The room did not look at all like the inside of a bank. There were no inch-thick security windows, no polished desks for the officers, or plush chairs for the clients, and no guards. Nor did the clients look much like the kind of people who apply for business start-up loans these days - no tailored suits or $200 briefcases. And they didn't sit in discreet anonymity, waiting their turns for confidential appointments with the loan officer. Instead, they gathered casually around a large table.
There were six clients: all mothers and Spanish-speaking immigrants to the United States. The loan officer, a 24-year-old administrator for a nonprofit group called the Foundation for International Community Assistance (FINCA), did not exhibit the smooth self-assurance of an experienced banker. She had never done this before, and it wasn't even her office - it was the cluttered, borrowed office of a local tenant's union. On the table, a plastic cover incongruously paraded a children's cartoon character. It was a Sunday afternoon in Alexandria, Virginia, and all the regular banks in the city were closed.
The "officer" invited the applicants to present their plans. The first, a woman named Rosa, explained that she had been running a child care business for five years, taking care of five children, 40 hours a week, for $100 per child. She needed $1,500 to buy toys, books, chairs, a table, and diapers so that she could expand her clientele. Another applicant, Sandra, explained that since most of the borrowers sold products like clothes, cosmetics, and business cards, it was important for them to receive loans before Christmas, so that they could buy more stock to sell during the rush season.
The paperwork had been done earlier. None of the applicants would have qualified for a loan from a conventional lender, but FINCA was not operating by conventional rules. Now, after each applicant agreed to assume a share of responsibility for the others, all six loans were approved. The meeting eventually ended with a celebration: food and drink and rounds of applause as each check was signed. With that, four new one- or two-person businesses - "microenterprises" - expanded, and two were born.
Outside the building, drivers passed by in their Toyotas and Buicks, unaware of the unusual transaction within. To a public accustomed to the idea that business ownership is something increasingly beyond the reach of ordinary working people, the chance of securing a startup loan without substantial collateral may be inconceivable. Yet such a chance - the chance to break the vicious circle in which poverty denies aspiring entrepreneurs the creditworthiness to work their way out of poverty - may be an essential [TABULAR DATA OMITTED] tool for reaching people who otherwise benefit little from the global economy.
What the fledgling loan officer was doing was part of a growing movement to extend business credit to the poor - whether in the villages of the developing world or the inner cities of the United States. FINCA's mission, which began 12 years ago in Bolivia, is to provide financial assistance to people who would be unable to get it through conventional channels - and to provide it in a way that lets new microenterprises get off the ground without either excessive risk of default or heavy reliance on charity.
These tiny enterprises contrast starkly, of course, with the companies most citizens of industrialized countries think of when we refer to "business." It is the large corporations that dominate much of our attention - in their omnipresent advertising, their lobbying and dealing with governments, and their performances on the New York or Tokyo stock exchanges. The world's 500 largest corporations, for example, control 25 percent of the world's economic output. Yet, they employ only one-twentieth of one percent of the world's population. It is with much smaller enterprises that most people make their livelihoods - many of them so small that even their own governments pay little attention to them.
By some measures, the real backbone of world commerce and global employment is made up of the millions of unsung small enterprises that farm small plots of land, cook food, provide daycare for children, make clay pots or straw mats by hand, do piecework for apparel makers, and carry out the countless other tasks that larger businesses don't do. In the cities of developing countries, for example, a growing percentage of the working population - sometimes estimated as high as 50 percent - is engaged in microenterprise activity. In the seven countries of southern Africa, there is evidence that small, unregistered enterprises provide work for substantially more people than the "regular," legal ones do. In Latin America and the Caribbean, more than 50 million microenterprises employ more than 150 million workers. Even in a wealthy country like the United States, more than a quarter of all employees work for establishments of fewer than 20 people, and those businesses constitute 87 percent of all U.S. business establishments.
The tasks these businesses perform cover the whole range of human activity, from the basics of housing and farming to the luxuries of entertainment and tourism. In many parts of the world, microenterprises frequently have only one employee - who is also the owner - or they benefit from the work of family members who are not really employees at all. In wealthy countries, many microenterprises may be larger, up to 10 or 20 people, for example, but still small in comparison to many of their competitors. But throughout the world, what most of these businesses do have in common is a lack of access to resources. They get little help from lawyers or accountants; often they are not able to afford retail space; many of them are not even legally registered as businesses.
