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Micro-lending, a market-based solution to the problem of integrating the poor into the economy, got a big boost this weekend at a conference on the topic held in Washington, DC. In attendance were a number of Head's of State and the first lady, Hillary Clinton. Following a background report, Paul Solman is joined by two experts to take a close look at this new idea.
PAUL SOLMAN: The global subject on microlending in Washington this week is being called the first of its kind. To proponents the idea is simple: a market-based solution to one of capitalism's thorniest problems, how to integrate the poor into the economy. We first looked at the microlending phenomenon in 1994. Here's an excerpt from that report.
A RealAudio version of this NewsHour segment is available.
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PAUL SOLMAN: Next to Sue's Pawn Shop in Pine Bluff, Arkansas, a new business is dawning, J.P.'s Sheer Fantasy Beauty Salon. there are really two fantasies here, and both are actually being realized every day. One, ages old, is that women with hair problems like Susan Hunter can re-coif their heads and recoup their self-confidence.
PAUL SOLMAN: A second fantasy here is somewhat more topical, that Americans on the economic margin, like Jesse Pearl Jackson, can parlay their particular skills into entrepreneurial success, despite some age old hangups about business.
JESSE PEARL JACKSON, Beauty Salon Owner: I had an attitude. Let's just say it. I had an attitude.
PAUL SOLMAN: And was it an attitude about yourself or about business?
JESSE PEARL JACKSON: My attitude was about business.
PAUL SOLMAN: And what was the attitude?
JESSE PEARL JACKSON: The attitude was -- (laughing) -- it's awful.
PAUL SOLMAN: For years, Jackson worked for others or at home. Clients kept telling her to get organized, be a business woman, but she didn't have the attitude, or for that matter the money and know-how to become a capitalist. And then she discovered Good Faith, a nonprofit fund that lends money to would-be micro-entrepreneurs. Good Faith, with initial money from private benefactors, and now the Small Business Administration, was founded five years ago. It's a small part of a larger, private, nonprofit effort to spur economic growth in rural Arkansas. Good Faith's guru--a legendary banker from Bangladesh with a host of admirers, Mohammed Yunus. Establishment bankers think that established businesses are the key to economic growth. Yunus thinks:
MOHAMMED YUNUS, Grameen Bank: This is wrong with the way you are looking at the capitalist system. Capitalist system is people, people and their energy, and in a free market situation exchanging their goods and commodities. That's what the free economy is all about.
PAUL SOLMAN: So every time you have another micro-entrepreneur, you have a little bit more economic growth.
MOHAMMED YUNUS: Absolutely, because once you have a micro-enterprise coming up, you are allowing a person to show his work and her work.
PAUL SOLMAN: The theory is that as micro-entrepreneurs like J.P. Jackson succeed, they expand their businesses, hire others, and add to economic growth. Jackson needed a $1200 loan from Good Faith to get started, and she needed something else.
SEMINAR LEADER: Now let's suppose that our selling price is fifteen cents, a nickel and a dime.
PAUL SOLMAN: Before would-be borrowers like Jackson can apply for a loan, Good Faith requires that they attend a sort of business boot camp to learn the essentials of entrepreneurship, how to price, how to sell, how to stay in business. The second requirement, if you want a loan, is to join a borrowing group with other aspiring entrepreneurs. Thus, members share their experiences and must approve each other's loan applications.
JESSE PEARL JACKSON: Okay. I wanted to make a presentation to you all so that I could better understand what I needed the loan for.
PAUL SOLMAN: Good Faith's strategy is "trickle up," economic growth loan by loan, job by job. And in Bangladesh, that's just what Good Faith's model, the Grameen Bank, has been doing since the mid 1970s, organizing people into borrowing groups and teaching them the tricks of trade. Recently, at a village outside Dacca, Grameen's local borrowers were rather excited to receive its founder, Prof. Yunus, and to show him the fruits of their loans. This woman now spins yarn into string with results that rival Rumpelstiltskin.
PROF. YUNUS: And she built a new house recently for 25,000 dachas.
PAUL SOLMAN: Another borrower buys flour to make biscuits. And this woman bought straw to make baskets. In a country as poor as Bangladesh, for as little as ten of fifteen dollars, people can create their own businesses, instead of waiting around for a job. Prof. Yunus thinks this is true everywhere.
