Microenterprise: Giving Credit Where Credit is Due

by Larry Wilson

One of the most effective strategies in the global fight against poverty is loaning people money to start small businesses.

For most of 24-year-old Nuuru Miiro's adult life, she waged a daily battle against hunger. The Ugandan woman's hard-earned meager income barely enabled her to feed her children each day. Selling chapati bread, she earned $1.50 a day - just enough to pay for food for her family and for the ingredients she needed to bake more bread the next day. It wasn't nearly enough to expand her business or income.

When World Vision started a revolving loan fund for small businesses in Nuuru's community, she applied for a $60 loan. She immediately bought a jerry can of cooking oil, two cartons of wheat flour, a bag of charcoal, some baking powder, and started attending classes on simplified bookkeeping, marketing, and personnel and money management.

Nuuru's production soared, as did her profits, and she paid back the full amount of her loan, with interest, one month later. With her earnings she began saving money for the first time in her life, and she could afford to send her oldest daughter to school - an opportunity Nuuru never had.

As Nuuru and the other 112 loan recipients in her community repaid their loans, World Vision's revolving loan fund has grown, enabling more families to acquire loans, start new businesses, and hire more employees, benefitting the whole community.

Over the past 25 years, as extreme poverty has threatened the lives of millions of people like Nuuru, organizations like World Vision have begun developing innovative ways to help people and their communities live productive and sustainable lives. One of the most successful solutions is the simple process of providing business loans to screened applicants who repay their loan plus interest to a "revolving loan fund" pool that grows over time.

Trapped in Poverty

According to the World Health Organization, 1 billion people - one-fifth of the world's population - live in extreme poverty. Like Nuuru, these families cannot adequately feed themselves or plan for the future, working menial jobs or selling whatever they can to survive one more day.

In most Third World countries more than half the people survive by working in small-scale businesses or "microenterprises" outside the traditional economic structures. They are fruit vendors in Haiti; ragpickers in India; basketmakers in Ghana.

To climb out of poverty toward self-reliance, access to credit for these people is critical, but hard to come by. "It is lack of capital ... and lack of access to traditional channels of credit that hamper the business activities of most of this informal sector," says Kristin Helmore, who has written about microenterprise development for The Christian Science Monitor.

Government credit programs and traditional lending institutions do not offer affordable loans to the poor because they cannot afford loan fees, offer collateral, or show a credit history. They're viewed as high risks who yield a low return.

Though many poor people possess relevant skills and often own necessary tools, without access to credit they cannot establish or expand their business to sustainably support their family. Generation after generation is trapped in poverty.

What is microcredit?

"Most of the poor want to earn their own way," says Ron Sider, author of Rich Christians in an Age of Hunger and one of the world's leading advocates for the poor. "They have enormous social capital: intact families, a desire to work, pride, and integrity. But they need some help. One of the greatest success stories of the last 20 years is the explosion of micro-loans. Scores of Christian and other organizations are now empowering millions of desperately poor people with tiny loans of $75, $200, or $500 so they can start tiny businesses and thus provide a better living for their families."

From Bangladesh's now-famous Grameen Bank to projects in America's inner cities, more than 200 agencies are using various microcredit schemes to reach 8 million people in 43 countries.

Simply put, microcredit is a way of granting small loans to the world's poorest people, who don't qualify for loans from typical lending institutions, to help them start small businesses. Revolving loan-fund programs are most common. With an average repayment rate of more than 90 percent, loan funds are used over and over again without requiring additional money for overhead. As the capital revolves, or "recycles," the original investment multiplies over time, creating an excellent return and enabling more entrepreneurs to receive business loans.

To maximize the effectiveness of its loan programs, World Vision looks for individuals with a good business idea. "Sustainability begins with the idea that the underlying business must be viable in the real-world marketplace," says David Befus, an enterprise development coordinator for World Vision. "Finding businesses that are viable is not an easy task. It requires technical assistance, innovation, attention to quality control, and a sense of entrepreneurship."

Charging Interest

World Vision's program provides capital at reasonable rates of interest to trustworthy entrepreneurs, and also gives them the technical training and consultative advice that will enable them to succeed.

