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July 8th, 2009
Microfinance and Entrepreneurship
Lesson Activities

Introductory Activity: Entrepreneurship and starting a business

1. Ask the students what the name is for someone who starts, organizes, and manages his or her own business? (Answer: entrepreneur)

2. Next ask: what does an aspiring entrepreneur need in order to start a business? (Accept all answers, which should include capital, or elements that could function as capital: money or goods that can be used to produce more wealth). Confirm with the students that one thing that entrepreneurs need to start a business is capital.

3. Distribute the “Terms and Definitions” student organizer (PDF) (RTF) to each student. Have the students fill in the definitions for the first two terms, which they have already discussed. An Answer Key (PDF) (RTF) is provided for teacher reference. As the lesson proceeds, students should fill in the rest of the definitions for the terms on the organizer as they arise.

4. Tell the students that capital is something entrepreneurs need not only to start a business, but also to expand their businesses. Ask: How can entrepreneurs get the capital they need to start or expand businesses? (Answer: by getting a loan – also known as credit).

5. Pass out the “Entrepreneur Descriptions” strips (PDF) (RTF) to the class – 1 strip to each student or pair of students. Tell the students that each strip identifies an entrepreneur in the developing world. For each scenario, the students should think of at least one way that the individual could expand his or her business (to get more profit). Specifically, what would a loan of additional capital enable him or her to do to expand the business? Give the students a few minutes to come up with ideas, then share with the class. (Ideas might include: buying more inventory, investing in equipment or tools, renting or buying a storefront, buying livestock, or hiring staff).

6. Now have the students imagine that the entrepreneurs put in applications to a bank for loans to expand their businesses. What would the banks want to be sure of before lending them the money? (Answer: The banks want to be sure that the loans will be repaid).

7. Examine the factors that a typical bank will consider when evaluating a loan application. Explain the term creditworthy to the class, and have the students create the chart below (leaving the right-hand column empty for the moment). Have the students visit the CitiFinancial: Resource Center: All About Credit website (or distribute printouts of the page to the class) and explore the factors that contribute to a bank’s assessment of creditworthiness in a potential borrower (making sure the students also define each term on their “Terms and Definitions” Student Organizer – see the “Terms and Definitions Answer Key” for suggested definitions). [NOTE: If students have completed the “You Can Take that To the Bank!” lesson, they may be able to do this step from memory].

Factors included in creditworthiness assessment
Banks
Character (mostly credit history)
Capacity
Capital
Collateral
Conditions

8. Remind the students of the entrepreneurs they read about earlier. Ask the students to refer to the creditworthiness factors and determine why these individuals might have trouble getting a loan from a bank? (They may have no prior loans on which to base a character assessment that relies largely on this, they may not have large income potential for the capacity assessment, nor much net worth for the capital assessment, they probably have few items of value to offer as collateral). If these individuals were to present their loan applications to a typical Western bank, would they likely be approved? (Most likely, no!).

Learning Activity 1: Two models of credit for the poor
1. Discuss the global problem of poverty: over 1 billion people in the world survive on less than one dollar a day, which is a figure used by international organizations to measure abject poverty (equal to over three times the entire population of the United States, or one in every five people in the world). This is a problem on a grand scale, and many people are trying to find ways to raise the global poor out of poverty.

2. Explain that the inability of poor people to borrow money to expand businesses and generate wealth has been one factor in the ongoing difficulty people around the world have in raising themselves out of poverty.

3. Review the concept of collateral by asking the students to give you examples of collateral that might be leveraged for a business loan (these should be items of high value). Make sure that students understand that one of the most common forms of collateral for individuals seeking loans is the home that they own. But what about people who are too poor to own homes?

4. Frame Video Clip 1, “Is property the route to wealth?” by explaining that many poor people throughout the world cannot afford to own homes, and also are too poor to pay rent to landlords. The poorest people worldwide often set up shanties or huts in the shadows of cities, building on land that does not belong to them. This practice is known as “squatting.” In this video clip, the students will see if programs encouraging home ownership among the poor can help them out of poverty by providing them with collateral.

