Micro Credit Lending Experiences

Reprinted from Crafts News Spring/Summer 1995 Vol. 6, Issue 24
1001 Connecticut Ave NW, Suite 1138
Washington DC 20036

As recently as 1990 donors and micro enterprise development program specialists voiced doubts about extending financial services to people in the marginal economies of developing countries. Few people believed that low-income people, virtually without jobs or income, and hampered by gender, class and social barriers could develop successful enterprises, pay back loans, and generate enough loan volume to be able to service institutions. Five years later poverty lending, a savings and loan method for the poor, has enabled these people to expand and diversify their enterprises and increase their income enough to repay loans at market rates and make savings deposits.

Poverty lending's success has led to an increase of organizations which are using various methodologies to reach very poor people in many developing countries. The non-governmental organizations are starting to integrate themselves into national financial systems as profit enterprises since profitability is crucial to long-term sustainability. As they begin to achieve self sufficiency, micro enterprise programs are increasingly providing credit to the poor. Mainstream financial institutions usually cannot provide the special services needed by very small enterprises since their capitalization is small and their planning cycles short. Because micro enterprises usually keep no formal records and have neither credit ratings nor collateral, the costs associated with lending to them are high.

In the last 15 years several institutions like the Grameen Bank, ACCION, and the World Council of Credit Unions have revolutionized micro enterprise finance through the following techniques:

Repayment incentive structures:
Peer group lending, wherein a group of borrowers guarantee each others' loans and there is the promise of continuing, increasing credit for borrowers paying on time.
Streamlined administration:
Simplified and decentralized loan applications, approval and collection processes which assign much of the approval process to borrowers.
Market-based pricing:
Though micro enterprise loans must pay higher than market rates to cover costs and prevent fund depletion, they are willing to do this to secure credit which would cost even more through informal lenders.

Yet micro lending cannot he sustained only by grants from donor agencies. Micro enterprise finance systems need to support themselves, as well, with locally generated funds. Moreover, low-income borrowers tend to save better when provided with appropriate savings mechanisms. Private voluntary organizations which are involved in micro enterprise lending must shift their attitudes from alleviating social problems to providing market-based financial services, As these organizations improve their institutional performance and thus become increasingly self-sufficient, they are less dependent on charitable donations. Once a group accumulates some savings it then , must operate according to its national financial regulations. Some successful micro enterprises illustrate the ways in which they are effecting this transition.

Bank Rakyat (Indonesia's Unit Desa system) is possibly the most successful existing micro credit institution with two million borrowers and eight million savers who fully finance its loans. Between 1984 and 1989 the Unit Desa system was transformed from a highly bureaucratized and subsidized channel for credit into a self sustaining and profitable financial intermediary. As of 1990 the Unit Desa system made 115,000 loans each month with an average size of $437. It shows that providing financial services to rural areas can be profitable.

BancoSol is the first private commercial bank that lends specifically to low-income entrepreneurs. It grew directly out of a successful non-profit micro lending program, Fundacion pars la Promocion y Desarollo de la Microempresa (PRODEM), Although PRODEM succeeded in covering its operating costs with interest income lending fees it could not grow at a sufficient rate to meet the huge demand for credit. In 1989 its directors began creating a market-driven alternative to the non-government organization (NGO) model, Today BancoSol's success derives largely from its ability to keep the best parts of an NGO while gradually shifting to the more formal, private sector.

Asociacion Grupos Solidarios de Colombia (AGS) is an organization which provides free technical assistance, institutional development, new program promotion, and financial intermediation to its member groups. In 1989 the savings and loan cooperative, AGSCOOP, was created. With membership consisting of institutions rather than individuals, it has been helpful to small groups as they' obtain loans until they become self-sufficient. AGS-COOP was instrumental in changing attitudes toward positive interest rates at the national level. Moreover, it has been successful in introducing greater financial sophistication into NGO programs and reconciling the conflicts between business and social welfare approaches.

Major donors and other development institutions are increasing their funds for poverty lending institutions. The World Bank has increasingly engaged local NGO's in its operations, in part because of their first hand knowledge of the needs and interests of the poor. To promote this cooperation the Bank is seeking means to institutionalize its work with NGO's. While it does not directly fund them, it provides social funds which support projects proposed by NGO's and a number of special grants programs which support them.

In 1994 the Bank's Private Sector Development Department developed and launched a Small and Medium Enterprise pilot initiative which helps NGO's, This consists of three initiatives CARE Canada Tools for Development, Women's World Banking Best Practices and Enterprise Network Initiative, and FUN DES Enterprise Centers,

Recently the Bank's board approved a $30 million fund whereby direct loans and grants will be made to NGO's. Also the InterAmerican Development Bank allocated a $500 million for a five year micro enterprise initiative to strengthen NGO's which carry out micro enterprise programs.

Generally, multilateral development banks contain funding for micro enterprise lending. however these are threatened by many' U.S. legislators in Washington who wish to phase out U.S. contributions over the next five years. Micro enterprise lending falls under the Development Assistance (or the 150) account with the U.S. Foreign Assistance budget of $14.4 billion representing one percent of the U.S. budget. Of this the U.S. Agency for International Development (USAlD) administers by far the largest -portion $6.5 billion in Fiscal 1995. The Micro enterprise Initiative, $142 million, sets aside half of its development resources to poverty lending. Half of these loans are $300 or less. The repayment rate for micro enterprise lending is over 95 percent, far higher than the repayment rate of U.S. small business loans. This success has led many member agencies in the Washington-based Micro enterprise Coalition to start community banks in the U.S. Today 200 successful U.S. micro enterprise programs are being studied as alternatives to traditional welfare assistance. These work because they are selfs ustaining programs whereby an interest rate is charged to cover program costs. They provide the entrepreneur with working capital and place the people in a productive working economy, adding to each nation's gross national product and its ability to trade.

For further information please contact:

Lawrence Tanovitch or Maria Otero, Co-chairs, Micro enterprise Coalition,
c/o FINCA International, 901 King Street, Suite 400,
Alexandria, Virginia 22314,
703-836-5516 (phone) or 703-836-5366 (fax)

Return to the Documents Section

Hari Srinivas - hsrinivas@gdrc.org
Return to the Virtual Library on Microcredit