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Micro loans on macro scale reap returns. Third world and donors gain from funds to small enterprises

By Kristin HelmoreStaff writer of The Christian Science Monitor / January 11, 1988


``It's the small producer that's going to save the developing world,'' says Rupert Scofield, with a touch of triumph in his voice. ``It's not government-run industries, not huge and costly public- works projects. The smaller guy is more efficient. We get a higher return when we invest in him. Now we can reach him - and we're going to reach him.'' Mr. Scofield is a leading expert on microenterprise credit, an innovative strategy for third-world development that extends small business loans to people at the very bottom of the world's economic scale.

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He sounds triumphant because a bill became law last month, earmarking $50 million of United States foreign-assistance funds specifically for loans of not more than $300 each to the developing world's ``poorest of the poor.''

It's not the $50 million that has many development experts cheering: The amount is only 3 percent of the total nonmilitary aid budget of $6 billion. The law itself is significant, observers say, because it requires the US Agency for International Development (AID) to channel at least a tiny fraction of its foreign-assistance resources directly to the people who most need help.

At an average loan size of $50, that could mean a million small business loans over the next year or two. If allowed to expand, experts predict that this new policy will bring tangible benefits to the entire ``informal sector'' - the vast sea of under-employed and self-employed men and women who are the majority of many countries' populations, and the backbone of many local economies.

Reaching the world's neediest

``Focusing on the poorest means we reach many more people,'' says John Hatch, director of FINCA, an independent agency that already provides microenterprise credit in three Latin American countries. ``If you have a woman with no source of income who gets her hands on $50 and creates an income flow - say, by selling vegetables out of her house - that's the equivalent of 10 or 15 paid work days per month. That's a tremendous increase for her family.''

Scofield is a development consultant to AID and the United Nations Development Program, and a board member of FINCA. He says the traditional development approach has been to ``move as much money as you can as fast as you can.''

``The idea was, the bigger the project, the better,'' Scofield says. ``Large sums are lent to high-level people with political clout, and the understanding is they don't really have to pay it back. They design a project from the top down, and if they make loans to small farmers, they don't ... consult the farmers. The main concern is to find an institution that can move $5 million or $10 million. But the institution fails to move it because it doesn't have [grass-roots] contacts.''

``We feel our approach can be much more effective in its impact on the small farmers and entrepreneurs. And if we can set up national, regional, and village level organizations, we can move as much money just as quickly, with much more positive results.''

Small loans on a macro scale

Some observers, however, remain skeptical, dismayed by the logistical complexity of it all. How do you get a million $50 loans into the hands of Salvadorean street vendors, Ghanaian fishmongers, and Indonesian rice-farmers?

Robert S. McNamara, former president of the World Bank, endorses the principle of microenterprise credit programs, but points out the difficulties involved in implementing them on a massive scale.

``I guarantee you these programs will work,'' said Mr. McNamara in a telephone interview. ``The problem is how to do it. What's really needed is a much larger program to bring both capital - and in some cases technical assistance - to the poor. That requires some structure. Also, it's expensive to lend $50 or $100: the administrative costs are so high. You've got to get this into an institutional format that can extend across nations.''

Microenterprise credit programs of various kinds have existed for about 15 years now, mostly funded by AID, the UN, Scandinavia, and Canada. Such programs have produced impressive results from Costa Rica to Kenya, from Bolivia to Bangladesh.

Often the credit program has been part of a larger development project. Increasingly, development experts are promoting the credit component alone. They frequently describe credit programs as ``self-sustaining,'' citing excellent loan-repayment rates, often higher than 95 percent.

Now that microenterprise credit has become official US government policy, specialists see the coming months as a time to prepare to expand such programs into an institutional format.

``AID officials around the world will be responsible for administering this program,'' says Jeffrey Ashe, director of a study on microenterprise credit commissioned by AID.