Philippines Vietnam
Tiny Loans as Key Tool for the Poor
At an international gathering of micrcredit experts in the nearby city of Puebla, President Vicente Fox pushed his plan for an ambitious loan program that he hopes will produce a multitude of Arguellos, by offering credit where none is available. The program aims to double, to 600,000, the number of microloans in Mexico over the next few years. Fox's plan is an aggressive--some say too aggressive--attempt to make up for Mexico's relatively late start in microcredit which involves making small loans that allow people with little or no collateral to start their own businesses. Other countries in Latin America and Asia are much further along in channeling government and donor funds into small loans for the poorest of the poor. With one-twelfth of Mexico's population, Bolivia already has twice as many microcredit borrowers. According to microcredit experts, an estimated 30 million impoverished borrowers, mainly in Asia and Latin America, are receiving small loans designed to make them self sustaining by government or donor capital, and often include health and vocational training. The penetration of microcredit programs among Mexico's poor has been stymied by several factors.

SAN BALTASAR TETELA, Mexico --A loan of $60 was all Apolonia Arguello needed to launch what has become a 300-chicken-a-week delivery business, just the sort of success story that Mexican President Vicente Fox needs to deliver thousands of times over to achieve his promised economic miracle.

Though she had no collateral, Arguello started borrowing from a microcredit outfit called Compartamos (Let's Share) in 1999 and has used increasingly larger loans to buy more and more live chicken from a nearby farmer. She dresses and delivers them to a bulging list of customers in this community, about 80 miles east of Mexico City, the nation's capital. Now, Arguello owns a store and a pickup truck--and apparently has escaped the grinding poverty that affects the 40 million poorest Mexicans, who earn $2 a day or less. "I had no other resources and now I am working with my own profits.", she said this week in this town near the volcano Popocatepel. There is money to be made here !

There is an innate distrust of any lender among poor Mexicans, especially those who have lived through failures of the country's banking system. In addition, past rural loan programs under the long-ruling Institutional Revolutionary Party, or PRI, often gave money away in exchange for political support, feeding a culture of loan defaults. But since Fox took office in December, ending seven decades of PRI rule, he has promised to replace patronage with sustainable microcredit programs to stimulate private initiative among the poor and reduce poverty.

The first major step came in April, when the Mexican Congress passed a law setting up the legal framework for a new class of microfinance companies that can give loans of as little as $50 and also take saving deposits. Regulations for the industry, which will be largely self-governed and self-insured, are still being drawn up, but loans should start flowing in the next several weeks.

Some observers at the meeting, which was co-sponsored by the Mexican government and the private Washington-based Microcredit Summit Campaign, thought the Fox plan might be pushing too hard, saying successful programs have evolved slowly with a minimum of government intervention. Others argued for greater intervention, saying that government is inviting malfeasance by setting up a new class of financial institution, but abdicating supervisory responsibility.

The Fox plan--which would create up to 650 microfinance institutions that would make loans and also accept deposits at about 4,000 locations nationwide--would answer a critical need among the poor, said one World Bank official. "The banking infrastructure is usually not where poor people live, and those that are, don't often make poor people feel very welcome", said Elizabeth Littlefield, a World Bank director and chief executive of a microcredit think tank in Washington called C-GAP. "So they rely on informal places for putting their savings, which are often less secure. Research suggests having a safe place to put savings is valued more by the poor than credit."

The ability of lenders to accept deposits is the key to the institutions' self-sufficiency, which must be the long-term goal of any microcredit program to reach an ever-larger number of borrowers. That goal is still a distant one: only 65 of the 10,000 known microlending operations in the world are self-sufficient. The rest depend on donor funds to continue operating.

On Tuesday in San Baltasar, Arguello and 25 other women organized by Compartamos, the largest microfinance company in Mexico, met to make payments on their existing loans. Peer pressure is high to make good. Less than 0.5% of the loans that the company has made here and elsewhere, have defaulted.

Antonia Vargas made the last payment on a $1,000 loan she used to buy a powerful sewing machine, which she uses to earn money, making pants and other apparel. "I would have never been able to buy this without the loan, " she said, pointing to the gray machine dominating her humble living room.

By Chris Kraul, Extracted from Los Angeles Times, October 12, 2001.


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