*The image used for this article is not mine. It is the work of Flunkey0. The rest of their work can be found at https://pixabay.com/users/flunkey0-1023550.
*This essay was originally written for a course on development in Latin America.
From a Washintonian perspective, Cuba has always seemed to be a curious case. Following the Cuban Revolution, all that was known about its Development model was that it was socialist; buried underneath this was any clarity on how that actually looked. I write today to shed some light on one recent addition to this apparatus: microfinance. Following external shocks to the Cuban economy, it has progressively liberalized under the tutelage of Raúl Castro and Miguel Díaz-Canel. The 2011 reforms created a limited possibility for microfinance to proliferate in the island nation. In this essay I will explore the reason for the 2011 reforms, what microfinance is, why it has played out differently than international observers hoped, proposed changes to the apparatus and just what the system could look like down the line.
Context for the 2011 Reforms
A closer inspection of the Cuban economy shows that it has always been dependent on export to and import from markets abroad, as it was set up this way. Following Spanish colonization the economy thrived on the export of sugar and tobacco, while later becoming highly dependent on imported oil. This led to a growing American interest in its neighboring island, and after the 2nd War of Independence, an outright client-state relationship. The American domination of the Cuban economy angered many, with its army allowed to intervene militarily and its businesses owning a vast amount of property in the country. This resentment, combined with the dictatorial rule of Fulgencio Bautista, led to the creation of Fidel Castro’s M-26-7 (July 26th Movement). After a protracted guerilla war, Castro became the new leader of the country; his drive to rid the country of imperial influence and US dependence saw him almost come to blows with those in Washington, and led to him to make overtures with the Soviet Union. Whereas America had previously bought Cuban sugar and shipped it oil, the USSR subsidized the nation’s oil needs, bought its sugar at an advantageous price and gave millions in foreign aid. This arrangement seemingly worked up until 1989, when the Soviet Union collapsed. Cuba lost its source of oil and subsidies and biggest trade partner in just a few weeks. This and the still-in-place US trade embargo led to the dubiously dubbed “Special Period” in Cuban history, where citizens starved and power outages ruled the day. It was in the backdrop of this disaster, the average citizen losing startling amounts of weight and the subsequent death of Fidel Castro that the government was forced to change its approach.
Successive waves of reforms had been ongoing since even before Fidel Castro’s death to stem the effects of the USSR’s collapse. These reforms had seen a flirting with market forces that had previously been a taboo in Cuba; the allowing of foreign tourists and permitted use of the US dollar being just some of them. Thus the 2011 reforms, which saw a further liberalization, were not, altogether, unsuspected.
What is Microfinance?
Before explaining the impact of the 2011 reforms, we must first explore what microfinance is. Broadly speaking, it is a relatively recent financial strategy employed to both reduce poverty and empower those at the bottom of the economic ladder. In contrast to past approaches this strategy relies on a “democratization of capital” to those who typically do not have access to it. This is achieved by making loan options available to those with no credit history, in hopes that recipients will use these “microloans” to create a profitable venture, in order to repay the loan and have another source of income going forward. This practice has its roots in the work Grameen Bank, one of the premiere microfinance institutions, has been doing in Bangladesh since 1983 (Bee 23). In the present day, this strategy is touted as a hallmark and novel solution for the “under development” that pervades the Global South, and is classified a sort of “Creative Capitalism” which is kinder than previous iterations and makes a profitable business out of eliminating poverty (Roy 3). Microfinance enterprises operate in Bangladesh, India, Indonesia, Mexico, Guatemala, the Philippines, China and many more countries to varying degrees.
2011 Reforms and Results
The reforms of 2011 are wide in scope. For the sake of this essay I will only discuss those that pertain to microfinance. Reforms in 2003 actually provided the basis to legally establish private enterprises as “sole proprietorships” in Cuba (About Microfinance). The “self-employed” entrepreneurs who headed these were permitted to hire non-family members in 2010, as part of a separate package of reforms (Frank). Yet, November of 2011 saw the opening of a program to extend credit to these enterprises. Legally, these small and medium-sized enterprises (SMEs), or “cuentapropistas,'' still cannot obtain loans, but the owners of these enterprises can acquire personal loans for them - as well as farmers. This was landmark, as before individuals could not receive a line of credit, and farmers had only limited avenues to do so. According to the new measures, three banks, Banco Metropolitano, Banco de Crédito y Comercio (BANDEC) and Banco Popular de Ahorro (BPA) are able offer these services to citizens. Specifically, self-employed peoples, private farmers and non-agricultural cooperatives are able to take advantage of these loans, while others are able to utilize them for house repairs, cars and “home purchases” (Vidal Alejandro). These loans have a duration of up to five years, typically being a few hundred dollars - yet technically there is no upper limit to the monetary value. Interest rates on these microloans are anywhere between 4.25-9%, and “unconventional collateral” is required to be put down, such as banking deposits, promissory notes, personal property and certain kinds of real estate.
