Loans to Poor are Good Business
UN-backed program assists creditless entrepreneurs in countries with large `informal sectors'. ECONOMIC DEVELOPMENT: LATIN AMERICA
WHEN you go to a movie in Peru, you don't buy your ticket from the movie house; you buy it from an imaginative entrepreneur who bought a stack of tickets hours earlier. You pay a little more, but you don't have to wait in the normally long lines. In Costa Rica you can expect to be approached by fried plantain sellers when you are waiting in your car at a traffic signal. And in Guatemala you may be entertained by men blowing fire from their kerosene-filled mouths at busy intersections, collecting donations before the light turns green.
``The inventiveness of the people to survive is never-ending,'' observes Magna Moyanoa, deputy resident representative of the United Nations Development Program (UNDP) in Lima. ``And it demonstrates the desperately poor conditions of the [Latin American] countryside and the lack of opportunities there.''
Development strategists, including UNDP, have recognized the potential of this entreprenurial spirit. They are finding that loaning money to the poor is good business, as demonstrated in Peru and Guatemala.
Small businesses not registered with the government are referred to as the ``informal sector.'' In Peru they make up an astounding 60 percent of the working population there. These businesses are normally run from people's homes or in the street by those without sufficient space, training, or machinery.
Yet, according to Hernando DeSoto's recent book, ``The Other Path,'' these unregistered businesses provide 95 percent of the public transport in Lima. Your cab driver may be a moonlighting doctor or mechanic who puts a taxi sign in his windshield.
``You are dealing with the best businessmen in the country,'' says Bill Tucker, an adviser to the Development Institute for the Informal Sector (IDESI), the UNDP-funded, private, nonprofit agency that offers loans at commercial rates to small entrepreneurs without a credit history. ``They have built up enterprises without credit, without machinery, without professional training, and without any form of support.''
To bring these enterprises into the mainstream economic sector, IDESI offers small loans, from $30 to $500. The businesses are not required to be registered.
``Once they grow bigger, they see the advantages to becoming legalized,'' says Luis Mott, financial manager of the institute. ``Their businesses expand to the point where they need bigger loans than what IDESI provides. And to get a loan from a commercial bank, a business must be legal.''
Rosalia Zevallos (Castro) and her husband Fidel Castro Miranda sold their wedding rings to start their shoemaking business. She worked with their infant slung on her back and without shoes herself. They started with one homemade shoefitter and now they have five machines. But they work in their house in crowded conditions. The rooms fill up with dust and the environment is dangerous for the children.
``We have many clients and could expand production and hire more employees if we had more space,'' says Mrs. Castro.
One year ago she took out her first loan with IDESI. Since then she has taken out several more loans, earning her a credit rating that entitles her to larger amounts of capital that will help her move the business into its own location.
Castro is one of 40,000 who have received loans and training and who have been organized into trade associations by IDESI. Loans have been paid back in 95 percent of the cases. ``The entrepreneurs are not asking for help,'' says Mr. Tucker. ``The credit we give signifies an obligation on their part, which they have to pay back at commercial rates.''
In Guatemala, the goal is to strengthen small businesses so they can create jobs. The two principal programs received their initial funding from UNDP. The National Program of Urban Small Enterprises gives loans averaging $1,200 only to urban industries and service-oriented businesses.
``The advantage of these small enterprises is that they don't have to pay the costs of being legal,'' says Mario Carpio, director of the program. ``Our main objective is to make 40,000 loans in the next three years and generate 1.7 jobs for each loan made.''
In just its first six months - from February to July 1988 - this ambitious program granted 1,700 loans worth $2.4 million and generated 2,116 new jobs.
While the Peruvian program provides training only in small business administration, the Guatemalan program also teaches technical skills from sewing to metallurgy. Trainers use the Learning By Action method, taught by an International Labor Organization consultant. The students identify their own problem areas and teach each other through an exchange of experiences.
The Guatemalan program is not run by a private agency, but is administered by the government as a top priority through Vice-President Roberto Carpio Nicolle's office. The actual contact with participants is through non-governmental organizations.
To ensure that nearly all the loans are repaid, the Peruvian program requires participants to join in groups of five; if one does not pay, the rest are responsible. In Guatemala, where the payback rate is also 95 percent, an income-earning relative sometimes cosigns a loan.
Barber Bruno Santos learned to cut hair from his father at age 12 and has been at his trade for nearly 45 years. Now he can afford to buy a second chair and hire an employee. Shoemaker Miguel Bolanos worked alone making shoes until he received a small loan to buy more machinery and higher-quality materials. His demand has surged, resulting in the hiring of three employees.
`THE people of San Juan of the Mountain had good ideas but they didn't have the resources to make them work...''
So begins the promotional video for another Guatemalan loan program, this one aimed at rural cooperatives and farmer associations.
Called Financial Intermediation For Integral Development, its aim is to convince commercial banks that investing in rural businesses can be profitable. And if profits can be made in the rural zones, there is less pressure to move to the cities, thus slowing urbanization.
``Little by little we will incorporate private banks into the financing of the `third' sector of the economy,'' says project director Aleksander Serovic.
``In Guatemala, the rural indigenous sector has closed, traditional systems,'' explains program director Eugenio Gobbato. ``The concept [of] informal doesn't fit, because their system is actually very formal.''
The first project funded by the program is in Aguacatan, a valley six hours by car northwest of the capital. One thousand families there have traditionally depended on garlic cultivation, but recently lost their principal market, Panama, due to that country's current economic crisis. The United States and European markets will not buy the small heads of garlic filled with tiny cloves, which are grown in Aguacatan. So with a $90,000 loan, the cooperative was able to import a seed from Mexico that will produce bigger and better garlic for overseas markets.
These ambitious Guatemalan programs are all part of a new national policy of the three-year-old civilian government. While it is criticized for allowing military repression and human rights abuses to continue, the government promotes a self-described democratic process, which includes what Mr. Gobbato calls, ``the democratization of credit.''