OTI Online
Spring 1997

Collective Entrepreneurship
by Marlene C. Piturro


What developing nations are teaching American women about business


"I knew I needed more money to help my business survive," says Ana Pe - a. "But the bank wouldn't lend to me and I was afraid to borrow more on my credit cards because the interest rate is so high." In her 30s, with dark hair and a bright smile, Pe - a and her large family immigrated 20 years ago from the Dominican Republic. Pe - a had long been a self-employed beautician, but without capital she couldn't stock up on the supplies she needed or upgrade the appearance of her two-chair beauty salon in the Williamsburg section of Brooklyn.

Then she heard about ACCION New York, a banking program that offers "microloans" to customers that ordinary banks don't view as creditworthy. (Once offering loans as small as $100, ACCION New York now provides microloans ranging from $500 to $25,000.) Pe - a joined forces with two other women to create what Accion calls a "solidarity group." The group applied for a $4,500 loan, with the funds to be divided equally among them. Together, they were responsible for repaying the entire loan. If one member defaulted, the other two would have to make up the difference or no one in the group be eligible for another loan. Today, with the original loans successfully repaid, the group has borrowed a larger amount on what Pe - a calls "comfortable" terms. She has expanded her business, employs two beauticians and can now pay her mother and sister to help out during busy times.

The concept of microloans has its roots in the work of developing nations to secure its citizens' economic future. One of the first bankers to go micro was Dr. Muhammad Yunus, president of Bangladesh's Grameen Bank. He intuited that lending women entrepreneurs small amounts of money -- whether to buy two laying hens or a sewing machine -- would do more to end poverty than government handouts or dependence on a husband.

How to lend to women with no credit or collateral? Yunus solved that problem by having women form groups of four to six entrepreneurs to cross-guarantee loans. Each woman received a small loan, which all had to repay before receiving subsequent higher loans to grow their businesses. A laggard's loan would be covered by the other group members before they could move forward. Yunus' idea worked. Grameen Bank has made over two million microloans, nearly all to women, with a repayment rate of 97 percent, versus less than 60 percent for wealthy Bangladeshi borrowers. "Capital does not need to be the handmaiden of the rich," Yunus says.

India's Ela Bhatt started the Self-Employed Women's Association, a trade union and its bank in 1974, to help its 4,000 members earn a living. The association lends amounts as little as 50 rupees ($1.40) to buy seed corn or fabric to women who couldn't even sign their names. Bhatt's bank has maintained a loan portfolio of $3.6 million and reached 85,000 customers. The group has a loan repayment rate exceeding 95 percent.

It might come as a shock to many Americans that conditions for 40 million poor people in the United States have become so appalling that international relief agencies such as Oxfam, Accion International and Save the Children support the establishment of similar relief programs for America's inner cities. But the fact is that such programs, imported from Bolivia and Bangladesh, are working just as well among the American poor. These economic innovations have come not a moment too soon; the bipartisan 1996 welfare reform bill, with its sink-or-swim approach to poverty, makes inner city and rural entrepreneurs vital to stopping the further economic deterioration of their communities.

Public Policy Breakthrough

In the U.S. microlending began in the early 1970s. Accion International, which has run micro-enterprise programs in Latin America since 1973, set up shop here in 1991 after recognizing the widening gap between haves and have-nots in the United States. By 1994, microlending vaulted to new levels, when leaders at the World Bank realized that after nearly 50 years of trying to spur economic development in less developed nations, the rich were still getting richer while the poor languished. The bank's top honchos had an epiphany: put tiny amounts of capital into the hands of entrepreneurs and you build countries. Joined by 23 other development banks, the World Bank pledged $27 million of the $200 million total to microlenders through the Consultative Group to Assist the Poorest (CGAP), expecting to reach 7.5 million women and their 38 million family members in ten years.

Piqued by the World Bank initiative and the success of international microloan programs, U.S. Treasury Secretary Robert Rubin successfully lobbied Congress and President Clinton, and in 1994 helped create the Community Development Financial Institutions Fund (CDFI) to expand the availability of credit, investment capital, financial and development services in poor urban and rural communities. He then appointed Kirsten Moy, an expert in mortgage lending in poor areas, as CDFI's first executive director. To implement the CDFI politicians, following in the footsteps of international microlenders, deferred to private agencies experienced in micro-enterprise. CGAP would leverage the $200 million in funds allocated -- enough to reach nearly 40 million borrowers.