As a result, many of these enterprises also lack the protections against excessively long hours, exhaustion, and injury or illness that larger or more officially regulated businesses are likely to provide. And much of the work is tedious and drab. In 1983, for example, Nobel prize winner Rigoberta Menchu described some part-time work done by her family and their village neighbors during her childhood in Guatemala. "We grow little beans but we don't eat them," she wrote. "They all go to market . . . for us it's almost a day's walk to the town and . . . we have to carry our beans on our backs. I used to carry 40 or 50 pounds of beans or maize from our house to the town. We'd sell maize too when there was something we needed to buy . . . . When my mother goes to town, she shouts very loud to all the neighbors: 'I'm going to market,' and they say: 'Buy us soap, buy us salt, buy us chile,' and tell her how much she should buy . . . . This is how we sell things as well. Most people in our village make straw plaits for hats, or they make mats, or weave cloth, so at the weekend they get it all together for one person to sell."
Meanwhile, the large corporations that have brought wealth to many parts of the world have failed to take that wealth to other parts - most notably to most of Africa and to large parts of South and Southeast Asia. These companies will have to be complemented by another form of business, one that can succeed in the poorest nations. Microenterprises have been able to do this.
In part, this is because microenterprises are more flexible and mobile than most larger, more complex and building-bound businesses. They provide part-time work to women and men who also have to take care of families, and seasonal work in places where crops have to be harvested. They require little capital, office space, or startup tittle. They can thrive in rural areas, thereby slowing the rush to urbanization. Jobs in microenterprises are accessible to immigrants and disenfranchised people who need to moonlight or share jobs. And they are run by women at least as often as men, helping to reverse a pervasive global inequity.
Microenterprises also offer an alternative to the conventional strategy for bringing development to poor nations - making large loans to governments for massive power or infrastructure projects. Such project-oriented development has come under growing criticism from grassroots activists, who say the projects often benefit large contractors and central governments more than they help local people. More investment in smaller, local industries, they argue, could bring economic and social benefits at far less cost. Their view is reflected in an old Chinese saying, "many little things done in many little places by many little people will change the face of the world."
CREDIT WITHOUT COLLATERAL
In recent years, some socially concerned lenders have begun to demonstrate that for people facing economic disaster, the need to feed one's family can be at least as strong an assurance of reliability as the fear of losing property.
An incident recalled by Ela Bhatt, the Chair of an Indian microcredit organization called Women's World Banking, demonstrates the point. "In 1975, when the bank was not taking many risks, a vegetable vendor came who was under such economic pressure that she was absolutely desperate. Her husband was an unemployed textile worker, and he would somehow roam about and fill his belly each day, but it was a very difficult situation for her and her children. The bank decided to extend her a loan of Rs.50 (about $5.50 in 1975 dollars), and someone went with her to buy green masalas like coriander, mint, ginger, garlic, and chilies. That day SEWA (the Self-Employed Women's Association) cared for her children, who were sick and hungry. She earned Rs.6 profit selling the masalas that day, and she took home food that night. She continued building her business day by day, and the next week she repaid Rs.51. It was hardly any risk for the bank and it literally meant life or death for that woman. After that we started extending those Rs.50 loans to many women."
The first major demonstration of this kind of lending came in Bangladesh, a country whose name was virtually synonymous with poverty, around 1978. A professor of economics at Chittagong University, Mohammad Yunus, began an experiment aimed at helping impoverished villagers. Defying the usual rules, he lent them unsecured money to start up small enterprises such as rice processing, rickshaw driving, and weaving. Instead of collateral, the borrowers would form small groups and agree to a pact of mutual liability - if one defaulted, the others would have to pay from their own profits. The participants in a pact often knew each other, which created peer pressure for successful repayment, and along with the compelling need for an income source in a place with few other opportunities, it produced a surprising result. After the first two years, Yunus found he was getting a payback rate of 99 percent. The experiment, by then officially the Grameen Bank, was expanded and has become legendary in the development world.
The Grameen prototype was widely watched, and by the mid-1980s, similar programs had been established by nonprofit aid organizations around the world. In Latin America, a nongovernmental organization called Prodem had been serving as a traditional charity, receiving grants and donations which it had then parcelled out as loans to poor borrowers who started microenterprises. But in 1990, Prodem was changed into Bancosol - an institution that functions like a commercial bank insofar as it does not lose money on its loans and is even able to raise its own funds by borrowing on commercial financial markets and through the interest collected on past loans.
