PSWM Microcredit Fund with the catadores of São Paulo

Introduction

A collective commercialization initiative was initiated under the PSWM Project and expanded under the offspring Rede Gerando Renda project. The complexity of transactions between industry and catadores presents a challenge to commercialization, as it results in payment delays, a lack of transparency in the price negotiation process, and subsequent insecurity. The majority of catadores cannot fulfill the requirements of traditional banks and microfinance institutions in São Paulo in order to access credit to provide financial stability. Delays are, therefore, particularly detrimental to the catadores because they do not have access to sufficient capital to cover basic financial necessities while waiting to receive payment from industry. Thus, the catadores commercialize their collected recyclables through atravessadores (middlemen), who are less bureaucratic and offer timely, simple and informal payment. Often the relationship between catadores and middlemen is one of exploitation and dependency, and the atravessadores pay much lower prices than industry.

 In August 2006, a workshop on collective commercialization, supported by the PSWM project and attended by 25 recycling group leaders, identified microcredit as a strategy to resolve the problem of delays in collective commercialization. The regular availability of working capital (capital de giro), provided through the microcredit programme, removes the need for immediate payment, thereby reducing dependency uponatravessadores. The microcredit fund can also help to formalize and build the capacity of catadores groups.

The following objectives were established through a participatory decision-making process that included all stakeholders:

General Objectives:

  1. To allow for a higher income for the participants of the recycling groups;
  2. To strengthen the bonds of cooperation among them;
  3. To promote the solidarity economy.

Specific Objectives:

  1. To support the organization of collective commercialization of the groups;
  2. To increase the volume of commercialization recyclable material that is directly sold to industry;
  3. To improve the autonomy of the groups.

Organisational Background

Recycling in the PSWM network is organized at several levels. The catadores (individual recyclers) are organized into several groups and centrais(central recycling stations). The two centrais are formalized and are able to negotiate directly with industry, making them effectively responsible for the network. Groups lacking formality either sell collectively through the centrais or directly to the atravessadores. The centrais Granja Julietaissues the invoices for the Rede Gerando Renda. On average, the earnings through the centrais are 55% higher than selling to the atravessadores. Despite this large income increase, many groups remain dependent upon the atravessadores because they are not able to afford the 2-3 weeks delay in collective commercialization.

Commercialization of Recyclables

The microcredit fund is an initiative of the PSWM Project, created to support collective commercialization of the Rede Gerando Renda project through the provision of financial security to cover the 2-3 week delay. The Rede Gerando Renda project, which was approved in February 2007, is an initiative to support the creation of a second-tier recycler’s cooperative, combining 145 catadores in 10 recycling groups from the municipalities of Sao Bernardo do Campo, Diadema, Maua and Ribeirao Pires.

The microcredit fund is overseen by a general assembly formed by the groups’ members who have signed the Fund Contract with a contribution of R$1 per member per month. The assembly is managed by an elected committee, which is currently formed by 8 women who represent the groups of each municipality. The participatory management of the microcredit fund results in increased accountability and transparency, a strengthening of the network, and social cohesion. Regular meetings also build and reinforce strong relationships between the groups. The groups are, therefore, enhancing their own organizational and financial capacity, which leads to social and economic empowerment.

However, the microcredit fund is still in its infant stages and is struggling to satisfy the high demand for working capital. Funding strategies need to be found to increase the fund’s capital reserves, so that the demands can be adequately met. Some of the groups have already started to develop products ready for further commercialization (for example, the PET washing line from the Cooperma group). These initiatives could lead to a larger need for credit and more second-tier cooperatives throughout the entire network. The microcredit fund can play a vital role in realizing these opportunities.

Commercialization and the Role of Credit

The simplest form of commercialization is as follows: capital (credit) is used to purchase inputs (equipment, raw materials), production turns inputs into products, and products are marketed to industry as intermediary goods or to consumers as final goods. The commercialization process of the catadores includes the collection, separation, stocking, compression, transportation, and then selling of recyclables to either the industry or the atravessadores. At each phase, however, potential income can escape the system through excess interest on credit paid to moneylenders, interest paid to traders when inputs are purchased on supplier credit, and selling to the market through the middlemen. To ensure that all the income stays within the network, all three phases of the commercialization process must be under the control of the recycling groups. Through the provision of capital, the microcredit fund can help the groups to maintain this control. The capital is also available for the purchase of fixed inputs such as tools and machinery. Currently the microcredit fund issues credit based on the inventory of recyclables that the group possesses, and can draw upon many credit enablers and guarantees to manage risks.

