Microenterprise in international perspective: an overview of the issues.

• Author: Buss, Terry F.

Abstract

This issue of the International Journal of Economic Development is a special symposium on microcredit programs in developing, developed and transitional economies. This introductory paper reviews current issues debated among advocates, critics and policy-makers in the microcredit field and weaves in symposium papers as examples for more detailed study. Even though the symposium covers much material, it cannot do justice to this rich field of endeavor.

Introduction

Poor people, especially women, could contribute to wealth creation of nations and improve their own quality of life if they could start, maintain or grow a small business. When poor people do not participate in self-employment or seek to employ others, economies waste human capital and governments incur great expense in supporting poor, dependent populations. But poor people often lack capacity necessary to become economically independent and they cannot fully access societal resources to help in attaining this goal. Poor people are often under-educated, inexperienced in business, in poor health, saddled with large families they can barely care for, isolated in rural villages or urban ghettos, or discriminated against because of race, religion, ethnicity or gender. Poor people lack access to capital necessary to drive existing or potential businesses, for want either of personal assets or collateral, or of financing from friends, family or acquaintances willing to invest. As such, credit from banks or other formal financial institutions, the engine of economic growth in every country, eludes poor people, holding them down.

Microcredit programs offer loans and/or technical assistance in business development to poor people. Generally, programs have one or more of three goals: (1) improvement of self-sufficiency and welfare of poor entrepreneurs, (2) development of stable sources of income and full-time employment, and (3) expansion of microenterprises to a larger firms (OECD, 1996).

Recent microcredit programs owe their development to dissatisfaction with earlier methods of aiding poor populations in developing countries. These were often large infrastructure or public works projects that frequently failed to meet poor people's needs (Cassen, 1993).

Microcredit programs of all stripes have exploded in popularity in the 1990s, although they have been in existence since the 1960s. Adams and Von Pischke (1994) note, however, that microcredit programs of today are based on exactly the same rationale as failed programs to help small farmers in the past. In the United States, more than 200 microcredit programs exist, offering targeted groups loans from $200 to $25,000, occasionally more (Sevron, 1997; Edgcomb, Klein and Clark, 1996; Shorebank Advisory Services, 1992; Himes and Servon, 1998). Cumulatively through 1996, U.S. microcredit programs served 200,000 people in 54,000 businesses with loans over $44 million (Edgcomb, Klein and Clark, 1996).

Hillary Clinton recently drew national attention to the need for such programs through speeches and news conferences. The U.S. Small Business Administration added microcredit to its portfolio of finance and technical assistance programs for small business. Community Development Agencies (CDCs) have broadened their activities to include microcredit. The U.S. Department of Treasury provides incentives for financial institutions to invest in microenterprise in its Community Development Financial Institution (CDFI) initiative. Banks, feeling pressure from federal legislation--Community Reinvestment Act--requiring them to invest more capital in poor neighborhoods and sensing some untapped market opportunities in microcredit, often fund programs. Charles Mott Foundation and Ford Foundation began to fund microcredit programs, evaluate them, and publicize their successes and best practices (Shorebank Advisory Services, 1992; Community Economics Corporation, 1993; see also, Economic Opportunities Program, 1997). Programs, once exclusively offered in developing countries, ACCION International's, for example, have been imported in U.S. cities (Himes and Servon, 1998).

Internationally, microcredit programs are even more prevalent. A 1998 United Nations report estimated that more than 3,000 small financial institutions have pioneered microcredit programs (Rossette, 1998). Cameroon alone has 250 programs, while Kenya has 34 nongovernmental organizations (NGO) operating in the country (Snow and Buss, in press). The U. S. Agency for International Development (USAID) began funding microenterprise programs in eligible developing countries around the world--Africa, Asia, Near East, Eastern Europe, Former Soviet Republics, Latin America and Caribbean--investing $138 million in microcredit programs in 40 countries during FY 1996. The World Bank allocated $218 million for small loans in an effort to reach 100 million families by 2005. The European Union's PHARE (EVCA, 1997), TACIS (TACIS, 1997), and European Bank for Reconstruction and Development (EBRD) support numerous microcredit programs in countries of the former Soviet Union and Eastern Bloc (OECD, 1996). USAID even co-sponsored a widely-attended international summit in 1997 to draw attention to the need for microcredit (Szabo, 1997). Just as importantly, USAID, World Bank, and the European Union have begun evaluating programs and developing best practice models for wide distribution in the development community. Even international private charities, like CARE and OXFAM, have developed microcredit programs.

