Little Loans, Bigger Benefits
Jim Landers, The Dallas Morning News, July 08, 2007
SAN CRISTÓBAL DE LAS CASAS, Mexico – Give a poor woman a loan to help her weave skirts or bake tortillas, and soon her business, her family and her self-image improve.
So it was with Esparanza Perez Garcié, 52, who sells tacos and other foods at her little restaurant in the artisans' marketplace here. Her one-room kitchen and dinette faces a covered patio that fills with noise as southern Mexico's rainy season sends its daily deluge spilling down the mountains. Customers welcome the shelter, and the quesadillas and chalupas sell for 50 cents apiece.Esparanza, her sister and her daughter have turned their $600 loans from Al Sol, a lender supported by developer Lucy Billingsley and other Dallas women, into small profits. Interest on the loans works out to 36 percent a year – steep, but better than what the banks offered.
"Al Sol – bless them," Esparanza said. "The banks don't want to help me. I don't know who they're helping. It's not the poor, or those who need it."
That may be changing. Small profits are, after all, profits. Commercial banks are beginning to show interest in uncollateralized small loans for the poor that until now were the province of philanthropists.
Some of the philanthropists, meanwhile, are working to lure profit-seeking capital.
"Over the next 10 years, I think this field is going to explode like crazy," said Roy Jacobowitz of Acción International, another nonprofit with hundreds of microfinance outlets across Latin America. It started making small loans in 1971 in Recífe, Brazil.
This could be good news in the fight to reduce poverty around the world.
Microfinance is one of the few broadly successful strategies for helping the poor. It gives the poorest entrepreneurs access to the crucial financial tools of capitalism as well as the support of peers who offer advice, fellowship – and pressure to make sure the loans are paid back.
Money not repaid by one entrepreneur often must be raised from other members of the group.
Acción International has lent $12.3 billion over the years to 4.9 million women and men.
Inspiration and support
Al Sol operates under the direction of the Grameen Foundation, a U.S. foundation inspired by Grameen Bank. The bank was started in 1976 by Muhammad Yunus of Bangladesh. Since then, Grameen has lent $6.2 billion to more than 6 million borrowers. Last year's Nobel Peace Prize went to Mr. Yunus and his bank.
Although there's no collateral for such loans, both Grameen and Acción say repayments average better than 97 percent. Both groups target women rather than men because women have proved more likely to invest their earnings in their families.
A woman gets opportunity and responsibility hand in hand," said Ms. Billingsley, founder of Al Sol's Chiapas Project. The project gets its name from the poorest state in Mexico, where the town of San Cristóbal de las Casas is located.
Ms. Billingsley is also one of the backers for a $32 million guarantee fund for Grameen Foundation loans that's being administered by Citicorp. The Washington-based foundation hopes to attract enough backers for a $50 million guarantee fund by the end of the year.
Both Grameen and Acción also have microfinance chapters in Dallas, where they make small loans to low-income businessmen and women in South and East Dallas.
In 2003, Ms. Billingsley took 30 Dallas women to Chiapas to see the poverty and the work of Al Sol.
They went home and raised $790,000 for Al Sol's lending capital, which now goes to more than 12,000 women in the state. The women use the loans to grow their businesses, from weaving skirts, to embroidering blouses, to running tacquerias.
"When she succeeds, she has increased self-worth," Ms. Billingsley said of the women Al Sol helps. "On the family side, when a mother is a success, her children see new opportunity and hope through her eyes."
You can see this hope in the eyes of the daughters of Fabiola Peralta Ruiz, a microfinance borrower in Oaxaca, Mexico.
"Mainly from my tacos, we have money to eat and live, because what my husband gives me is not enough," she said.
Mrs. Ruiz belongs to a microfinance group called Bancommunidad that's also supported by the Chiapas Project.
"Thanks to the loans, I have been able to sell more and invest more," she said. "I was able to buy this motorcycle to go to the market to sell and to the stores to buy my products, like cucumber, avocado and meat."
Hundreds of millions of other poor people could benefit from programs like these, but they haven't spread that far because, some argue, microfinance has relied too much on donors for capital. If mainstream bankers are persuaded that microfinance is a profitable business, capital should no longer be a problem.
But there's a tension between the profit-seekers and those who feel it's morally wrong to profit from the poor.
Donald Terry, with the Inter-American Development Bank, tries to persuade reluctant Latin American bankers to jump in by citing higher returns.
"What aren't you getting here?" he asks. "For the last several years microfinance has been the most profitable and least risky part of the Latin American financial sector."
But Alex Counts, president of the Grameen Foundation in the United States, isn't so eager for the arrival of traditional banks: "I always wonder whether that's good news or bad news."
While commercial banks might skim off some microfinance customers who are less wealthy than their usual clients, Grameen affiliates go to the poorest first, Mr. Counts said. "We want to start at the absolute bottom and build up to where the banks left off," he said.
And Grameen offers its clients more than loans.
The women's groups meet weekly to make payments and submit loan applications – and to discuss nutrition, cooking stoves, child care, sanitation and other social services.
The weekly meetings are major social events, although not always happy ones.
Al Sol loan officer Margarita Diaz Gomez recently was heading for a meeting in a hilltop hamlet called Pinar when a young man with a battered red Chevy pickup truck stopped her.
The man's wife, Sebastiana, owed $30 on her $300 loan but did not have the money.
She'd given her loan money to him – a violation of Al Sol's rules – and he had not been able to come up with the payment in time for the meeting.
"Well, if Sebastiana doesn't have the money, the group will have to cover her payment," Margarita told him.
It was only the third time one of Margarita's clients had failed to make a payment.
"She won't be able to get another loan," she said of Sebastiana, "and she's lost her friends."
There are between 60 million and 80 million tiny enterprises in Latin America, but only about 6 million borrow from microfinance groups like Al Sol (Alternativa Solidaria Chiapas AC).
The Chiapas Project is in the process of raising $3.5 million in donations for an expansion of Grameen lending into Honduras, El Salvador, Haiti, the Dominican Republic and Bolivia.
But getting loans to the poor entrepreneurs in these countries will require more than philanthropy, said Acción International's Mr. Jacobowitz, even though his organization also relies on donors, in this case for about half its operating expenses.
"If it's a cute little donor-funded thing, microfinance will remain as it is," he said. "Making money at it breaks the fundamental obstacle to seeing this grow."
Acción International's biggest affiliate is Banco Compartamos SA. Compartamos has more than 700,000 clients scattered across Mexico – 98 percent of whom are women – and hopes to reach 1 million by the end of next year. Its average loan is about $400.
When it comes to making money in microfinance, Compartamos is a top performer. Return on equity in 2005 was 54 percent. In April, Compartamos sold 30 percent of its equity to various institutions and investors for $446 million.
Sylvia Valencia, 54, was making baby sweaters in the Oaxaca market when she got her first Compartamos loan of $100. Each time she paid off a loan, she took out another, larger one. Eventually she and her husband, a truck driver, used the program to start a bakery.
Mrs. Valencia borrowed $1,000 and bought some old bread ovens. Soon her family – six men and four women – were baking, packaging and delivering 6,000 loaves a day. "Before the bakery, life was hard," Mrs. Valencia said.
"But we've been able to leave the poor life thanks to Compartamos. I can share the money with my family, and I no longer feel inferior to the men."