5. Provide the students with a FOCUS, asking them to determine how the video answers this question: Can making sure poor people own their own homes give them the means to rise out of poverty? PLAY Clip 1. Follow up by discussing the focus question (No – in the Argentinean example, a government program to encourage property ownership – one that gave squatters leases that converted after 20 years to full ownership of their homes – did not ensure they could borrow money after that).

6. Review the elements of a typical bank’s assessment of creditworthiness. Consider: How did giving poor Argentineans title to their property impact their character, capacity, capital, collateral, and conditions? (It increased their capital and the collateral they could use against a loan, but did nothing for their character, capacity, or conditions. Using the typical bank definition of creditworthiness, they were still not considered creditworthy).

7. FRAME Clip 2, “Microfinance,” by explaining that this video segment will show a totally different way to get money in the hands of poor people around the globe. Provide the students with a FOCUS, asking them to determine: “How are the loans that the Bolivian women are receiving in the video segment different from traditional bank loans?” PLAY Clip 2.

8. FOLLOW UP by reviewing the focus question (the loans seen in the video are different from traditional bank loans in that they are not secured with anything – no collateral backs up the loan). Ask: Would the women in the clip be considered creditworthy by a traditional bank? Why or why not? (No – they have very little capital or capacity, no collateral and no credit history on which to base a character assessment). Explain that this model – of giving out small unsecured loans to poor entrepreneurs who have no collateral or prior loan history to back up their repayment promises – is called microcredit and is one of the services of a financial service industry called microfinance. The institutions lending the poor people the money are not traditional banks, but microfinance institutions that specialize in this kind of lending. Have the students fill out the definitions for these terms in their “Terms and Definitions” Student Organizer.

9. Explain that while the traditional bank criteria for creditworthiness do not apply to most microcredit applicants, the microfinance model has proven that poor people, with little to no net worth or assets, can still be extremely creditworthy. Microfinance loans get successfully repaid 95 to 98 percent of the time – a rate higher than for almost any other kind of loan, including student loans and credit card debt in the United States (source: Grameen Bank Foundation)

10. Ask the student which Bolivians, in particular, were shown as being creditworthy in the video? (Women). Explain that not all microfinance institutions give loans only to women, as ProMujer does, but that in general it has been found that women with many responsibilities in the home are extremely dependable, financially responsible, and pay back loans promptly and on time. Microfinance, in fact, has opened up a completely new set of criteria for creditworthiness. Have the students create a chart comparing the traditional bank criteria for creditworthiness to the microfinance criteria for creditworthiness. Lead them through the activity by creating the following chart on the board:

Factors included in creditworthiness assessment
Banks Microfinance institutions
Character (mostly credit history) Character (mostly responsibilities to home and family and reputation in the community)
Capacity Strength of business plan
Capital
Collateral
Conditions

Culminating Activity
1. Distribute the “Profiles of Microloan Applicants” Student Organizer (PDF) (RTF) to the students. Explain the instructions on the organizer: as homework (or in class if time permits), have the students view the 15-minute video from the FRONTLINE/World episode “Uganda: A Little Goes a Long Way,” at http://www.pbs.org/frontlineworld/stories/uganda601/video_index.html (this video showcases the lives and businesses of some microloan recipients in Uganda, and shows how an innovative website, kiva.org, provided a new way for individuals in the United States to loan money directly to these small business owners who had been preapproved for loans by Ugandan microfinance institutions).

2. As a FOLLOW UP to the FRONTLINE/World video, lead a discussion in the class about Jessica and Matt Flannery (founders of kiva.org). Ask the class to describe how they, too, are entrepreneurs – and to name some steps they had to take to run their successful enterprise (generate the idea, work with local partners, set up the technology, hire staff, build a website, expand the business with new technology etc.)

3. The Organizer also directs students to visit kiva.org and browse profiles of the microloan applicants on the site, picking one entrepreneur to present to the class (this can be completed as homework). The students will produce written reports, at least some of which should be shared orally with the class.

4. If desired, this activity could be used as a stepping-off point for real fundraising and loan granting from the class and/or school, granting and tracking loans using kiva.org, Donors Choose, or another microloan website.

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    I believe that prior advice from a qualified financial manager is irrefutably necessary before one embarks on taking a loan of any nature. Taking loans based on misinformation can really be detrimental for an individual’s financial well-being.

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