PROF. YUNUS: People create their own jobs, and that's how the human history began. Would you believe when we were hunters and gatherers of wood we would be waiting around for somebody to hire us? We'd be all finished. We wouldn't be here today. They went out and got their fruits, hunted their animals, and ate themselves. That's their self-employment. Today we just fold our hands and say we don't have a job. Why should you wait for a job? You create your job, but you cannot do that. To create a job, I need money. And banks will not lend me money.
PAUL SOLMAN: The Grameen Bank now lends to -- get this -- 1.6 million micro-entrepreneurs, more than 1 percent of the entire population of Bangladesh. Seventeen years later, it's loaned out almost a billion dollars.
PAUL SOLMAN: Okay. That was part of our report from 1994. Tonight we debate the subject with Mari Otero, executive vice president of Accion International, which does microlending in the United States and Latin America, and Carl Horowitz, Washington correspondent for "Investor's Business Daily." Welcome to you both.
Maria Otero, let's start with you. It started a few years ago. How has microlending fared since?
MARIA OTERO, Accion International: Well, I think the last few years of microlending have been years that bring to us a great deal of promise. On the one hand, we have been able in the last few years to demonstrate that the programs that are making small loans to very poor people can become economically viable. In other words, they can begin to cover the costs of doing this lending. This is a very significant finding because it means you don't have to depend exclusively on donations or grants in order to be able to take microenterprise where a level it can reach hundreds of thousands or even millions of people.
PAUL SOLMAN: What's the data on this? I mean, how many delinquent loans are there compared to regular banks, for example?
MARIA OTERO: If we look, for example, at I can use the network of organizations that we work with throughout Latin America at Accion International, we work in 13 countries. And, we've been working for the past 20 years in this. And we also work in six cities in this country, and our experience in this country is only about four years old, but we know that during that time that persistent repayment rate is about 98 percent.
PAUL SOLMAN: 98 percent, and that's compared, do you know what a normal bank would be?
MARIA OTERO: A normal bank would be I think much less, but certainly you would not find--most bankers laugh when you say, my goodness, a 98 percent interest rate is--I mean, a 98 percent repayment rate is a dramatically high rate.
PAUL SOLMAN: So then, Carl Horowitz, why don't you get in here? My experience was in Arkansas almost universally positive with this stuff, and we've heard all the positive. Inject a note of skepticism into this, if you would.
CARL HOROWITZ, Investor's Business Daily: Well, I can inject, I think, three notes of skepticism.
PAUL SOLMAN: Fair enough.
CARL HOROWITZ: First, these micro banks are not banks as you and I know banks. They're very heavily subsidized operations, not necessarily in government, but from the private sector and from non-profit philanthropies. It's fair to say that left to their own devices, they would simply not exist, or, if they did, they would collapse overnight. Well, maybe not overnight. They would not last.
PAUL SOLMAN: Okay.
CARL HOROWITZ: Second, there are implications for the welfare reform law that was signed by President Clinton in August. People are saying this is the way to move people off the dole and into productive enterprise. I would like to point out that even micro bank advocates point out that only about 10 percent of all Americans are self-employed, and it's not realistic to expect that much--anything more from the welfare recipients.
PAUL SOLMAN: So no more than 10 percent could become entrepreneurs.
CARL HOROWITZ: Well, realistically, it's a ball park figure, yeah.
PAUL SOLMAN: Okay. And your third objection?
CARL HOROWITZ: My third objection--certainly a note of skepticism--is that this has very real implications not only for what we call micro banks but all banks, our entire commercial bank system. The argument is that if these banks are so wonderful and they're so successful in producing entrepreneurs from the poorest of the poor, and with such a phenomenally high repayment rate on time, one would think why aren't banks rushing to make loans to these people? Well, there are real reasons why.
PAUL SOLMAN: Well, let's get into them in a minute, but those are your three?
CARL HOROWITZ: Yes. I would say those are--
PAUL SOLMAN: All right. So let's take the skepticism or notes of skepticism one at a time. First, subsidize these loans, wouldn't make it without, well, I don't know, sort of left-wing goodwill or something like that. I mean, good--
CARL HOROWITZ: Goodwill for the time being.
PAUL SOLMAN: Subsidy.
MARIA OTERO: Let's look at the experience of in the developing world, which is really where this experience comes from. We, in the last few years, have demonstrated in the last ten years that these programs can cover other costs; that they don't need subsidies. In fact, if we point at some of the most advanced programs in this area, we see, for example, a commercial bank in Bolivia, Banco Sole, which is a bank that specializes in providing micro loans and serves about 7,000 clients in the country. None of the clients it serves could ever access a loan from a regular bank in the country, and yet, this bank is completely self-sufficient. It's even profitable at this level.