Much of the impetus for microcredit programs has been inspired by the Grameen Bank in Bangladesh, established in 1976 by Professor Muhammad Yunus as a research project (Khandker, Khalily and Khan, 1995). Grameen Bank--a kind of credit union numbering more than 2 million members--provides small loans to rural poor people, 94% of whom are women, in about 35,000 villages. To date, Grameen has lent about $2.1 billion to 2 million borrowers. Grameen Bank's admirers have tried to replicate it in other countries, including the United States. Many, though, have failed (Bouman and Hospes, 1994). And some studies question whether Grameen actually operates what it claims (Jain, 1996).

In spite of its continued popularity and recent growth, microcredit has not been without its critics (Buckley, 1997). Governments in developing countries may support microcredit, not because it is a good policy, but because they fear implementing large-scale land reform (Khandker, Khalily and Khan, 1995). Microcredit may force poor people or groups of borrowers into debt they cannot repay, or into businesses where they can barely subsist (Montgomery, 1996). Heavily-subsidized microcredit distorts capital markets, crowding out private credit or channeling resources away from more productive investments and politicizing the process (Adams, Graham and Von Pischke, 1984; Seibel, 1994). Even if microcredit programs succeed, they make little difference in economies, even in small developing economies. The poorest of the poor are rarely helped and often hurt (How Bankable Is Microfinance, 1997). Those who receive subsidized credit in many cases likely do not need it (Seibel, 1994). Most do not have positive impacts and many are highly inefficient. Although these criticisms appear well-founded, there exists considerable disagreement about how extensive they are and whether they can be corrected.

Issues Ongoing in the Field

A reading of the burgeoning volume of materials on microcredit suggests that the following are major (but certainly not all) issues in developing, implementing or monitoring programs concern advocates, critics, and policy-makers:

* Program Rationale. Microcredit is justified for many, because they perceive private capital markets to have failed in reaching poor people in need and deserving of credit. Others claim either that private capital markets are well-functioning or that microcredit is unwarranted, with credit problems associated more with government regulation or failure. What is to blame, market or government failure? Is there really a credit gap?

* Poverty Assessment. Microenterprise programs are generally targeted not only to very, very small businesses, but also to poor people, many of whom are women. This seems straightforward, but is not. Not all poor people can operate businesses successfully or pay back loans obtained. Offering credit may make some people worse off by obligating them to debt they cannot repay. For others, they may already have access to credit, but are drawn by better terms offered by subsidized microcredit programs. This wastes money by funding what would have been undertaken anyway. Still others may borrow without intent to repay, or even to use loans for business. How can programs avoid adverse selection and moral hazard problems while still targeting loans to poor people?

* Economic Environment. In many parts of the world, microcredit programs help participants faced not only with problems common to small business everywhere, but also additional worries--economic crisis, war, political instability or transition, and natural disasters. Can microcredit contribute to the positive resolution of these problems? Is microcredit a good safety net? Or, is program money wasted under these circumstances?

* Impact Assessment. Because government, international donor organizations, and charitable foundations subsidize microcredit programs, holding them accountable has become mandatory. Funders want to know whether programs impacted poor participants, financial institutions and economies as expected. But impact can be measured in many ways, sometimes supportive, sometimes critical of microcredit; sometimes credibly, sometimes not. What is the impact of microcredit? What do different measurement strategies and options reveal about program impacts?

* Performance. In an age of reinventing government, management wants to keep programs on course, while...