To ensure the success and self-sustainability of its revolving loan funds, World Vision sets appropriate interest rates to cover the costs of managing loans, bad loans, and inflation rates. In addition, applicants are carefully screened, choosing people who not only have a good business idea but who show personal initiative. Loan recipients also receive business training to maximize the potential for success.

The interest charged on the loans varies from country to country, but they are generally much higher than U.S. rates (though much lower than the local financial institutions offer) due to inflation rates and other economic realities.

Many funds charge interest rates between 1.5 percent and 2 percent per month (18 to 24 percent annually). In most cases, payments on the loan begin within a month. More than 96 percent of World Vision's loans have been paid back in full.

But most loan recipients need more than capital to succeed. They need training. A requirement for World Vision loan recipients is participation in business training, including bookkeeping, marketing, and managing of resources. In addition, World Vision staff emphasize Christian management principles - treating employees fairly and producing high quality products in an ethical manner. And in many programs, the entrepreneurs also hear the message of Christ's love at the training classes.

More than one-third of the money used to start the loan programs comes from individuals, foundations, and U.S. churches. The rest comes from U.S. government programs and from abroad.

Benefits of microcredit

The benefits of microcredit programs like World Vision's are legion. "Many development professionals see the strategy of providing credit to poor entrepreneurs as the most direct means of combating hunger," Helmore says. Among the first benefits of loans is that they enable people to obtain or grow more food. Families who ate only once a day sit down for three meals.

Thousands of families have become self-sufficient through World Vision business loans. In addition to obtaining more food, they're able to pay for social services such as health care and schooling for their children. Then, as their businesses take off, their dignity and self-worth are strengthened. The extreme poor tend to see themselves as outcasts, experts say, and as being incapable of making positive changes in their own lives.

"We believe that when you give somebody something as charity, you lower their self-esteem," says Barbara Rodey, executive director of the Foundation for International Community Assistance, a private, U.S.-based agency that provides small loans to the working poor in Peru, El Salvador, and Costa Rica. "But when they feel that what they have done has been through their own efforts, it changes their lives."

Then, as the funds recirculate in the borrowers' community, more people in that community benefit. Loans disbursed through World Vision's revolving loan fund in Bogota, Colombia, for example, have been repaid at a rate of 97 percent. With this repayment rate, the loan fund quickly became self-sustaining and grew to provide three times as many loans to needy families within three years.

Loan funds in 14 Latin American countries created nearly 5,000 jobs for the poor in 1996. More than $4.5 million has been loaned to 7,881 clients. The interest on these loans has paid for the entire cost of operations in all but four of the programs, and the capital investment continues to be recycled to new applicants as the funds are paid back.

Such small businesses grow fast and people quickly learn how to take initiative. Since industries need suppliers of raw materials, transporters for goods, advertisers, and items such as order forms and record-keeping books, there are often spin-off effects, which can begin to reverse the decline of state-run towns. People gain confidence. In Kenya a group of grateful business leaders used a portion of their profits to take charge of an orphanage that was falling apart under state management. People have refurbished the local church and attendance has trebled. Alcoholism and family abuse are declining.

The future of microcredit

Aid organizations like World Vision are increasingly adopting credit schemes to lift the world's poor. At a Microcredit Summit meeting held in Washington, D.C., last February, a gathering of representatives from helping agencies in 110 countries pledged to raise $21.6 billion to reach 100 million of the world's poorest families, especially the women of those families, with cash or in-kind credit for self employment by 2005.

Currently, World Vision manages about $8 million worldwide in the loan portfolio of its credit programs. In addition, World Vision spends about $30 million in 47 other countries, operating income-generation programs that will soon develop into full-scale loan operations. And by 2005, World Vision hopes to increase this loan portfolio to $100 million, benefiting 400,000 families.

"By raising people up both economically and spiritually," wrote correspondent Daryn Kobata in a recent edition of Pulse newsletter, "Christian microenterprise programs are moving people toward what aid agencies and donors have long sought - complete and sustainable development."

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Microenterprise: Giving Credit Where Credit is Due

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