Fitting Microcredit Into a Macro Picture

The idea of using small loans to turn the poor into entrepreneurs is catching on, abroad and in the US

Captains of industry blew their horns and touted major projects between headliners George Shultz and Colin Powell last fall at the fifth annual World Economic Development Congress. But across Washington on Capitol Hill, a small group of foreign journalists heard a humble idea that would have beefed up the larger gathering's gruel - a $27 business loan to a poor woman in Bangladesh.

In 1976, that was the average out-of-his-pocket loan of Prof. Muhammad Yunus as he experimented with a "microcredit" method of getting working capital to the world's poorest. Mr. Yunus achieved impressive results, but banks, preferring to be fleeced by big borrowers, continued to insist the poor - besides being small potatoes - would never be creditworthy. Yunus was told to peddle his crazy idea elsewhere.

The Grameen Bank

Fine. He created the Grameen Bank, which approached $450 million in loan business last year and has served 2.1 million borrowers with loans averaging $150. His on-time payback rate is 98 percent, with a default rate of half a percent. Despite conservative Islamic traditions of backbenching females, 94 percent of his borrowers are women. More than a third have lifted their families above the poverty line, another third are close, and the rest are in motion.

But why should trickle-up theory permeate the minds of shakers and movers dreaming up power plants and dams at development conferences? The most sober know, however, that while new highways in developing countries may enrich builders, if the roads are trod mostly by the desperately poor, then economic, political, and environmental systems will head south as potential customer bases dissolve.

This reality has stirred a handful of major financial institutions and companies. They are funding a nexus of philanthropy and pragmatism: the Microcredit Summit in Washington, which concluded on Feb. 4. Participants hope to provide credit for 100 million of the world's poorest families by 2005. The estimated tab is $21.6 billion. Given the ambition, that's pocket change.

"By creating jobs at the margin, microcredit is an economic stabilization program," says Jannet Thompson of Citibank, one of the summit sponsors.

One of the nonprofit microfinance groups Citibank provides grants to is Accion, headed by Michael Chu, formerly with Wall Street's Kohlberg Kravis Roberts & Co. Mr. Chu believes that microfinance programs that succeed are those that become more self-sufficient as they grow. Accion, focused on Latin America, now has pilot programs in the US, involving a transfer of methodology from the developing world.

Success in Bolivia

Accion provides technical assistance to small nonprofit groups of entrepreneurs and acts as a liaison to banks. The group's executive vice-president, Maria Otero, notes that one of its projects in Bolivia became a self-sustaining commercial bank, Banco Sol. It gets funds from the capital markets and recently placed a half million dollars in paper with Scudder-Stevens, backed by uncollateralized loans to women who sell oranges or operate similar ventures.

Some successful programs have been closely modeled on Yunus's Grameen Bank; many others have worked their own variations. But while specifics vary, there are a few constants. One is the substitution of peer group support - and pressure - for collateral. An entrepreneurial group is formed, and everyone pays back their loans or the entire group is cut off.

Though technical assistance may be provided to set things up, the borrower generates the entrepreneurial ideas. To avoid political manipulation and corruption, loan money comes only through private channels. The payback begins immediately, often with a group savings component built in. While loan rates are competitive (to encourage sustainability), they are bargains compared with the loan sharks the vast majority of poor are stuck with.

Will the methodologies transfer to the states?

More capital, of course, is required - a minimum of $500. Special care must be made in creating the all-important solidarity of the borrowers' circle, compensating for high mobility, less interaction with neighbors, and more hazards to the traditional family. But initial projects are showing good results.

One of the beauties of microcredit's arrival is its staying power across the political spectrum. Hillary Rodham Clinton is an honorary chair of the summit. The conservative Heritage Foundation sponsored a Yunus lunch with journalists, and applauds domestic applications.

Some notes of caution

However, there are cautions. Some warn that proper infrastructure to deliver microfinance must not lag behind a sudden rush of resources, or there might be discrediting flops. Others point out that microcredit is not a panacea, but simply "an exciting tool."

In any case, microcredit is launched, and heads of government should study the concept. It offers more bang for the buck than most approaches, and includes vital intangibles that strengthen the individual. In economic development, this seemingly small picture is really the big picture.

* Skip Kaltenheuser is a writer and lawyer in Washington.

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