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Microcredit--bolstering entrepreneurship: microcredit is big business not just internationally, but here in Canada as well.

While it may stir immediate thoughts of hardscrabble living, the reality of microcredit is a far cry from the kind of hard-luck images conjured up by old songs like 'Brother, can you spare a dime?'

In fact, microcredit is far from a 'micro' concern--it's a multi-million dollar, grassroots-intensive industry spurring business innovation and creativity among some of the world's least likely loan candidates.

Microcredit is the process of loaning small sums to business people with big--and marketable--ideas. Microbusinesses are very small companies of less than four people, and the loans help them get started in business, offering a big step up on the path out of poverty.

Microcredit has enjoyed the limelight of late: 2005 was the United Nations 'International Year of Microcredit.' There was even a federal National Microfinance Day, celebrating the Canadian International Development Agency's investment of more than $1 billion over 35 years in microfinance programs in the world's developing nations.

And last October, economics professor and banker Dr. Muhammad Yunus, founder of Bangladesh's Grameen Bank, was awarded the Nobel Peace Prize for creating modern microcredit. In south Asia, the Grameen Bank has lent more than $5 billion to upwards of 5.3 billion borrowers since 1976; its efforts include a Struggling Members program that serves 55,000 street beggars. It's a model that has been adopted in more than 20 other countries.

Microcredit in Canada

If you thought that microbusiness was the stuff of developing nations only (or perhaps that Canadian microbusiness was limited to the 'microbrewing' kind), think again. Though it sometimes tends to coast a little under the radar of the major lending institutions, Canada's microcredit industry is thriving.

There is a philosophy the Grameen Bank and Canada's own microlenders have in common: both believe in the notion that low-income earners can be both excellent entrepreneurs and reliable borrowers.


Microcredit is defined as a loan under $25,000. But economic differences between Canada and the developing nations change the landscape a bit--Canada has an economic infrastructure that includes a wide variety of loan options, including credit cards; as well, a single Canadian entrepreneur's one-person venture could be considered a microbusiness, while employing scores of people through contract work generating millions of dollars. It's a far cry from the standard microbusiness image, perhaps of a street-based seller of dyed goods on a dusty road in southern Asia.

And yet Canadian microfinance proponents comprise a flexible but strong cornerstone of our small business economy. According to the Canadian Bankers Association, 54% of borrowers of chartered bank financing are taking out loans under $25,000, and within that band are a wide range of businesses, so that the banks comprise 63% of total microcredit financing.

According to a Statistics Canada survey of suppliers of business financing:

* Domestic banks supplied just over half of the $7.9 billion in business microcredit in 2004;

* The average loan amount authorized was $7,440;

* In 2004, more than 80% of loans applications submitted by micro-enterprises were approved.

Getting institutions involved in both establishing microcredit programs and delivering them is essential, says Ted Mallett, vice-president of research, and chief economist at the Canadian Federation of Independent Business (CFIB). "We've been advocating these kinds of roles, as we need to find ways to address the gaps."

Fulfilling a need

While the average loan to a CFIB member is $100,000, many people get started in business with much less, and there must be a process in place to serve them, says Mallett. "There are particular segments in society that need access to these lending procedures."

Dollar-wise, banks have a bigger slice of the micro-financing pie, and yet grassroots organizations are busily getting funding to worthy micro-borrowers. In addition to organizations like the Canadian Youth Business Foundation and the Canadian Community Investment Network Cooperative (CCINC), a number of community development funds are seeded by government, the private sector and donations.

"Working with borrowers at the local level is essential," says Mallett, "It's important that people who have control over finances have a sense that 'this will be a good venture.'"

Roughly a third of CFIB's 100,000 members are microbusinesses, says Mallett. "They don't always need financing but the ones who are new to entrepreneurship may need it. [Clearly] it's not the same dynamic as in developing nations. In Canada the context is that here we tend to have access to people with money or access to funding through the use of credit cards."

Sheila Carruthers, executive director of Calgary-based CCINC, a 26-member national co-operative focused on bringing together the voices of community investment in Canada, says community investment serves people who are underserved by traditional lenders at the local level.

In community investment, "a pool of capital, along with relevant technical assistance, is used to make loans and/or equity available to low-income individuals, micro-enterprises, affordable housing projects, non-profits, environmental projects and community development initiatives," says Carruthers. "The intention is to alleviate poverty and to encourage co-operative business models.

"[The] key here is that money alone is not enough if a loan recipient lacks the capacity to efficiently use the funds," adds Carruthers. "The risk of unmanageable debt can be mitigated by providing technical assistance with the capital to ensure the project, business or non-profit is carefully planned and implemented, and the money is used wisely."

But where are the Feds?

A good example of local action is the Ottawa Community Loan Fund (OCLF), which provides short-term loans of up to $15,000 to small business owners, new entrepreneurs, internationally-trained professionals and community groups.

OCLF managing director George Brown says his organization, incorporated in 2000, was created as a vehicle to meet the needs of small business financing at a local level.

In the past couple of years, OCFL has partnered with the Ottawa Women's Credit Union and with Alterna Savings; Alterna is a self-described 'people and communities first' financial services organization with 150,000 members; OCLF's volunteer committee (drawn from the business and banking sector) reviews business plans and loan applications while Alterna looks after loans administration.

Brown is proud of OCLF's track record. "We can claim responsibility for over $600,000 worth of loans," says Brown. "[That's] 89 loans over four to five years of lending and the average loan is $6,000."

Microbusinesses represent a wide range of businesses, many in the service industry, such as landscaping, interior decorating, flower shops, photography, and joint ventures--even a comic book shop. One enterprising entrepreneur, an electrical engineer, turned his OCLF microloan into a successful home and business lighting venture and is getting ready to open a second retail outlet.

The challenge with microlending is that it often coasts under the radar of the federal government and the major banks. While community investment groups hesitate to criticize either the feds or the chartered banks, the general question is 'where will people go if they have a good idea, they need a small amount of money, but no one will lend it to them?'

"The poor are not a lousy credit risk if you do the due diligence that we do," adds Brown. "We grill them over the business plan that they bring in. They have to have a sound business plan."

It's clear that support for microbusiness, both here and internationally, continues to be a focus for Canadian lenders. Last November, for instance, Halifax hosted the Global Microcredit Summit 2006; a follow-up to the first summit held in 1997, it brought together more than 2,000 delegates from 100-plus countries to look at the progress being made in reaching and extending credit to the world's poorest.

And the guest speaker? Appropriately enough, Nobel Prize winner Muhammad Yunus, who got things started in a big way three decades ago.

John Cooper is a Whitby, Ont.-based freelance writer.
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Title Annotation:government issues
Author:Cooper, John
Publication:CMA Management
Date:Feb 1, 2007
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