The need is there. In 1995, CDFI received 268 applications requesting more than $300 million in financial assistance which is a 10-1 subscription above the $31 million available.

Janie Barrera, Executive Director of Accion-San Antonio and a daughter of micro-entrepreneurs, has demonstrated the correctness of those decisions. Barrera's parents scrimped and saved to open a Mexican restaurant in Corpus Christi, where she waited tables. After a stint in the Air Force, her entrepreneurial instincts and her desire to return to her community to "make a difference," led her to Boston-based Accion International. With Accion seed capital she set up an office, then went banging on doors until she got four banks to extend $150,000 worth of interest free credit. She cadged an additional $150,000 from Partners for the Common Good Loan Funding, a religious organization dedicated to socially conscious lending.

Crisscrossing the sprawling city, she now ferrets out the conventional banker's nightmare clients -- women, mostly Latinas, with bad or no credit. Often she finds them as food vendors at street fiestas that move from neighborhood to neighborhood. Some work from store fronts; perhaps a curtain and drape retailer who could land a major contract with the school district, if only she had credit to purchase material.

Barrera and her staff find these entrepreneurial women through word-of-mouth, public service announcements (PSAs), newspaper ads, socials, and tenant meetings. With loans averaging $2691, Accion-San Antonio has dispersed a total of $1.5 million in loans; they had one default this year. ("If only she had come to us for help," moans Barrera). Barrera's goal for Accion-San Antonio and her clients is economic self-sufficiency. She has funds to make 350 loans a year but expects to come up short. It's not easy to find borrowers among those alienated by the banking system, and convincing them one-on-one that they deserve access to credit and capital. Since the lender goes out on a limb (Barrera once accepted a day care center's couch as collateral), she must have monthly payments on the loan's due date. Poor judgment about a client's credit worthiness and lax repayment collection would quickly doom a microlender. Barrera recalls a husband-wife team who sold ice cream from a truck for 15 years, saving every penny to buy a dilapidated grocery store. A small loan transformed it into a thriving taqueria; two subsequent loans enabled them to build a drive-through window. Rapid growth sometimes created cash flow problems. Barrera feared that they would start skipping loan payments. Her fears seemed real on the last day for an on-time payment, until the borrower arrived at Accion's office, soaking wet after taking buses through a rainstorm to deliver her loan payment.

An Antidote to Welfare?

Connie Evans, executive director of the Women's Self-Empowerment Project in Chicago, tries to strike a balance between microlending and support services for her agency's clients, 35% of whom are on welfare, 80% whom are black, all with family incomes below $15,000. Having visited Grameen Bank in Bangladesh, Evans has modified microfinance to work in an inner city. She's flexible about solidarity groups, forming them only when a simpatico group coalesces. She also spends time helping women negotiate social services, puts five percent of loan proceeds into an savings account for clients' emergencies, and offers some business and technical support: "This is not Bangladesh where you can buy a cow and sell the milk. A woman from the South Side might be sewing garments from home, but she's competing with Wal-Mart and J.C. Penney. We've got to step up with technical assistance and increased loan size."

Other municipal programs contract with private agencies with close ties to their needy clients. Ithaca Urban Renewal Agency of Ithaca, N. Y., for example, chose Angela Noble President of the Noble Economic Development Group to design and deliver local microenterprise programs. Noble's typical clients are poor women of color, such as a landscaper who came to the loan-review committee with two-foot long garden shears in hand. "We didn't turn her down," notes Noble.

Flexibility and fine-tuning are the keys to successful microloan programs. Chicago's Connie Evans tinkered with the Grameen model so that it could work for welfare mothers. Angela Noble would like to raise her programs' loan cap from $5,000 to $10,000, and struggles with an 8 percent interest rate for borrowers -- higher than the human-service types wanted, but lower than the bankers' comfort level.

New Mexico's Melinda Kenefic lobbied her senator, Peter Domenici, to increase microloan funding as she stood behind him on the take-out line for Chinese food. Accion-New York's Delma Soto wants passionately to have the largest microloan program, (at the very least, to be the largest microlender to Latinas), and to keep her default track record at $26,000 on a $3 million portfolio.

