Enterprise: Third-World Debt That Is Almost Always Paid in Full --- With a `Microloan,' Cameroonian Women Parlay a Rabbit Into Two Shops ---- By Brent Bowers Staff Reporter of The Wall Street Journal
Tiny Third World businesses commonly repay these "microloans" faithfully because they crave the security of a favorable credit rating. This rescues them from the clutches of loan sharks -- microloans typically charge the prevailing local commercial loan rate -- and lets them borrow again in hard times. The money helps them start or expand their businesses -- selling vegetables, sewing, repairing shoes, making furniture and the like -- and boosts their local economies. Their repayment performance shines when compared with that of many sovereign nations. It also looks good compared with a default rate of 17% by U.S. recipients of federally guaranteed student loans. Though microlending has been around for years, it is now booming. With the decline of communism, U.S. development groups believe they are exporting free-market economics to tiny businesses that can fuel growth in the developing world. "Micro-enterprise lending is the hottest thing in development since the Green Revolution. Everybody does it," says Accion International spokeswoman Gabriela Romanow. The Green Revolution sent farm output surging in many poor nations. Ms. Romanow cites the case of Aaron Aguilar, an unemployed factory worker in Monterrey, Mexico, who borrowed $100 to buy clay and glazes for making figurines with his wife in their back yard. In six years, the couple took out and repaid five loans and built their business to 18 full-time employees. Sometimes borrowers have to struggle against setbacks that might seem comical in the prosperous West. One group of women in Cameroon received $100 from New York agency Trickle Up to start a rabbit-breeding business, but the rabbit ate her offspring, recalls Mildred Leet, co-founder of the U.S. agency. Undaunted, the women switched to chickens and made enough money selling eggs to branch out into tomatoes and tailoring, ultimately opening two shops, Ms. Leet says. Some Third World commercial banks are taking note of poor entrepreneurs' repayment rates. Accion persuaded family-owned Multi Credit Bank of Panama City, Panama, to start making microloans two months ago. Isaac Btesh, a director and son of the founder, says the bank has lent $80,000 to 100 people so far on 60-day, rotating lines of credit -- with a 100% repayment rate. "When we got in touch with Accion, we were incredulous," Mr. Btesh says. "We couldn't believe their figures. But everything they said is true." Poverty lending has such promise that Multi Credit plans to make it the bank's number one activity, ahead of trade financing, consumer loans and merchant loans, the official adds. Accion, a Cambridge, Mass.-based nonprofit international development group and a leader in the U.S. microloan movement, says it plans to increase its microlending this year to $66.5 million from $37.8 million in 1990 and $9.8 million five years ago. It says it plans to add 64,000 new clients, up from 40,000 last year and 9,000 five years ago. Its average loan is $303. Accion's Ms. Romanow says the group, which serves Latin America, plans to expand the lending to a total of between $500 million and $1 billion over the next five years. The payback rate is 98%. CARE, New York, perhaps the world's largest private international-development group, says small economic-activity development -- primarily microlending -- is its fastest-growing portfolio. "There's energy and creativity out there, people bootstrapping who aren't waiting for the next handout," says Larry Frankel of CARE. Trickle Up, which makes thousands of $100 loans annually, says its budget rose to $1 million this year from $800,000 in 1989 after doubling almost every year throughout the 1980s. Trickle Up makes $100 loans in two installments of $50 each to small groups of individuals. "We feel private enterprise is the way to help the poor," says Mrs. Leet, who founded Trickle Up with her husband in 1979. The group started a program in China in 1989 and moved into Laos, Vietnam and Namibia last year. Betsy Campbell, economic-development manager of Westport, Conn.-based Save the Children, says her group underwent a shift in the 1980s "from being primarily a charitable organization" to being one oriented towards helping profit-making activities. She says microlending to individuals in 20 nations is rising sharply, with more than $3 million in circulation at the moment. Repayment rates in most nations exceed 90%, she says. "These people value access to credit so highly that default isn't really a problem," she says. Some Third World banks, notably in Asia, have been making microloans for years. Grameen Rural Bank of Bangladesh is considered a pioneer. However, most such banks were set up with state support specifically to target the poor. Not every charity group in the U.S. has joined the microloan bandwagon. The Christian Children's Fund of Richmond, Va., sticks to relief efforts and to person-to-person sponsorships, in which a U.S. donor makes regular payments to an impoverished Third World child, for example, while Africare House in Washington, D.C., focuses on helping cooperatives improve food production and health care. Nor is the booming field of microlending without its detractors -- or its controversies. David Munro, an official with TechnoServe of Norwalk, Conn., says he prefers to work "on a larger scale, and I also don't see {microlending} as passing on much in the way of skills." And officials at the U.S. Agency for International Development, which finances a big chunk of many private groups' overseas operations, say they support the principle of expanding poverty lending but oppose congressional efforts to mandate minimum levels. AID has more than doubled its micro-enterprise budget, which includes microlending, training and other activities, to an estimated $114 million this year from $58 million in 1988.
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