Moving Forward

As a relatively new venture, the capacity of the micro-credit fund remains limited. Thus, many groups remain dependent upon the atravessadores, and they are unable to capitalize on new commercialization opportunities. The future success and sustainability of the fund, therefore, depends upon an increase of capital reserves. In December 2008, economist Anthony Mondia carried out an initial progress report on the micro-credit fund. In his report, Anthony Mondia identified the following potential avenues for enhancing the capital reserves of the micro-credit fund. These avenues are currently under consideration by stakeholders in the PSWM project.

Internal financing: This includes voluntary savings, maximization of resources, compulsory subscriptions, and income from various other related activities. It is unlikely that members will have sufficient funds to sufficiently finance the fund. However, to build its capital reserves, the fund could purchase required inputs and products, and collect interest payments from the catadores in order to re-channel payments from the original supplier to the fund. In the short-term, however, this does not help the catadores themselves. A short-term solution for the catadores would be for the fund to pay the instalments to the original supplier of the inputs, but this would not help the fund to accumulate capital. Alternatively, in order to maximize resources the fund could be combined with that of the centrais. However, this would increase the complexity of the fund, and result in problems of ownership, communication, and a lack of standard organization. A long-term plan of slow integration of the funds may resolve these issues. An increase of the current $R1 a month subscription fee would help to increase the growth rate of the fund. However, as indicated above the catadores lack the financial reserves and stability to cope with an increase, and any increase may potentially place them in a more precarious rather than more secure situation. Attention must also be paid to ownership issues that arise from the subscription. Internally, therefore, there are not many viable short-term options for increasing reserves. Any savings that the catadores might be able to deposit into the microcredit fund would have to be static for a lengthy period of time, allowing the microcredit fund to loan it out as credit. However, as a result of their vulnerable economic position, the catadores require available and accessible credit, as well as savings. Therefore, any internal savings mobilization would be subject to very high liquidity risks.

External financing: This includes local fund-raising, donations, gifts, subsidies, swaps, and international aid. The Rede Gerando Renda attempted external financing through initiatives such as garage sales. However, external financing is problematic due to the lack of capital circulating in the community. Fund-raising events need to be organized with little costs, as working capital is limited. In addition, the time required for organizing fundraising events would have to be diverted from the more stable income generating activity of collecting recyclables, thus increasing the opportunity costs of external fundraising. The capacity exists within the PSWM project to negotiate for funding from governments or international donor organisations. However, the human resources required for fundraising remain scarce. Applications are highly bureaucratic and require large time investments, making international donor funding more viable as a long-term solution only.

Leveraging: Including via bank guarantees, venture capital partnerships, and shareholder subscription. Through the leveraging of assets, the fund will be able to gain access to larger lines of credit and therefore expand its capabilities. In this regard, the microcredit fund can act as an intermediary between banks, microfinance institutions, NGOs, or development funds, and the recycling groups. The fund acts as a communal bank, isolating the bureaucracy away from the groups. While individual catadores struggle to meet the requirements for bank loans, Rede Gerando Renda can use the microcredit fund and other assets as guarantees for the banks, thereby reducing the credit risk. Communal banking of this form is widely adopted in the microfinance industry, thus strengthening the credibility of the microcredit fund. A further deterrent to traditional lines of credit is the level of bureaucracy involved in establishing credit. If the Rede Gerando Renda and PSWM project could secure a long-term low interest loan, the loan could in turn be redistributed through the microcredit fund to the groups thereby eliminating much bureaucracy. The microcredit fund would need to issue credit so that repayment are able to cover the interest on the loan. Not only would leveraging solve the problem of capital reserve size, bureaucracy is minimized and solidarity is preserved because credit is administered to the groups by the microcredit fund and not the bank. It must be noted, however, that a plan to phase out the loan must be created, either through increased interest rates in credit issued by the microcredit fund, using the subscription fees to pay off the loan in instalment payments, or with the financial debt-relief from governments or international aid agencies.