As it became clear that loans from organizations like Bancosol to small enterprises were getting successfully repaid, more charitable organizations followed suit - metamorphosing from grant-dependent bodies into independent financial institutions that do not rely (or rely as heavily) on outside aid. In Paraguay, for example, a nonprofit group called the Foundation for Cooperative Development has lent $18 million to more than 15,000 microentrepreneurs during the past decade, creating nearly 20,000 jobs. One day last year, the Foundation offered $150,000 worth of bonds on the securities exchange, to finance a new portfolio of loans to microentrepreneurs. The offering was sold out in less than 10 minutes.
Meanwhile, the Grameen Bank, with its two-decade track record to inspire investor confidence, recently sold $163 million in bonds to six Bangladeshi commercial banks at annual interest rates between 4 and 6 percent - the first time the Grameen Bank had moved away from reliance on grants and soft loans from the International Fund for Agricultural Development and donor governments. In addition to the money from those bonds, Grameen officials, like the officials of other microcredit institutions, are reinvesting the money earned from past loans - a substantial sum, since interest rates paid by microentrepreneurs are commonly around 20 percent and payback rates frequently above 98 percent. Low-income people who would never have been offered loans by ordinary banks are now generating substantial profits for the Grameen Bank and other microcredit institutions.
Since the late 1970s, our understanding of what makes micro-lending succeed has improved to the point that the practice may now be on the verge of supporting a substantial portion of the world's smallest businesses. Two decades of experience have solidly confirmed the reliability of the high payback rates found by Dr. Yunus, which were eventually credited not only to the effectiveness of mutual liability, but to two other techniques he had used - externalizing credit-check costs, and offering support services to applicants along with the funding.
Externalizing credit-checks eliminated what had been considered a serious barrier to microenterprise lending by conventional banks - the expectation that the administrative costs of managing tiny loans could exceed the entire value of the loan. Community development banks found an ingenious solution: making the clients themselves do the legwork. When Yunus formed the Grameen Bank, he required each borrower to share responsibility for the loans of others within groups of five or six borrowers, in addition to the responsibility taken by the creditors. As a result, the loans had remarkably little overhead.
The support services include advice, technical assistance, and sometimes even the donated labor or equipment needed to make a venture succeed - all provided both by fellow members of a borrower's group and by representatives of the creditor. Some observers have come to believe that these services account for much of the success of microcredit - perhaps even more than the money itself. In the case of the Alexandria, Virginia group, for example, the borrowers did not speak English.
A FINCA representative quietly coached one of the borrowers on how to spell s-e-v-e-n-t-y, so that she could write a check. (In other countries, many of the borrowers are illiterate and sign documents with thumb prints, since they cannot write their names.) And the members of the group often send each other clients, buy each other's products, and coach each other on how to take care of their money.
Moreover, much of the corruption that can be rampant in the underground economy of the informal sector is curbed by this lending structure. In the Grameen Bank, all transactions occur in the presence of group representatives and other colleagues. This transparency, coupled with an annual rotation of leadership positions at the center, reduces the opportunities for abuse of power.
With a now proven formula - shared liability, peer support, and low overhead all contributing to high payback rates - one microcredit institution now states in its promotional literature, "Collectively, these banks are rapidly evolving into a World Bank for the poor." Mohammed Yunus seems to agree; last fall, he met with representatives of other microenterprise groups to plan a microcredit summit to take place in Washington, D.C., in early 1997. The declared goal of the summit, he said, is to reach 100 million of the world's poorest families, especially the women of those families, by the year 2005.
REACHING THE OUT-OF-REACH
In addition to reaching the disenfranchised poor of the developing world, these small enterprises offer a growing value to the industrialized world. Many of the "inner cities" of the United States, for example, emerged from the 1970s scarred by riot damage and gutted by extensive middle-class flight to the suburbs - leaving the blighted core labeled off-limits by conventional banks. Aid to inner cities has been limited largely to such programs as food stamps, subsidies, and welfare, which may be essential but which some experts - including Harvard Business Professor Michael Porter - believe do not build a long-term base for economic well-being or growth. Inner cities may be fertile ground for microenterprise, however; Porter notes that inner city markets remain poorly served, especially in retailing, financial services, and personal services - leaving abundant opportunities for new entrepreneurs.
