"Ethics of Relief vs Job Creation Programs as a Means of Poverty Alleviation"
Wednesday, February 19, 1997
Featuring: Ben Sprunger, President
Mennonite Economic Development Association (MEDA)
Low income countries need to create over 100,000 jobs per day. The vast majority of these will be created by the businesses run by the poor, by tailors, shoemakers, vendors, iron workers, builders and bakers. These are the poor producing affordable goods and services for the poor -- meeting the needs of their own families and communities. And contrary to popular opinion, the poor are a good credit risk.
Most banks won't bother lending to the poor; they have no collateral and their capital requirements are too small. Until lending programs like ours came on the scene, micro-entrepreneurs' only recourse was often loan sharks, who may charge up to 250% interest.
Although they often generate most of the jobs in a country, and account for 30-60% of the GNP, the informal sector works without policy support, without credit access, and without recognition in official statistics of the country's economy. But these enterprises, neglected because of their individual small scale, are the engines of the economy.
MEDA is convinced that one of the things micro-entrepreneurs need most is access to credit -- the same kind of credit that most North American businesses and households can't live without. As a result, MEDA's first Small Business Development Program (SBDA) was started in Port-au-Prince, Haiti in 1986, extending loans averaging $500 along with management training and technical assistance. The program expanded to Jamaica, Bolivia, Nicaragua, Tanzania and Zimbabwe.
While credit is affordable, the full loans must be repaid to cover program operating costs, inflation and the cost of capital. Only in this way can the capital continue to be available to others needing access to it.
And when given access -- a level playing field -- small businesses are highly responsive. Within our programs, on average, businesses receiving loans:
create or secure a job for every $1000 borrowed
increase their assets by over 25%, and
increase owners' incomes by over 25%
Every dollar invested in credit programs yields a return of $2 within the business served.
And because the businesses are given access, not charity, the owners gain in confidence and dignity -- they have made gains, not had them given to them!
This is one of the most effective ways to alleviate poverty. As businesses stabilize, income is directed to improving nutrition, housing and health; as the household economy improves, investment is made in community needs - clinics, stores, and schools. People are enabled to take care of many of their own development needs, and don't have to rely on the largesse of others.
We measure performance in a number of ways, including repayment rate, self-sufficiency and institutional strength. We're also are concerned about growth and financing. These are all normal business considerations.
Services: In additional to credit access, businesses receive training to increase their effectiveness. While many businesses are attracted to the program because of the credit, many come to value the training even more. Two categories of loans are issued: Micro-enterprises are production sector businesses with significant growth and job creation potential, often requiring first loans of $50 or more to increase working capital, while successive loans add fixed assets. Solidarity groups are self-formed groups of 5-7 people, often in the commercial sector, who receive a single loan which they allocate among their members, and for which they are mutually accountable. Generally, over 50% of loan recipients are women.
Self-sufficiency: Ultimately, programs must be self financing. Local funds are generated when clients pay their interest charges and technical service fees, fees ranging from 12 to 35% of the loan value.
Generally, after 3 to 5 years the local costs of the SBDP are covered entirely by interest earnings and technical service fees. The goal in each country is complete self-sufficiency, and Bolivia and Nicaragua show that it can be done.
The poor are, in effect, contributing to their own economic development. As they repay their loans the money goes back into a revolving loan fund to enable further loans for them and their neighbours.
Repayment rate: Repayment rates are well over 94%. That high success rate is due to a careful screening process, an excellent training program and consultants who monitor their clients closely. It's also due to the fact that the clients value the program, and take it seriously.
Institutional development: How long will we need to continue to operate these programs? Our policy calls for identifying and strengthening local institutions that can eventually take over the entire operations themselves. Our success (or lack thereof) in actually doing this is another measure of our performance.
In every case we work with local partners like the San Luis Cooperative in Bolivia, SHEC in Haiti, CHISPA in Nicaragua and EDT in Jamaica. In places like Haiti we are encouraged as, in the midst of formidable odds, a local institution is emerging and independently delivering services, managed by very competent Haitian staff.
Growth: Launching new programs takes a lot of financial and human resources. It is also very time consuming.
The upfront costs of delivering this program recognize that the poor in Low Income Countries do not have the education and other support systems that we in North America take for granted. Our governments provide universal education, for example. Not so in the countries where our SBPD is active.
Although we subsidize the development of the delivery system, we are also concerned about cost-effectiveness. The capital required to offer sufficient loans to make local operations viable can range up to $1,000,000. The personnel required need to be competent business-oriented managers, committed to MEDA values. A tall order.
So how do we move ahead? For one thing, we have been carefully developing systems and documenting our experience in a form that can be shared with others. Detailed operating manuals are in place. So are policies and working papers. We have conducted several international workshops, in Bolivia, Tanzania, Nicaragua and Canada, for organizations interested in getting into micro-enterprise ventures. In effect, we are expanding our impact by sharing our experience so that other organizations can improve their services to the poor.
Answers to some of the questions from the attendees
1. MEDA only goes into a country that has invited MEDA in.
2. There are no religious requirements for people helped.
3. To identify persons needing help in a poor area, we invited to a meeting any persons who are interested in developing a business to see who can get started.
4. In establishing a credit union, it becomes self sustaining when the union reaches 3,000 loans.
5. MEDA has found that:
a. The poor want to work.
b You can bank on their credit.
c You can apply business principles to the poor.
d Welfare breeds dependency.
6. To the question -- Where does faith come in -- couldn't you say your work is just humanitarian? My response: it is the faith of the Mennonites to tithe and have an association that is concerned with how to stimulate economic development activity for the poor.
About the Mennonite Economic Development Association (MEDA)
MEDA is an organization of 2,900 Christians in business who desire to integrate faith with daily work. As an association, members connect entrepreneurial gifts to a needy world. MEDA sees small business development and job creation as a viable and a preferred option to relief and welfare programs.
This year MEDA will help start or grow 20,000 small family businesses. The primary method is small business training programs and microcredit. MEDA will make over USD $10 million in small loans in nine of the poorest countries. Although most loans are without collateral, the worldwide repayment rate is 94%. MEDA believes you can bank on the poor. The association also helps establish credit associations that eventually become self-sufficient, are locally owned and continue for years after MEDA is no long active in an area. MEDA also helps create rural production and marketing cooperatives in developing countries amoung farmers who have become marginalized. MEDA has 32 North American and 168 national staff scattered in 10 countries plus U.S. and Canada.
Mennonite Economic Development Associates
Worthington, OH 43085 USA
T. (204) 956-6430
Council for Ethics in Economics
125 East Broad Street
Columbus, Ohio 43215-3605 U.S.A.
(614) 221-8661 FAX: (614) 221-8707