Banking on the poor. Changing the face of foreign aid

BASILIA CHAMBI lives in the slums of La Paz, Bolivia - one of the poorest countries in the Western Hemisphere. She gets up at 4 a.m. each day to buy vegetables to resell at the market. In her early 20s, Mrs. Chambi is already the mother of three. She works hard for the 52 pesos ($25) she earns each week. But because of a trend that is gradually changing the face of international development - the granting of small loans to the working poor - this is twice the amount she was earning a year ago. In a country where malnutrition is widespread, her children already eat better.

Until last March, Chambi, unable to pay cash, had to buy her produce on consignment, paying 10 percent interest per day to the wholesaler. She was not given a choice of vegetables, and often had to accept spoiled goods. About 20 percent of her stock went unsold.

In March, she received a loan of $50 from the Foundation for the Promotion and Development of Micro-Enterprises (Prodem), a local development agency funded by Bolivian businessmen and the United States Agency for International Development (AID). Prodem began its credit program for women produce vendors last February, and has extended $50 loans to some 1,200 women in La Paz.

Interest on Prodem loans is 2.5 percent per month, the same as that charged by local banks. The difference is that commercial banks do not lend to vendors like Chambi. Most of them are illiterate, can barely sign their names, have no collateral or credit history, and are considered bad risks. To date, however, there have been no defaults on any Prodem loans.

The Prodem program reflects a fundamental shift in development philosophy taking place throughout the third world. Over the past 40 years, billions of dollars have been spent on efforts to improve the economies of these nations. These activities have been based largely on the theory that successful economic development requires a ``macro'' approach - investment in large-scale, industrial projects.

Yet the standard of living of millions of people in developing countries has fallen. Large-scale investments, whose benefits were expected to ``trickle down'' to the masses, have failed to eradicate hunger or stem the tide of migration from destitute rural villages to dehumanizing urban slums. ``Development has lost its way,'' says Michael Farbman, chief of the Employment and Enterprise Division at AID.

Since the early '70s, development policy has gradually been assuming a more human face, shifting away from the ``trickle down'' approach, and experimenting with ways to channel aid, in the form of credit, directly into the hands of the people who need it most - Guatemalan street vendors, landless Nepalese peasants, Senegalese fishermen.

Programs aimed at small-scale entrepreneurs account for only a minor portion of most development agency activities, and reach only a tiny fracton of the needy. But they are on the rise. The UN International Fund for Agricultural Development extends credit to 2.3 million people in 21 nations - more than any other agency. And a bill before Congress (which observers say will pass) would require AID to spend $50 million in 1988, $75 million in 1989 on business investment loans to the ``poorest of the poor.''

In fact, AID has been supporting microenterprise lending for years, but the definition of ``microenterprise'' has been very broad. The current bill seeks to ensure that credit is provided to people at the very lowest economic levels. The sums covered in the bill would be transferred from existing AID programs and do not involve any new appropriations. Why the emphasis on such lending?

An increasing sense of urgency surrounds the issue of world hunger today, and many development professionals see the strategy of providing credit to poor entrepreneurs as the most direct means of combating hunger. Among the first benefits of loans to individuals like Chambi and subsistence farmers is that they are able to obtain or grow more food.

Many experts also see the microenterprise approach as making an essential contribution to social and political stability. Barbara Rodey is executive director of the Foundation for International Community Assistance (Finca), a private, US-based agency that provides small loans to the working poor in Peru, El Salvador, and Costa Rica. ``We estimate that in Latin America [alone] there are approximately 140 million people living in life-threatening poverty,'' she says. ``These are the poorest of the poor. You cannot have stability in the world as long as such a tremendous number of people live in such terrible poverty.''

In most third-world countries more than half the workers belong to the ``informal sector.'' These are people who survive, often marginally, through self-employment, outside the economic structures. They are fruit vendors in Cartagena, Colombia; ragpickers in India; basketmakers in Accra, Ghana. In India, for example, a country of 770 million, more than 80 percent of workers are in the informal sector. Access to credit for these people is critical, but hard to come by.

``One of the great misconceptions we Americans have about the developing world is that there's a lot of unemployment,'' says William Burrus, director of Acci'on International, which designed the Prodem credit program in Bolivia. ``There's underemployment, but nobody's unemployed. To live, you have to do something - there's no safety net.'' Capital and credit needed

It is lack of capital, experts say, and lack of access to traditional channels of credit, that hamper the business activities of most of this informal sector. Chambi, for example, had been selling vegetables for years before she received her first loan from Prodem. But the 10 percent interest per day she had to pay to her supplier ate up most of her profits.

``Money lenders charge between two and 25 percent interest per day,'' says Maria Otero, regional director of Acci'on's program in Honduras. ``More than anything, this hampers individual economic growth and perpetuates poverty.''

All credit programs for the poor charge interest to defray program expenses, often including the cost of business training for the borrowers. Interest rates, though often steep by US standards, are always lower than those of local moneylenders. Contrary to traditional views about the ability and willingness of the poor to pay their debts, many credit programs boast repayment rates of more than 95 percent.

Many also have built-in savings mechanisms, to ensure that when the principal and interest of the loan are repaid, the borrower has achieved financial self-sufficiency, with his or her own fund of capital to continue business operations.

A key advantage of microenterprise loan programs is that the funds recirculate in the borrower's community and are available to others. ``This way, the poor pay the cost of their own development,'' says Finca's founder, John Hatch.

We are proving ``to the established banking system that these people are tremendously responsible with their loans,'' says Carlos Pareres, head of Save the Children in El Salvador, the local agency running Finca's program. ``Our repayment rate of 95 percent is very much higher than the 65 percent rate of banks who lend in the traditional market here.''

A large proportion of these borrowers are women. According to experts, this is a key to success. ``When women borrow, the beneficiaries are the children and the household,'' says Mohammad Yunus, founder of the Grameen Bank. Since 1976 this successful program has lent an average of $60 to close to 300,000 people with a 97 percent repayment rate: And 80 percent of its borrowers are women. ``In the case of a man, too often the beneficiaries are himself and his friends,'' says Dr. Yunus. ``A loan to a woman results in more benefits to the family.''

``We try to guide the money into the hands of women,'' says Finca director John Hatch. ``If the money is available to the wife, she will spend it on rapid-turnover investments like buying and selling vegetables, raising chickens or pigs. She knows what to do with her $50.''

Such a woman, says Mr. Hatch, already knows the realities of the local market, because day-to-day survival of her family traditionally depends on her efforts. Men, he says, often do not share such responsibilities, and thus have less understanding of household management and local economic conditions. ``It's ironic that the woman has traditionally seen herself as a nobody,'' says Hatch. ``Now, with access to credit, she's empowered.''

This increase in borrower self-esteem is considered one of the principal benefits of microenterprise lending. The very poor tend to see themselves as outcasts, experts say, and as being incapable of making positive changes in their own lives.

``We [at Finca] believe that when you give somebody something as charity, you lower their self-esteem,'' says Finca's Ms. Rodey. ``But when they feel that what they have done has been through their own efforts, it changes their lives.''

``A poor person's first taste of success tells them they're not worthless,'' says Yunus. ``This program builds up the dignity of human beings while building up a country's economy.''