lewisma9 at msu.edu
09-02-2004, 08:22 PM
World Business Council for Sustainable Development (WBCSD)
http://www.wbcsd.org/plugins/DocSearch/details.asp?type=DocDet&DocId=7222
Real business, real small
The American Enterprise, 1 September 2004 - The concept of giving very
small loans to the poorest of the poor to help them establish businesses
first emerged some 30 years ago. Since then, "microfinance" programs around
the world have exploded. And they have proven very successful and
cost-effective.
Ruth is living proof. She is a mother who lives in the Filipino slum of
Tondo, outside Manila. Nearly half of Tondo's citizens live in a state of
abject poverty, according to the World Bank. The neighborhood has little
infrastructure other than sporadic electricity, and the tin shacks in this
vast squatter area are inhabited by as many as 250,000 people.
However, Ruth has been able to parlay a series of microfinance loans (some
as small as $ 60 U.S.) into a growing enterprise that brightens the slums
of Tondo like a desert flower. She owns what the Filipinos call a Sari-Sari
store--a counter at the front of her home where she sells everything from
canned goods to candy to baked items.
She also owns the shack across the muddy path from her store, and uses it
for an array of purposes: storing inventory, including some she wholesales
to other Sari-Saris; hatching eggs in an incubator (as many a 50 at a time,
which she then sells locally); and operating a"movie theater" where local
children sit on wooden benches and watch pirated Hollywood films for 5
pesos (about 10 cents U.S.).
While Ruth's income from these ventures is statistically insignificant
according to most economic measures, her entrepreneurial efforts have
tangible benefits for her family. In addition to regular meals--a luxury
that many of her neighbors cannot afford--Ruth's business income allows her
occasionally to purchase new clothing and shoes for her children. She and
her children may one day get out of Tondo for good.
The Center for Community Transformation, the microfinance institution (MFI)
that has given Ruth her loans, currently enjoys a 95 percent repayment
rate. This is an astonishing rate in what should be a high-risk enterprise.
Five years ago, the Center had a loan repayment rate that hovered around 50
percent.
At that time it practiced group lending. Originally, group lending was the
preferred method for distributing microfinance loans. The assumption was
that the very poor with no economic track record could be lent money in
groups, which would cover the risk of the individual members. If one person
in a group couldn't make his debt repayment one particular month, the
burden would be spread among the larger collectivity.
But this proved less successful at encouraging loan repayment than
individual lending. And many MFIs have been forced to adopt a
you-can't-save-the-world-if-you-can't-pay-the-rent attitude. So there has
been a shift toward individual lending.
A central idea behind micro finance is that it is not charity. It is
supposed to be a profitable banking industry that encourages economic vigor
among the poor. That requires identifying individuals with energy and ideas
and encouraging them.
One problem with the shift to individual lending is that microfinance
institutions increasingly seem to be fighting over a small set of people
like Ruth who have demonstrated their entrepreneurial abilities and already
have a successful business.
This also explains why repayment rates have increased, though it's not
necessarily an indicator of successful economic development. The original
mission of microfinance was to bring business thinking to new places and
people.
According to George Mason University economist Steve Daley, microfinance
organizations "don't distinguish between the poor and the economically
active poor, they distinguish between good risk and bad risk as a financial
institution."
Many such organizations are now so focused on the bottom line, they aren't
putting enough effort into cultivating entrepreneurship where it doesn't
exist yet but could take root given some support and encouragement.
Microfinance institutions are now at a crossroads. They must find a balance
between being able to pay their own rent and providing an ever expanding
circle of people with the capital and guidance that can help them become
agents of long-term growth. It won't be easy.
Copyright 2004 Gale Group, Inc.
ASAP
Copyright 2004 American Enterprise Institute for Public Policy Research
The American Enterprise
~~~~~~~~~~~~~~~~~~~~~
Copyright © 2004 LexisNexis, a division of Reed Elsevier Inc. All rights
reserved.
