Three Golden Rules

By Otero, Maria | UNESCO Courier, January 1997 | Go to article overview

Three Golden Rules


Otero, Maria, UNESCO Courier


Keys to success for microfinanciers and their clients

Tiny economic units operating at the margin of the "modern" sector or outside it are the major source of employment in urban areas throughout the developing world. In some cities, more than half of the economically active population are employed in these "microenterprises" as carpenters, shoemakers, street vendors, trash recyclers, and in innumerable other businesses of varying sizes and sophistication.

Microenterprises operate outside the laws and regulations that govern formal business activity. They are not licensed as businesses, generally do not fulfil the legal labour requirements (social security, benefits, taxation), and operate informally, often employing non-paid family members. Other characteristics include a lack of division of labour or specialization in the workplace, lack of accounting procedures, serious limitations in accessing capital, the prevalence of businesses located in the owner's home, and more important, the lack of access to information, technology, training and bank credit.

Although some microenterprises belong to relatively well-to-do individuals, the vast majority of their owners come from the poorest sectors of the population and have seldom completed secondary education. Most microentrepreneurs live in the slums of large cities and therefore lack access to public services and to adequate housing.

The technology for lending to microenterprises has improved greatly in the last few years through the work of such institutions as Bank Rakyat Indonesia (see page 24), the Grameen Bank (see page 20) and ACCION International (see page 28). The lending schemes run by these institutions share the following core characteristics that make them highly effective:

* Familiarity with the market. Microenterprise institutions know that the poor are willing to pay for access and convenience. Their major need is for small short-term loans to cover working capital needs and liquidity constraints.

Microentrepreneurs need these loans quickly with little paperwork or other time-consuming requirements. …

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