Movin' on up: Mexico City and federal micro-credit programs aim to help small-business owners finally get a piece of the pie. (Spotlight).

It was with great pain that I Maria Elvia Cruz saw her successful furniture business crumble under the weight of the devastating peso crisis of 1994/1995. Before that, it was inconceivable that she would turn to the government for help. But now, as head of Hoy y Siempre, a group of 30 Mexico City women who have received Mexico City government-sponsored micro-credits to launch their own businesses, she is optimistic that her small investment will one day bring big rewards.

Cruz's woes are not unlike those of millions of Mexicans who suffered what became one of the nation's worst economic crises in seven decades. The devaluating peso sent interest rates soaring and triggered a wave of loan defaults, causing credits to dry up and leaving many like Cruz out of business.

This time around, however, she is relying on a Mexico City-run social-lending program to operate a small bakery in a working class neighborhood in the south of the city. Although scant resources have hampered her efforts, Cruz says she has not given up hope that the business will turn around.

To date, she has received 6,000 pesos in micro-credits from the Mexico City government, and it appears that additional funding is on the way. That's good news for many disgruntled entrepreneurs who have been excluded from high-street bank financing since 1995. Because more than 95% of the nation's businesses are considered small, often family-run enterprises, local and federal economic development authorities know all too well that they cannot afford to turn their backs on people like Cruz.

NEW PRIORITIES

Prior to his Dec. 1 inauguration, then President-elect Vicente Fox attended numerous international conferences on micro-credits, sending a clear signal that social-lending programs would be a top priority for the incoming administration. The high success rates of such programs in Mexico and abroad have convinced local leaders of all political stripes that such small actions can have big results.

And nobody knows that better than President Fox. While governor of Guanajuato in the late 1990s, he set up several micro-credit programs that now boast successful results. For example, during his administration, the Santa Fe program helped more than 41,000 people receive average loans of 3,000 pesos, while the Fondo Guanajuato program lent about 104 million pesos to more than 8,500 small-business owners. There was also the Guanajuato Rural Development Fund, which reached out to some 37,000 farmers.

President Fox wants the small business loans to nourish the micro-economy, which has grown significantly less than the macro-economy in recent years. The National Fund for Social Lending (Fonaes) says it will earmark 200 million pesos for micro-credits this year alone. The goal of its recently launched National Program for Small-Business Financing is to grant 40,000 small loans a year. Thirty-thousand petitions have already been received, despite the fact that the program is not yet in full swing. Loans will range between 500 to 30,000 pesos, with the average loan expected to be around 5,000 pesos.

The Mexico City government has followed suit. Rocio Mondragon, executive coordinator for Mexico City's small business fund (Focome), says that this year her agency will authorize 100 million pesos in credits and loans. From 1998 to 2000, Focome lent 37 million pesos to about 4,500 recipients. This year, some 31,000 people will receive funding--about an 85% increase over last year. According to Mexico City Economic Development Secretary Alejandro Encinas, residents in working class neighborhoods would have first priority. For example, the southern Iztapalapa neighborhood, rife with impoverished barrios, has more than 126 so-called zones where residents can qualify for loans. By contrast, the Benito Juarez neighborhood, considered several steps up on the socio-economic ladder, has only five such zones.

Cruz of Hoy y Siempre welcomes the additional funding with open hands. Still, her own experience with the bakery has led her to believe that there is plenty of room for improvement. One problem, she says, is that Focome requires all applicants to be literate. But many members in her group are indigenous women who cannot read or write. What's more, she says, the micro-credits--averaging about 3,000 pesos--are insufficient when facing competition from larger and better-equipped businesses.

"We certainly appreciate the help we have received," she says, "but at my bakery, for example, we must do everything manually because we do not have the money to buy equipment, such as industrial mixers, that would allow us to make a decent profit."

So, while she waits for additional funding, Cruz works as a secretary to make ends meet. But whether or not she will receive more credit is only part of her concern.

"I think the program lacks organization and it doesn't reach out to enough people," she says. "The requirements make me think that the program needs to be more flexible."

Even with the projected increase in micro-lending volume, Rocio Mejia, executive director of the Focome micro-credit funding, acknowledges that in a city with an estimated 3 million people living in poverty, only 1% of those people will benefit from the program.

But looking beyond the immediate benefits of small-business promotion, Fonaes General Coordinator Eduardo Ibanez says the federal government is expecting loans and micro-credits to generate additional tax revenue. By incorporating a small fraction of the nation's informal economy into the formal sector, Ibanez says the macro-economy stands to gain as well. The informal economy comprises about 40% of the working population who still pay no taxes. Their wages represent about 17% of the nation's total gross domestic product.

LENDING PROTOTYPE

The benefits of micro-lending were first touted following the Grameen Bank model in Bangladesh, which began in 1976. The Bank's founder, Muhammad Yunus, discovered that it was possible to lend to the poorest of poor without the need for collateral. Lending at market rates ensures that the beneficiaries understand that they are not being given charity, but an actual loan which they must work to repay. The Grameen model has grown to cover 35,000 villages and more than 2 million borrowers.

With a remarkable 97% repayment rate in Bangladesh, many other nations such as Mexico have adopted similar programs. The Federal District government, which awards loans on a group basis, credits the Grameen Bank for pioneering the concept of so-called solidarity groups. Under this scheme, each member is responsible for the payment of all the other members of the group and must therefore take care in selecting only trustworthy people to join them.

More than 90% of the Grameen Bank's beneficiaries are women, and Mexican authorities have also been more inclined to favor loans to women, whom they consider lower risk recipients. Although Ibanez acknowledges it is a gross generalization, he says men are more likely to squander their loans in cantinas or non-work-related activities. Consequently, he says that this year Fonaes will approve loans for housewives in rural communities. Because most banks consider it unprofitable to open branches in such areas, government-sponsored loans are the only option for people who live in sparsely populated regions, he says. Tin many rural areas, a large percentage of the male adult workforce has been forced to seek employment opportunities in larger cities. Some go one step further, leaving their loved ones behind and making the perilous journey to the United States. For rural housewives with children to look after, small loans can make all the difference while their husbands eke out a living far away from home.

Low interest and default rates have left both creditors and debtors hungry for more. Focome authorities were pleased to report a 15% default rate last year, which they consider relatively low. Mejia, of Focome, says her agency's success is largely due to the solidarity groups.

So, new ways of promoting a "culture of payment" have proven that social-lending programs can work in Mexico, says Mejia. But really, the idea isn't a new one: Mejia says some Mexicans used to borrow from socalled aboneros. Aboneros were neighborhood creditors that would go door-to-door offering easy payment plans on certain goods at a fixed interest. So, if a housewife wanted to buy kitchen utensils, she could make weekly payments until the merchandise was paid off, at which point the abonero would deliver the merchandise. It is a practice that has survived to this day.

And so has Maria Elvia Cruz. Even though her experience in 1995 serves as a painful reminder of all that can go wrong, she isn't ready to give up. Should she receive another micro-credit for her bakery, she knows exactly what she will do with the money.

"I want to buy more equipment and I want to replace the cardboard roof with something sturdier, maybe tin roofing," she says. "Little by little, I am confident we'll make a success out of the business. The only thing we are asking for is the chance to prove it."

John Hecht is a Mexico City-based freelance writer.