Terms and Conditions Privacy Policy
Author [] [] Mark Hemingway
Publication Date [] [] 01.09.2004
Document Type [] [] News articles
Issue/Topic [] [] Financial Sector
Sustainability & Markets
Sustainable Livelihoods
Region [] [] Asia
Country [] [] Philippines
Source [] [] The American Enterprise
This post transferred from the cdb-l mailing list
http://www.wbcsd.org/plugins/DocSearch/details.asp?type=DocDet&DocId=7222
Real business, real small
The American Enterprise, 1 September 2004 - The concept of giving very
small loans to the poorest of the poor to help them establish businesses
first emerged some 30 years ago. Since then, "microfinance" programs around
the world have exploded. And they have proven very successful and
cost-effective.
Ruth is living proof. She is a mother who lives in the Filipino slum of
Tondo, outside Manila. Nearly half of Tondo's citizens live in a state of
abject poverty, according to the World Bank. The neighborhood has little
infrastructure other than sporadic electricity, and the tin shacks in this
vast squatter area are inhabited by as many as 250,000 people.
However, Ruth has been able to parlay a series of microfinance loans (some
as small as $ 60 U.S.) into a growing enterprise that brightens the slums
of Tondo like a desert flower. She owns what the Filipinos call a Sari-Sari
store--a counter at the front of her home where she sells everything from
canned goods to candy to baked items.
She also owns the shack across the muddy path from her store, and uses it
for an array of purposes: storing inventory, including some she wholesales
to other Sari-Saris; hatching eggs in an incubator (as many a 50 at a time,
which she then sells locally); and operating a"movie theater" where local
children sit on wooden benches and watch pirated Hollywood films for 5
pesos (about 10 cents U.S.).
While Ruth's income from these ventures is statistically insignificant
according to most economic measures, her entrepreneurial efforts have
tangible benefits for her family. In addition to regular meals--a luxury
that many of her neighbors cannot afford--Ruth's business income allows her
occasionally to purchase new clothing and shoes for her children. She and
her children may one day get out of Tondo for good.
The Center for Community Transformation, the microfinance institution (MFI)
that has given Ruth her loans, currently enjoys a 95 percent repayment
rate. This is an astonishing rate in what should be a high-risk enterprise.
Five years ago, the Center had a loan repayment rate that hovered around 50
percent.
At that time it practiced group lending. Originally, group lending was the
preferred method for distributing microfinance loans. The assumption was
that the very poor with no economic track record could be lent money in
groups, which would cover the risk of the individual members. If one person
in a group couldn't make his debt repayment one particular month, the
burden would be spread among the larger collectivity.
But this proved less successful at encouraging loan repayment than
individual lending. And many MFIs have been forced to adopt a
you-can't-save-the-world-if-you-can't-pay-the-rent attitude. So there has
been a shift toward individual lending.
A central idea behind micro finance is that it is not charity. It is
supposed to be a profitable banking industry that encourages economic vigor
among the poor. That requires identifying individuals with energy and ideas
and encouraging them.
One problem with the shift to individual lending is that microfinance
institutions increasingly seem to be fighting over a small set of people
like Ruth who have demonstrated their entrepreneurial abilities and already
have a successful business.
This also explains why repayment rates have increased, though it's not
necessarily an indicator of successful economic development. The original
mission of microfinance was to bring business thinking to new places and
people.
According to George Mason University economist Steve Daley, microfinance
organizations "don't distinguish between the poor and the economically
active poor, they distinguish between good risk and bad risk as a financial
institution."
Many such organizations are now so focused on the bottom line, they aren't
putting enough effort into cultivating entrepreneurship where it doesn't
exist yet but could take root given some support and encouragement.
Microfinance institutions are now at a crossroads. They must find a balance
between being able to pay their own rent and providing an ever expanding
circle of people with the capital and guidance that can help them become
agents of long-term growth. It won't be easy.
Copyright 2004 Gale Group, Inc.
ASAP
Copyright 2004 American Enterprise Institute for Public Policy Research
The American Enterprise
~~~~~~~~~~~~~~~~~~~~~
Copyright © 2004 LexisNexis, a division of Reed Elsevier Inc. All rights
reserved.
Terms and Conditions Privacy Policy
Author [] [] Mark Hemingway
Publication Date [] [] 01.09.2004
Document Type [] [] News articles
Issue/Topic [] [] Financial Sector
Sustainability & Markets
Sustainable Livelihoods
Region [] [] Asia
Country [] [] Philippines
Source [] [] The American Enterprise
This post transferred from the cdb-l mailing list