United Nations Conference on Trade and Development (UNCTAD) said, “there can be little doubt that rising debt and financial vulnerabilities in the developing world currently are fast turning into a formidable obstacle for sustainable development.” Global financial crises were always centered on debt.

Microenterprises access debt through microfinance and as part of the global financial system, share in the global debt crisis. Microcredit in microfinance institutions use debt as a development tool with the end goal of lifting millions out of poverty. After almost four decades of microfinance, millions are still in poverty with even more debt burden.

In the early 2000s, SEDPI’s research showed that microfinance clients borrow from an average of 2-3 microfinance institutions. This jumped to 4-5 microfinance institutions in 2020. There is so much debt but very little progress is seen in poverty eradication.

On February 14, 2020, SEDPI decided to shift from conventional microfinance to social microfinance where the primary strategy is to veer away from using loans, debt or credit as a development tool. The aim is to eradicate debt burden in low income households and transform them as real partners in business and development.

The following are the princples of SEDPI social microfinance:

Principle 1: Emphasis on financial education

• Intensive savings mobilization
• Universal insurance coverage
• Providing investment opportunities
• Freedom from oppressive loan products

Principle 2: Capital infusion to microenterprises rather than loans

• Joint venture between SEDPI and microenterprise is formed establishing formal business partnership and co-ownership versus creditor-debtor relationship in loans
• Capital contribution of SEDPI to joint venture is at pre-determined, non-compounding and non-accruing cost plus basis. This is in contrast to loans that earn perpetual interest and charge penalties for non repayment
• Character, cash flow and asset-backed financing

Princple 3: Profit sharing and risk sharing

• Profit sharing mechanism that favors labor and participation rather than capitalism
• Cost plus of SEDPI capital contribution is based on agreed upon profit sharing mechanism
• SEDPI and microenterprise absorb risks and work out solutions together to address risks. This is unlike loans where debtor absorb all risks and creditor does not and will still force repayment or stop providing services even if cause of non-repayment is external to the microenterprise such as natural typhoon, earthquake, volcanic eruption, pandemic etc.
• Microenterprise eventually buys SEDPI’s capital contribution to gain full ownership

Principle 4: Loss follows capital

• Loss is defined as bankruptcy or when microenterprise decides to liquidate assets
• Losses will be absorbed as proportion of capital contribution in microenterprise; which means the party that provided larger capital absorbs more losses
• Microenterprise will not be empty-handed in contrast to loans where foreclosure is in favor of the creditor

Principle 5: Not for profit insurance product

• Main aim of insurance is protection through solidarity and not as an income earning activity
• Cost of delivering insurance service will be charged as expense. Surplus premium payments will be accumulated to strengthen the fund

Princple 6: Partnership and cooperation

• Establish partnership with government agencies to bring basic services closer to low income groups
• Collaborate with civil society and other like-minded organizations to push for poverty eradication