PAUL SOLMAN: What's the key to that? I mean, why does it work, if, as you say, it does?
MARIA OTERO: There are several keys, and this makes micro enterprise such a promising strategy. One is that I think we have been able to develop a way of extending loans to the poor in which you are able to substitute collateral.
PAUL SOLMAN: Money you would have, or wealth you would have.
MARIA OTERO: Money that you have, or a way in which you can guarantee your loan in a manner in which you actually are lending against character, and you are giving people an opportunity to pay back if, in fact, they demonstrate that they will use that credit.
PAUL SOLMAN: So what's the problem? If they do pay back and the record is that they do, then why are you skeptical?
CARL HOROWITZ: Well, the fact is there is no credit history. There is no collateral. Shouldn't that raise a bit of a red flag? The fact is that there is in this part of the world, like the famed Grameen Bank of Bangladesh, there is enormous social pressure, a level of intrusion into the private life of borrowers by the bank, by prior agreement, that simply would not exist, that we would not tolerate in this country even in say small business loans. A typical Grameen loan the first time is like payable in 2 percent increments over 50 weeks, and then you pay the interest in the last two weeks. What you have to go through when you're a woman is take a vow, a series of vows.
PAUL SOLMAN: Because most of them are, in fact, almost all of them are women borrowers?
CARL HOROWITZ: And that in itself makes you wonder, where are the men, why aren't they breadwinners? Can't they be trusted with money, and, if not, what does that say about that part of the world?
PAUL SOLMAN: But your point is it's too intrusive. What's your response to that?
MARIA OTERO: You're looking I think at one approach to working in micro enterprise. I think the Grameen Bank presents one way in which you can work, and Grameen Bank is working with poor, destitute women who can't really have a way out otherwise. There are many other ways of working in it without having to be intrusive. What you're doing is really enabling a person to come to an institution to borrow a loan, and then to be able to pay it back.
PAUL SOLMAN: So what about this point about entrepreneurs that he makes; that most of us simply aren't entrepreneurs, and yes, this is supposedly a strategy to get all the poor out of the problem of poverty?
MARIA OTERO: Well, if you look again in developing countries about anywhere between 40 and 60 percent of people, especially living in the cities, are self-employed, and the people, many of the people the micro loans are made to are people who are already businesses. They're already people who are banging pots on the street, or selling oranges, or are doing something in order to earn a living.
PAUL SOLMAN: Do you really think that most people can become entrepreneurs, I mean, more than the 10 percent? That seems to be a standard figure. It's not just Mr. Horowitz who uses that.
MARIA OTERO: Well, you're using the figure for this country.
CARL HOROWITZ: In this country.
MARIA OTERO: In this country.
CARL HOROWITZ: Yes.
PAUL SOLMAN: Well, it's just a guess as to how many people can really be entrepreneurs.
MARIA OTERO: What we have found in this country, and we're lending in six cities for the last three years, and we are, the money that we are lending we are borrowing from commercial banks in order to then lend in small loans, so the only level of subsidy that is required until the program gets large enough is in order to cover the operating costs. What we are finding is that the money that people earn from their self-employment is precisely that amount of their income that keeps them above the poverty level, so the studies that we have done show that it's not necessarily a question whether you're an entrepreneur or you're not entrepreneur. Poor people are basically weaving together their income from different sources.
PAUL SOLMAN: But your point is that banks, if this were really a profitable opportunity, banks would do it?
CARL HOROWITZ: Yeah. Why would banks hesitate? This really--these micro banks in a real sense are economic development agencies, are adjuncts of government, and they--they can be seen as economic development agencies with a welfare or at least poverty to work component, and while the idea is admirable, the bills won't--will come due, maybe not now, but in terms of the losses they rack up. There's a very high likely, I think, that they're going to be--that it's going to have to require constant infusions of government and philanthropy and lines of credit from commercial banks to keep these operations afloat.
PAUL SOLMAN: Now, you don't agree with that, but you just have the last word for a second here. Do you expect there to be an explosion of microlending, even with that note of skepticism, in the private sector?
MARIA OTERO: I think there will be an explosion, and I think what we will see that will be valuable is that the well-performing programs will rise way above what Carl is talking about, will demonstrate their commercial viability, and will be able to reach thousands of people that don't have access to credit.
PAUL SOLMAN: Well, thank you both very much. I'm sure this is a continuing story, and we'll continue to watch it.
CARL HOROWITZ: It was a pleasure.
MARIA OTERO: Thank you.
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