LOAN RECORD OF ZAMIRAN
Loan Repayment Amount Amount Purpose (months) (taka) (US dollars)
1 6 1,000 $30 cow fattening (600) paddy husking (400)
2 4 2,000 $60 milk cow (1,900) chickens (60) ducks (40)
3 8 2,000 $60 cow fattening (800) paddy husking (1,200)
4 8 1,000 $30 goat rearing (500) paddy husking (500)
5 6 4,000 $120 milk cow (2,200) housing (1,800)
The loan history of a Bangladeshi borrower from the Grameen Bank who, along with her husband, took out five loans. The first loan was used for two purchases. Zamiran bought a cow for 600 taka, which was then fattened and sold for 1,000 taka, enough to buy a tin roof for her house. Another 400 taka was spent on unhusked rice ("paddy"), which was then milled and sold at a profit high enough to repay the entire loan. The second loan bought a cow that produced milk for six months and was then resold at a profit, with the income used to mortgage a small piece of rice land - and so on. All loans were repaid on time, and the family, which ate one meal a day before borrowing the money, was able to eat three meals a day by the time of the last loan.
In Seattle, Washington, a microcredit group called the Cascadia Revolving Loan Fund has confirmed Porter's assessment by offering microcredit loans along with strong support services; it has given borrowers technical assistance on subjects ranging from accounting and employee benefit plans to marketing. In eight years, it has loaned nearly $2 million and lost less than 1 percent of it. "That's competitive with traditional banks on a portfolio they wouldn't touch," says Cascadia's executive director, Patty Grossman.
It is not just unemployment, however, but a more pervasive change in the corporate jobs market, that is pointing the way to a stronger role for microenterprise. The change can be seen in several concurrent trends: greater reliance on temporary or contract work; the trends toward telecommuting and job-sharing; and a widely noted retreat from the old understanding that a job was a stable, long-term relationship like a marriage. Even in Japan, job security is no longer the almost inviolable bond between employer and employee it once was.
As industrial countries proceed down this path, in a sense they are following the job strategies of the developing countries, rather than the other way around. The industrial countries are developing more of the small, micro, and individual enterprises that have long formed the backbone of rural economies and poor nations - except that in the industrial countries, these small businesses are often consulting firms and independent contractors. As corporate mergers and consolidations shed traditional employees, much of the work they did is being done by these contractors or consultants.
These trends have been labeled "de-jobbing," and according to writer Walter Truett Anderson, the process is proceeding at such a pace that many economists, management experts, and futurists are now talking freely about the "end of the job." Instead of possessing a "job," people will simply do work. The job, in fact, is a relatively recent social invention. As William Bridges notes in his book, Jobshift, "Before 1800 - and long afterward in may cases - 'job' always referred to some particular task or undertaking, never to a role or a position in an organization." You might do a job, but you didn't have one.
The effects of this shift are intensified by the growing mobility of the global labor force. In more affluent societies, people with marketable skills move freely from place to place. In the past, their work might have dictated where they lived, or vice-versa. Now, many people choose both. A chemical engineer who once might have had to live near Seacaucus, New Jersey or Metarie, Louisiana, may now decide she wishes to live in the mountains of Colorado, while still working as an engineer. With a good modem and a nearby airport, she can.
Meanwhile, in more troubled parts of the world, the mobility driven by civil upheavals and environmental or economic disruption is producing a very different, though not unrelated, kind of reliance on independent enterprise. Immigrants, for example, may not be quickly welcomed into jobs in their host countries - and are forced to create places for themselves by being flexible and resourceful. Many resort to moonlighting, working part-time, and sharing jobs. In Eastern Europe, writes Anderson, such people become "hustlers, traders, independent manufacturers, freelance deal-makers."
BIGGER IS NOT ALWAYS BETTER
Though micro-enterprises offer an opportunity to provide employment for groups of people not reached by large corporations, they are not suitable substitutes for all the functions performed by big companies. They cannot make medical equipment or aluminum, build large aircraft, or distribute fresh food to thousands of retail stores every few hours. They do not have the capital for large, long-term investments, so they usually can't conduct research and development for new products, and they can't exploit economies of scale.
On the other hand, it would be a mistake to continue regarding microenterprises as the poor cousins of the corporate world. For many tasks, small businesses may be better suited; they have the inherent advantages of high flexibility, lack of bureaucracy, and speed of decisionmaking. Very small businesses may also find more success in certain cultural settings than big companies do.