The Answer to Poverty?

Is there a downside to microloans? Touting microloans as the antidote to American poverty is asking more from a financing mechanism than it can deliver. Even though eagle-eyed microlenders do everything to ensure success -- providing basic business training, one-on-one attention, and peer pressure -- they can't make everyone an entrepreneur.

Although rugged individualism and the entrepreneurship it spawns symbolize America, small companies have always played a more important role overseas. A 1996 study in Inc. magazine found that micro-enterprises (businesses with fewer than 10 employees) were more prevalent in Europe than the U.S., 93.3 percent versus 78.2 percent Taiwan and Korea became economic superpowers from out of nowhere, thanks to their entrepreneurs. In China, since supreme leader Deng Xiao Ping declared in 1979 that "to get rich is glorious," small enterprise jumped from 1.4 million to 20.8 million, contributing 31 percent of that country's productive capacity. /P>

Best estimates indicate only 10 to 15 percent of Americans are cut out for self-employment. However, the Small Business Administration estimates that nearly all of the 2.6 million new jobs in America in 1995 were created by small businesses. So as micro-enterprises grow, they have job-creation potential that can benefit more people in poor neighborhoods.

A real threat to the continued success of micro-finance is conventional or SBA programs masquerading as microlending programs. The Illinois Development Finance Authority, for instance, made 22 loans totaling $410,000. The IDFA's average loan, however, were higher than the usual loan of $10,000-$20,000. Default rates soared to between 25 and 30 percent. IDFA's Executive director Bobby Wilkerson said: "The default rate raised some concern among some of our board members in terms of how we're handling credit analysis." If the IDFA scenario plays out around the country, with community development types handing out hefty loans without proper checks on credit and collateral, genuine microloan programs will be killed as well.

When it comes to increasing poor people's access to credit and capital, good intentions aren't enough. Greenpoint Bank of Flushing, Queens' "low documentation/no documentation" home mortgage loans shows that bad things can happen to nice bankers. With the same impetus as microlending, GreenPoint eased credit terms for immigrants, people with poor credit histories, and low-income borrowers. In less than two years the default rate hit 12 percent, resulting in 2,100 home losses, destroying the dreams of homeowners, their families and tenants. Without a micro-banker who leads with her gut, but follows her portfolio like a bird dog chasing prey, just lowering the barriers to credit and capital access can be disastrous.

Assuming that microloan programs continue their upward trajectory, will banks have a microloan window in every branch? No, because conventional banks are not structured to profitably provide small loans. That hasn't precluded program heads such as Barrera, Soto, and Evans from devising ways for big banks to participate by extending lines of credit to their nonprofit agency and treating the aggregate microloans as one loan. The agency, in turn, disburses the funds and takes responsibility for collecting the payments from each borrower.

Banks are also helping with philanthropic programs such as the Citicorp Foundation's "Banking on Enterprise", which will disburse $10 million over five years (1995-2000) to microloan agencies last year. Brandee Galvin of the Citicorp Foundation explains: "It makes perfect sense for us to partner with microlenders. These programs are effective, have a positive impact on people's lives, and build appropriate channels for accessing the capital markets." Citicorp is also sponsoring a microloan summit this month, expected to attract 4,000 global participants.

Despite the foreignness of micro-loan programs to most Americans, they represent a tremendous boost for the economically disenfranchised. Because small amounts of money can be lent over and over again, the relatively small investment of $200 million can reach over 40 million entrepreneurs, creating a cycle of independence and opportunity that can change women's lives.

For information on micro-loan programs in your area, contact:

Association for Enterprise Opportunity
70 East Lake Street
Chicago, Illinois 60601
(312) 357-0177

The Aspen Institute
SELP-Ste 1070
1333 New Hampshire Avenue, NW
Washington, DC 20036
(202) 833-7434

Office of Public Affairs
Department of Treasury

1500 Pennsylvania Avenue, NW
Washington, DC 20220
(202) 622-2960


Marlene C. Piturro is a freelance journalist and a former banker from Hastings-on-Hudson, New York. Piturro's last story for On The Issues was a profile of Hong Kong's Anson Chan, "First Chinese, First Woman," summer 1995.


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