Jan 11th 2001 | KAMPALA AND OUAGADOUGOU
From The Economist print edition
How to lend small sums to poor Africans to set up small businesses
ON A a steamy morning in a Kampala slum, the men are getting drunk. They sit in circles around pots of brown, sludgy millet beer, sucking it through long wooden straws to heighten the buzz and, through a filter, to strain out the lumps. Seven local women support their families by running the Otim bar. They brew the booze, too, in a large oil drum with the Shell logo still visible on the side. The business has grown rapidly, mainly because the owners, despite being poor, have access to credit.
Microcredit—lending small sums to poor people to set up or expand small businesses—is an effective way to alleviate poverty. The poor cannot usually borrow from commercial banks, because they lack collateral. Loan sharks lend without security, but often at interest rates of 10-20% a day. Hawkers who borrow from sharks to buy a day’s stock often have to hand over most of their profits. Failure to repay can result in broken legs.
Microlenders try to satisfy poor people’s hunger for credit less brutally. Since the 1970s, organisations, such as the Grameen Bank in Bangladesh and Accion International in Latin America, have encouraged poor borrowers to form groups to cross-guarantee each other’s loans. In the Grameen model, one of a group of rural women takes out a microscopic loan, often as little as $25, to start a business. Only when she repays it can the next woman in the group borrow. Peer pressure makes sure that default rates are minimal.
The idea has spread. All told, about 14m poor people now borrow from microlenders, a number that has increased by over 80% in the past two years, according to the Microcredit Summit Campaign (MSC), a lobbying group. Each borrower is thought to support about five family members. Most borrowers are women. Microlenders prefer to lend to women because they are likely to use additional income to feed and clothe their children. Men, as the proprietors of the Otim bar can testify, may blow the spare cash on booze.
Microcredit works better than handouts for two reasons. First, it fosters enterprise rather than dependency. Second, a well-run microcredit scheme can be self-sustaining. Repayment rates of over 98% are common.
The business plans backed by microfinanciers tend to be breathtakingly simple. Take Pakmogda Zarata, a successful micro-entrepreneur from Burkina Faso, one of Africa’s poorest countries. Ms Zarata runs a restaurant in a marketplace near Ouagadougou, the capital. The place cost almost nothing to build: roughly-hewn logs prop up a ceiling of thatch and old dustbin liners; there are no walls to speak of. The menu is unpretentious. “We only serve rice,” she says, “but we do cook it.” By taking out a series of small loans from the local branch of the Fédération des Caisses Populaires du Burkina Faso, the country’s main microlender, Ms Zarata was able to buy rice wholesale rather than retail. Her profits rose. She now employs seven people, can pay her children’s school fees, and swaggers around town on a second-hand motorcycle.
As microfinance has globalised, it has run into local problems. Not all poor communities are as tight-knit as those in rural Bangladesh. The urban poor, being more mobile, do not always know their neighbours well enough to act as guarantors for them. In the shanty towns of Africa and Latin America, something called “stepped lending” often works better. A would-be borrower puts up a little money of her own. The microfinancier lends her roughly the same amount again. If she repays promptly, she can raise a larger loan. The better her credit record becomes, the more she can borrow. The carrot of more credit discourages defaults as effectively as peer pressure does in villages.
The MSC hopes to see 100m poor borrowers receiving microloans by 2005. To reach such an ambitious target, microlenders will need much more capital. Support from donors is buoyant, but not enough. To expand faster, microlenders need to tap capital markets. This is not easy. Many microlenders break even, but few produce the kind of returns that might entice hard-nosed capitalists to give them their backing.
Some, however, are creditworthy enough to borrow at commercial rates. In Bolivia, BancoSol, a microlender with over 70,000 clients, has issued $5m in bonds backed by its lending portfolio, $2m of which were bought by foreigners. Commercial banks can sometimes be persuaded to take equity stakes in microlenders, partly to make contact with up-and-coming small businessmen with a sound credit history. For example, two Peruvian banks own shares in Mibanco, Peru’s first for-profit microlender. According to Accion International, perhaps 50 of the world’s 7,000-10,000 microlenders can cover their own operating and financial costs unaided.
In many poor countries, however, disease makes this difficult. In Africa, AIDS often causes borrowers to default, either because they are too ill to work, or because their family’s medical bills have soared. A survey of microborrowers in 14 African countries found that 95% had trouble paying medical bills, 77% had trouble paying for funerals, and half had difficulties finding money to look after orphans, usually the children of relations who had died of AIDS.
Microlenders often try to tackle this through education. In Burkina Faso, where diarrhoea is a killer, those who want to get their hands on a loan must first learn about washing them. In eastern and southern Africa, many microlenders promote condoms.
A more challenging idea is to combine microcredit with micro-health-insurance. FINCA, a microlender in Uganda, runs a pilot scheme allowing members free treatment for a range of problems at a mission hospital in Kampala, in return for a small quarterly fee. The scheme is popular, but racks up big losses. Before it can be duplicated, FINCA needs to find ways to encourage healthy people to join the scheme, and discourage frivolous visits to the doctor. If micro-insurance can be made to work, the Internet will ensure that the idea is swiftly copied. Globalisation is not just for the rich.
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