and then we tallied the boxes of tomatoes they harvested each week and estimated the prices. Smallholder farms are complex, and it takes a lot of work to get the data on their costs and earnings.

The bank agronomists spend a day getting to know the farmer, and can then disburse the loan. Each agent signs up two farmers a week, and each banker agronomist loans to several hundred farmers. When the agronomist-bankers have large enough portfolios, they stop making new loans, and spend their time following up with the farmers. It has been a successful program, and is expanding.

I was surprised. I had heard bankers in Benin complain about loaning money to smallholders, complaining that they often default on their loan.  In a recent blog “Let me teach you how to take out a loan�, we saw that Guatemalan farmers liked getting loans, but the loans had to be subsidized by donors or the government.

I asked Mr. Méndez what happened when Bolivian farmers couldn’t repay their loan, especially because of drought or other troubles with the weather. He said that the bank agents worked with the farmers, analyzed their situation, and gave them more time and advice.

Now, just because borrowers repay their loan does not mean that they necessarily made money. Some micro credit programs have recently come under fire for loaning to groups, not individuals, and then using peer pressure to get the money paid back, even if the borrower lost money (Brett 2006).

So I asked Mr. Méndez if they loaned to individuals or groups. “Only to individuals,� he said, adding that the agronomist banker helped the clients to design and follow through with a repayment schedule.

Interest on these loans is 12%, not dirt-cheap, but less than a credit card. And while the interest rate is certainly not usurious, it is a commercial loan.

Loans in the city are a bit different. The bank knows that four out of every five businesses fail their first year. So the bank does not loan to new businesses, large or small. Entrepreneurs are only eligible for loans after they have survived their first year, gaining experience and proving themselves to be capable managers.

A few days later the story got better, when I happened to meet José Luis Pereira, a Bolivian agronomist who used to work for the bank, but has now gone on to work for the Swiss cooperation. Mr. Pereira was involved in the private credit scheme from the beginning. At first the bank was cautious, afraid that the smallholders would be risky borrowers, so Mr. Pereira got $120,000 in seed money from an international donor, and the bank put in $30,000. From this hesitant start, the smallholder credit program soon became large, and profitable.

I draw two lessons from this story. One, new technology can make it easier not just to communicate with farmers, but to understand them. In this case, the tablets and software help the bank to see that family farms are profitable, and credit-worthy.

Second, small farms are old businesses, tended for a lifetime and then passed on to the next generation. They are already successful businesses, ones that survive. Those who pretend to lecture to peasants about “farming as a business� should first sit in the pupil’s seat, and learn what the family farmers are doing right.

For a video on counting costs (and benefits) on farm, see: “Let’s talk money�.

Reference cited

Brett, John A. 2006 “’We Sacrifice and Eat Less’: The Structural Complexities of Microfinance Participation.� Human Organization 65(1):8-19.