Results for this proposal were mixed according to outside observers, with many seeing an under-utilization of the resource. The Borgen Project found that, between 2011 and 2014, 378,011 people secured loans for a total of $135 million. 63% of loans went toward the construction of new homes and renovations, while 34% went to farmers and small enterprises; only 2.6% of loans went to microenterprises (Adebayo). Associate professor of economics at Pontificia Universidad Javeriana in Colombia, Dr. Pavel Vidal Alejandro, claims that 90% percent of the demand for new credit has gone towards home repairs, while only 10% of it has gone towards the self-employed (Vidal Alejandro). It is helpful, however, to note that some of the loans granted for the construction and renovation of homes may have financed new microbusinesses, as some construction was “intended for the purpose of renting rooms to tourists and leasing spaces to restaurants (paladares) or cafeterias” (Vidal & Viswanath 11). It is hard to track how widespread this was, beyond speculation, as it is not recorded in official records. Thus, upon initial inspection, Cubans do not seem keen on using microfinancing to fund entrepreneurial endeavors.
Why so Low?
In a survey of self-employed Cubans, only 9 out of 120 respondents, or 7.5% of the sample reported taking out loans (Vidal & Viswanath 1). There are a myriad of reasons why this program did not make as large of an impact as some might have predicted.
Lack of awareness and bank hesitancy top the list. Due to Cuba’s years outside of the capitalist system, credit and bank culture looks vastly different here than in other societies. In fact, before the 2011 reforms, only state-owned enterprises and farmers - under rare circumstances - could take out loans. Many do not see a compelling enough reason to do so now. In the previous sample, when asked why they had not applied for a loan, 45% of respondents categorized themselves as "Prefer not getting into debt" and another 40.5% signaled "Do not need it because I have the necessary capital." Of the business owners that responded, 80% reported using their own money to start their microenterprise, while only 1.7% indicated use of a bank loan. Some have theorized that remittances from relatives in the US helped fund the startup costs for these businesses, yet only 13.3% of respondents claimed these as the source for their businesses.
Though earlier, respondents showed hesitancy to the idea of taking on debt, it seems that this hesitancy is more related to indebtedness to financial institutions in the country. 28.4% of respondents reported receiving loans from friends and family to start their cuentapropista. The bank-hesitancy theory gains more traction, when it is revealed that only 35% of respondents had bank accounts. 43.3% admitted to keeping their savings stored outside of the national banking system, and when asked about the importance of the system, 38% reported not using banks at all, while another 28% considered them of little importance. Only a combined 31% of respondents designated the institution as “fairly” or “very” important. It does seem that this trend may be slowly changing. According to the University of Havana’s Professor Juan Triana Cardovi, the number of savings accounts increased by 55% from 2007 to 2012 (About Microfinance).
Another obstacle impeding people from accessing these loans is the strict collateral rules. Many international observers have described Cuban microloans as “high quality” due to interest rates being so low and collateral requirements such as property and deposits. It seems that without a credit scoring system, creditors leverage this collateral to ensure loans are paid back. Yet these extreme requirements also drive away many people tentatively interested in the system. It is, instead, much easier to borrow money from family and friends or use remittance money. Thus, Dr. Vidal Alejandro suggests the creation of a credit scoring system, as well as a modernization of banking sector technology, to support online access to microfinance and use of telephone banking, magnetic cards and ATMs.
Systematic Changes?
The disappointing utilization numbers have led some analysts to call for a restructuring of Cuba’s nascent microfinance system. Many argue that instead of preexisting banks also offering microfinance services, there needs to be a dedicated microcredit bank for people to access. After all, typically, specialized Microfinance Institutions (MFIs), not banks, handle this sector. However, there are those that are calling for an even-wider structural shift. They advocate for a change towards the “solidarity lending” model Grameen Bank uses. In this system, different groups of 5-8 people, collectively, come together and request a set amount of money (Bee 23). Then, as individuals from the group need money, they access the group’s pot, circumventing the lender-recipient relationship. Borrowers are incentivized to pay back money loaned, as to not damage the collective’s total. The impetus for this idea is that many are not used to a corporate relationship, in which they individually solicit the bank for microloans; this model is thought to be much more accessible for those without prior credit history and culturally respectful.
