Microcredit: Trickle-up Economics

"The poor are good credit risks," says one lender. "They don't normally have access to funding, and they protect it carefully."

To track their progress, most global lenders use well-known key performance indicators like customer profitability or transaction-reserve ratios. For their part, however, microcredit providers employ a set of gauges much less familiar in the banking world: how many clients have moved from shacks to concrete-block homes; how many can feed themselves and their families; and how many have children that are properly clothed and attending school.

The measurement of success is so decidedly different for microcredit lenders because their clients are worlds away from those of traditional commercial banks. The recipients of such loans and grants are among the poorest people on earth: Africans, Asians, Latin Americans, and Eastern Europeans who live on less than a dollar a day. In such circumstances, a little goes a long way. Indeed, a loan of between $50 and $200 to start a business can help many clients work their way out of poverty, says Larry Reed, chief executive officer of Opportunity International, a microcredit lender based in Oakbrook, Illinois.

Advocates of microcredit, also called microfinancing, contend that it’s a modern-day example of the old Chinese proverb, “Give a man a fish, and you feed him for a day. Teach a man to fish, and you feed him for life.” The concept is to provide seed capital, in most cases less than $200, to entrepreneurs too poor to qualify for traditional bank loans. The expected result for the businessperson’s family is a self-sustaining income.

It may be unfathomable for Americans to imagine that a $100 loan could jumpstart anything more than a lemonade stand. But the standard of living is so low in the poor communities of countries like Malawi, Uganda, Colombia, the Philippines, and Romania, that equipment, tools, and packaging can be bought for a few dollars. Raw materials and livestock don’t cost much more.

Consider the Monger Group, a business started by a few Tanzanian entrepreneurs with a $100 grant from the Village Enterprise Fund, a microcredit lender and grant maker. The group, which used the cash to buy an anvil, crafts farm tools out of spare truck parts. Business is booming, Village Enterprise officials report, noting that the company has begun exporting tools to Zambia and the Congo.

Then there’s Aurora Matias of the Philippines, who once sold slices of bread and slivers of soap in a Manila neighborhood where people couldn’t afford to buy entire loaves and bars. Business was brisk, but Matias never turned enough profit to keep her shelves fully stocked. Using a small loan of about $100 from Opportunity International, she bought bottles, labels, and large quantities of bleach, fish, and soy sauce. By buying in bulk and reselling the products wholesale, her business gradually expanded. Now Matias sells to more than 50 stores and employs two full-time and five part-time workers.

Overall, microcredit lenders fund a sizable range of businesses. Some, for instance, sell vegetables and grain, used clothing, or charcoal for cooking. Others raise animals, produce bricks, or make garments.

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