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Micro-Loan Programs Expand, Key Questions Remain

Monday, November 26, 2001

Women are two-thirds of the world's 1.2 billion people living on less than $1 a day. Tiny micro-credit loans improve their lives, but experts debate whether micro-lending will help more people by becoming profitable or by remaining largely subsidized.

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Women are two-thirds of the world's 1.2 billion people living on less than $1 a day. Tiny micro-credit loans improve their lives, but experts debate whether micro-lending will help more people by becoming profitable or by remaining largely subsidized.
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(WOMENSENEWS)--They grow peanuts, bake tortillas, sell cheese in the market. They battle discrimination, poor health, shoddy infrastructure and, most of all, poverty. Seventy-five percent of them are women.

They are the world's poorest, the target of an international coalition of micro-lenders that hopes to offer small loans to 100 million families by 2005, providing them and their fledgling businesses with an opportunity to prosper.

The coalition, the Micro-Credit Summit Campaign, meeting in Mexico, announced last month that micro-credit institutions had served 19.3 million of the world's poorest people--a significant increase from the 8 million being reached in 1997 when the campaign was organized. Yet, if the program is to meet its goal of reaching 100 million families by 2005, it will have to expand even faster.

Micro-finance is an effort to offer financial services to the very poor--the small farmers, street vendors and artisans in developing nations who would otherwise be unable to obtain a loan or open a savings account. Loans of as little as $100 dollars are given without collateral and can go a long way toward starting a small business in impoverished areas. Top lending agencies enjoy rates of return approaching those of commercial banks, says the Consultative Group to Assist the Poorest, a coalition of donor agencies that includes the World Bank and government aid organizations from more than 15 countries.

As examples of successful borrowers, micro-financiers point to cases like that of Maria Elba Contreras Lopez, 33, of Huatabampo, Mexico. Contreras Lopez invested her first loan of 1,000 pesos (less than $100) into a gas stove to make tortillas. Two years and another loan later, she has enlisted her husband's help and tripled the family's income. Though she is still poor, making 5,000-6,000 pesos a month (roughly $500), her new profits have allowed her to furnish her apartment, provide for her five children, help her mother and brothers financially and even begin to save money.

The success stories cited for micro-credit are almost invariably women, highlighting the fact that the majority of micro-credit clients--75 percent according to the Micro-Credit Summit Campaign--are female. Women are generally thought of as better credit risks and more likely than men to invest earnings into their families.

Loan Repayment Rates Among Women as High as 98 Percent

Loan repayment rates among women run as high as 98 percent. Yet, they are the neediest. Women constitute about three-quarters of the 1.2 billion people worldwide who, according to the World Bank, live on less than $1 a day.

Studies in Mali and Honduras in 1998 reported that women who had received micro-loans were more likely to be able to feed their families, expand their businesses and add new products. The small loans empower their female clients, bestowing--along with the financial boost--pride and status.

"Now we know as much about the business as our husbands. They can't fool us any more," one woman told Jeanne Koopman, the author of a 1996 report on a micro-lending program that targeted Bangladeshi women.

"Women's status in the community has also improved," Koopman wrote. "One woman said that she had suffered from lack of respect as a day laborer, but had gained a good deal of respect as a successfully self-employed puffed-rice maker."

Micro-financiers are split into two camps over how to reach the greatest number of people. The largest group insists that lenders should strive to make a profit that can be reinvested, yielding more money for more loans. Self-sufficiency frees financiers from the vagaries of donors, allowing them to grow and provide services far into the future.

The other, smaller group says that pushing for profitability to lenders can exclude the neediest people.

Two Micro-Credit Camps--Profitability and Charity

"Micro-credit has become a hot issue," says Brooke Barton of ACCION International, a micro-financing consultancy based in Boston. "But it needs to become an industry like any other."

But remaining profitable and serving the poorest of the poor may not be compatible. The very poor don't have credit histories and may not be able to offer collateral. Loan providers might have to visit the clients' homes, interview family members and make follow-through visits. A $100 loan can cost the lender $25 in time and labor. To cover costs, lenders charge interest rates as high as 20 percent, according to the Consultative Group to Assist the Poorest, the coalition of major donors.

Clients should have at minimum good health and live in areas that are economically and politically stable, Barton says. Lending to the completely destitute means greater risk, and unsubsidized loans can drive them further into debt and poverty, says the consultative group. "Some people are just too poor, or have incomes that are too undependable, to enter into today's loan products," says Barton.

Others, like Gary Woller, an associate professor of public management at Brigham Young University in Utah, fear that the push toward profit will exclude those who need help the most.

"The incessant drumbeat of institutional self-sufficiency is a major culprit in the poor outreach achieved by so many micro-finance institutions," Woller said.

It is a mistake, he argues, to shy away from subsidized loans at the expense of the very poor. Self-sustaining micro-financiers should be complemented by charity programs providing the truly destitute with loans at below-market rates, he says. Donors, Woller argues, will continue to support a lender that can show it is making an impact.

It's an argument those at the Micro-Credit Summit Campaign have not failed to note as they pursue their goal of 100 million families. "There are many reasons why the poor are excluded from micro-credit programs," reads one of their reports, published in 2000.

"They are least likely to step forward, so identifying and motivating them bring additional costs. The small size of their initial loans makes it more difficult for an institution to become financially self-sufficient. But the goals set at the Micro-Credit Summit, at the Fourth World Conference on Women, held in Beijing in September 1995, and at the other global summits demand that we keep this as a priority."

Stephan Faris is a free-lance writer based in Lagos, Nigeria, covering Africa.

For more information:

Consultative Group to Assist the Poorest:
http://www.cgap.org/

ACCION International:
http://www.accion.org/

Micro-Credit Summit Campaign:
http://www.microcreditsummit.org/

"Where to Micro-Finance," by Gary M. Woller:
http://spaef.com/IJED_PUB/v1n1_woller.html