All loans are owned and overseen by the Cuban central bank, and thus the state, “reducing the risk of borrower over-indebtedness and portfolio mismanagement” (Vidal & Viswanath 10). Yet this also limits the number of people who can access these microloans. Microfinance is expensive and due to pre-existing budgetary concerns, the state cannot afford to over-invest into its infrastructure. Thus, a wide majority of observers have called on the Cuban government to allow foreign NGOs or UN programs, that specialize in microfinance, into the country. So far these institutions are prohibited from setting up operations in Cuba, out of fear of mismanagement and exploitation, as well as encroaching on state control. There is reason to urge caution when dealing with international microfinance organizations. Those critical of Grameen point to opaque figures on how much of donation money actually reaches recipients, interest rates as high as 20% and instances of communal shame tearing apart pre-existing bonds as reasons it does not live up to its utopian vision.
Though there are many calling for hasty reforms to Cuba’s fledgling microfinance system, one can be sure that any changes or expansions will be done slowly. Many have already described the top brass of the country as wanting gradual reform to economic institutions. Thus, to those that argue for a huge expansion in microfinance infrastructure, through relaxed lending rules and cooperation with international organizations, it is a) unclear if Cubans would access these opportunities for entrepreneurial ventures, given current hesitancy to do so and b) unlikely the government would allow a flood of microfinance ventures in such a short period of time. Given that Bangladesh’s experiences with microfinance started as far back as the 1980s and Cuba is just now making the necessary, preliminary reforms to follow suit, it seems that Cuban leadership is not “all in” on a hot new strategy, but more so experimenting with a new economic option.
A Roadmap for the Future
Dr. Pavel Vidal and Lubin University’s P.V. Viswanath theorize that the future of microfinance in Cuba could look at that of China. They characterize the Chinese government as tolerating but never really embracing foreign MFIs. Instead it sought to maintain the primacy of state-controlled organizations, leading state-sanctioned banks and cooperatives operating in a similar manner as the foreign and private companies. The basic framework Cuba has down, with banks making individual loans is similar to one aspect of the Chinese microfinance infrastructure, and with the aforementioned distrust of outside organizations it seems likely that this may take hold.
On the opposite end, the United States is also encouraging the growth of microfinance in Cuba. Both Presidents Obama and Biden have undone some sanctions placed upon Cuba. These changes have not resulted in any large shift in the status quo, but part of both packages have been measures specifically allowing American microfinance companies to operate in Cuba (Matheny III, Vaycaychella). Will this allow US companies to come and take the charge on growing Cuba's microcredit sector? After almost 60 years of hostility and strained relations, the fact that these concessions were made twice within the past ten years is astonishing. This seems to be a combination of a good will gesture and a furthering of stated American aims to encourage non-Communist thinking in Cuba. However, it is difficult to predict if these overtures will lead to anything substantial. For one, it seems like even this limited cooperation is only supported by just one of the two establishment American parties, leading to, at best, an inconsistent policy towards the island nation. Additionally, as mentioned before, Cuba has been very cautious when allowing foreign enterprises access to the country, making this move all the more surprising yet inconsequential. The two countries have long been geopolitical enemies, and it is likely that these changes may be a way to normalize relations without altering Cuba’s microfinance infrastructure much.
Conclusion
Microfinance has a continuing and rich yet embattled history in the world of Development. Starting as a fledgling idea, it has become an international standard amongst the Global South, and is now reaching Cuba. In this essay I have examined how, due to excessive reliance on the Soviet Union at the time of its collapse, Cuban leadership has been implementing successive economic reforms to restore the level of pre-1989 wellbeing to its population. One of the more recent attempts of this was through the introduction of microfinance in 2011, and though revolutionary, few actually used these loans to fund business ventures. Behind this was hesitancy and distrust of the banking apparatus and strict collateral rules, which look to slowly be changing, if at all. Though there have been calls for more rapid and radical reforms to the microfinance system, it appears that Cuba’s will largely stay domestic and state-controlled, even as Washington encourages outside organizations to enter the space.
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