Building Blocks: Microfinance and Entrepreneurship in the Developing World
Dokmo, Charles L., Reed, Larry, Harvard International Review
CHARLES L. DOKMO is President and CEO of Opportunity International USA, based in Oakbrook, Illinois, and LARRY REED is Managing Director of the Opportunity International Network.
A torrent of international capital, unprecedented in world history, has been unleashed in the past decade. Yet this capital has had little impact on the day-to-day lives of most of the world's population. In the past ten years, US stock market capitalization has grown by over US$10 trillion, while 20 percent of the world's households survive on less than one dollar per day. Between 50 to 70 percent of these impoverished families are self-employed, scraping out a living selling goods on the street, running cottage industries or small-scale agricultural operations with the simplest of tools. When the recent, rapid flow of capital out of Indonesia led to massive bankruptcies throughout the country, though, Indonesian banks and development organizations that lend to these poor farmers and market traders saw their arrears rates increase by only a few percentage points.
These two different worlds turn on different scales. Microlending, small loans to poor entrepreneurs who do not have sufficient collateral for bank loans, presently accounts for 0.2 percent of commercial lending, yet capital markets transact US$1.3 trillion per day.
Is there any way of bringing these two worlds together? Could the billions of people living on less than one dollar per day increase their incomes if they had access to international capital flows? Could the formal financial market smooth out the boom and bust cycles by tapping into the strength and resilience of this informal economy? Over 1,000 people gathered in New York City last summer to look at bringing the two worlds together by examining how a commonplace financial tool--credit--can be employed to serve the bottom end of the economic marketplace around the world.
The meeting, known as the Microcredit Summit, had the goal of ensuring that "100 million of the world's poorest families, especially the women of those families, are receiving credit for self-employment and other financial and business services by the year 2005." Microlending is the way that we can involve more of the world's people in the global economy.
The Microlending Process
Early efforts at international development sought to overcome the vagaries of the marketplace, providing medical assistance, food, and education to those who could not provide for themselves. New development efforts have taken another direction: bringing the marketplace to those it does not currently serve. This approach has had the greatest success in providing loans and other financial services to poor and struggling entrepreneurs, particularly in the developing world. The majority of the world's poor live in the 48 least developed countries. Although these countries constitute 30 percent of the world's population, they earn only 0.1 percent of the world's income.
Over the past two decades, pioneering microcredit organizations like Opportunity International, the Grameen Bank, Finca, and Accion International have published surprising news about the impact and potential of microcredit programs. These organizations make loans that reach large numbers of poor people (Grameen Bank, for example, has over two million clients), and they have found that the poor consistently repay loans with market rates of interest (repayment rates in these organizations consistently remain in the 95-98percent range). Indeed, with sufficient size and efficiency, organizations providing these loans can cover all their costs with earned income and gain a profit.
The secret to the success of these organizations has been the development of lending methods that drive the costs of making a loan down to the point where a US$50 loan can be profitable. More important, the loans create a fulcrum that leverages a process of real development in the lives of the clients, their families, and their communities. …