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By Peter Bate Are all microentrepreneurs poor? Is the lack of access to credit the biggest constraint facing microenterprises? Do high interest rates charged by microlenders stunt these firms' growth? These questions and others testing frequent assumptions about microlending were tackled by Norwegian economist Hege Gulli in her recent paper "Microfinance and Poverty: Questioning Common Beliefs," which will be published in November. Gulli, who took on this assignment as a consultant to the IDB's Microenterprise Unit, points out that development agencies usually consider assistance to microfinance institutions (MFIs) as a time-tested means to reduce poverty. While there is a good deal of truth in that notion, the tenets behind those intentions are not always corroborated by the facts. Her September presentation of the paper at the IDB was made just prior to the release of a U.N. report that raised questions about how effective microcredit is as a tool to fight poverty. "Microfinance should be seen as the provision of small-scale financial services to businesses and households traditionally kept outside the financial system rather than the more narrow view of microfinance as services for poor microenterprise owners," Gulli argued in her paper. Take, for instance, the idea that microentrepreneurs are poor and in need of assistance. A recent IDB study of the poverty profile of people working in urban microenterprises in six Latin American countries indicates that not all microentrepreneurs are living on the edge of poverty. In fact, such tiny businesses include firms ranging from survival tactics to highly sophisticated entrepreneurial activities, Gulli writes. As such, urban microenterprise development programs may need to make a special effort to target the poor. At the same time, many microenterprises are dynamic businesses with considerable growth potential. Other studies cast doubts on the validity of the notion that the greatest constraint microenterprises face is lack of access to credit. While it is often an important obstacle, it is not always the main concern cited by microentrepreneurs themselves. These studies suggest that there is an often greater demand for access to other financial services, such as deposit services to protect their savings. And what about the interest rates charged by MFIs? Some advocates find them "too high" for microenterprises to earn enough income and grow. Gulli found that financing costs constituted an insignificant portion of microenterprises' total costs, even in programs that demand effective real interest rates of almost 10 percent a month. The explanation is that microenterprises usually carry low levels of debt. Nevertheless, the best strategy for reducing interest rates and overall costs would be for microlenders to improve their own operational efficiency. Competition for clients among MFIs should have a similar outcome. __________________ The above study will be posted on http://www.iadb.org/sds/mic |
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