Some analysts argue, for example, that China is better suited to family businesses than to giant corporations. And in the late 1980s, when Chinese peasants were migrating to the cities in numbers large enough to alarm the government, Deng Xiaoping encouraged small towns and villages to start their own enterprises, creating jobs in the countryside so villagers could stay there. Owned by the local governments, these businesses usually employed fewer than 100 people, making anything from metal pails to silk rugs. Some of these undertakings were too large to be considered microenterprises, but were far from being big companies. Others employed just a few people. Yet by 1991, they were reportedly contributing about 30 percent of China's GNP. The number of these countryside enterprises had soared from 1.5 million in 1978 to 19 million in 1991, creating about 112 million new jobs - and slowing the migration into cities.
In most countries, however, microenterprises have been neglected. They have not been rewarded with the subsidies, tax breaks, and other benefits often received by major industries as political spoils; rarely can they afford to participate in financing political campaigns, lobbying for favorable legislation, or, in some countries, establishing profitable relationships with corrupt governments.
In the developing countries, the major flows of funding support have been historically oriented to large projects - hydroelectric dams, highways, pipelines, and mines. Only more recently has attention begun to shift to the development of "human capital" - the nurturing of educated and healthy people who can contribute to sustainable economic growth. But little official attention has focused on the kind of small-scale entrepreneurship that could help to give such people more opportunities to use their growing capabilities.
Even so, some analysts believe that it would be a mistake to shift public assistance toward microenterprises; they argue that without first investing adequately in electricity and roads, few businesses of any size will thrive. These analysts, such as Richard Rosenberg of the World Bank, also claim that the benefits to society that come from human capital investments like educating children are larger than those that will accrue from assistance to tiny companies, and that without growing investments in education, even microenterprises will suffer. Rosenberg strongly supports finance for microenterprise when funds are available, but argues that the funds should not come from spending on other more urgent programs, such as developing higher levels of literacy.
Critics also note that even where small businesses have received strong support, they have had a mixed history of success and failure during the past quarter-century. Many microenterprise development schemes emphasized supplementary, part-time income instead of full businesses, and not enough income was earned to support families or to give women more say about how money would be spent in their households. As a result, they did not improve women's status in the labor market, or expand their opportunities.
A key to making microenterprises a legitimate path for development in the future will come with the kinds of changes - in financing, support services, and public policy - that allow these activities to operate as full-fledged personal, family, or small-group businesses rather than just supplementary crafts grafted onto existing livelihoods. In this regard, the pioneer microcredit banks have made an important breakthrough. More recently, both the World Bank and the Inter-American Development Bank have decided to allocate funds for microcredit. The World Bank pledge has been set at $200 million.
In an era when governments are financially strapped all over the globe, the prospect of securing much stronger public support for microenterprise development might seem remote. But the big development bank decisions illustrate a unique quality of this kind of development that could give it a critical boost. Microenterprises have a strong potential appeal to both conservative and liberal politicians.
For liberals, there is the opportunity to help disenfranchised people - women and the poor - to thrive. There is the appeal of enabling people to work in ways that give expression to their individuality, rather than as cogs in a large industrial machine. And, perhaps most appealing, there is the thought that microenterprises give the worker a closer look at the meaning of his work. If he is a farmer, for example, he is likely to be closer to the land than if he is an employee of a large agribusiness firm; he is more likely to have to work personally with the complexities of local soil, weather, and water, and to be more knowledgeable about what practices are sustainable.
For conservatives, there is the opportunity for disenfranchised people to make their way out of poverty by virtue of hard work instead of charity. There is the claim of some analysts that development loans would produce better results if, instead of being directed to governments, they went straight to private industry, including small industry. And, finally, there is the possibility of taking moral pressure off corporations that are laying off large numbers of employees, if it can be said that those ex-employees now have ample opportunities to live their own lives as independent small businesses or contractors. The World Bank and IAD Bank decisions may reflect the influence of such thinking.
Whatever their origin, the development banks' entry into finance for microenterprises can be seen as a momentous endorsement - not of microenterprise as a substitute for infrastructure projects or for children's education or public health, but as an important complement to those needs. No longer stigmatized as a "backward" kind of business, to be rolled over by the juggernaut of large-scale modern development, microenterprise has the potential to be not only a very productive, up-to-date kind of business, but one that may well prove vital to the long-term sustainability of human economies.
Hal Kane is a co-author of Worldwatch Institute's State of the World 1996.
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|Title Annotation:||importance of small businesses to the global economy|
|Date:||Mar 1, 1996|
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