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Microfinance lenders help working poor help themselves

Carole Marshall knows $25 won't change the world. But in a remote village in western Africa, it might make a world of difference for a struggling entrepreneur.

Marshall isn't giving the money away. She's lending it to small business owners in the developing world with the help of a one-year-old community development project at the University of Winnipeg called Smarter Village.

"I'm an entrepreneur, so that's why this program appealed to me," says Marshall, owner of marketing firm Lynx Communications.

"I know how hard it is to get started when launching a business and it's hard no matter where in the world you are."

While it is indeed tough all over for entrepreneurs starting out, launching a business is an almost impossible task for the hundreds of millions of working poor around the globe. Despite adversity, they manage to do just that, only to find their economic prospects severely limited because of one major obstacle: access to credit. Although many poor entrepreneurs often require less than $500 in capital, they are unable to get loans from banks because they have no collateral and the loans are too small to be profitable for traditional financial institutions. That's where microfinance has stepped in to fill the financing gap, providing small loans to poor entrepreneurs to grow their businesses, create jobs and develop their local economies.

And more Canadians -- such as Marshall -- are looking at providing the loans as another means to help the less fortunate, besides the well-travelled route of charitable giving.

"The best thing about this is the money goes to a community and multiplies itself many times over," says Karen Keppler, a University of Winnipeg business instructor who helped launch the Pellital microbank part of the Smarter Village project.

"You put in $65 and that person can start a business that will maybe create a couple of other jobs."

The Pellital microbank and the Smarter Village project are the brainchild of Adama Diop, a Senegalese exchange student who contacted Keppler through her community development Facebook page. Now living in Montreal, Diop spent a year attending the U of W where, with the help of Keppler, he created a website where people could lend small amounts of money to mostly women entrepreneurs in Agnam-Goly, a village in northwestern Senegal.

Although the concept may be new to many people in the developed world, microfinance has been around for about 30 years, Keppler says.

The world's best-known microfinance project started in the 1970s. At the time, Muhammad Yunus, a Bangladeshi economist, realized the working poor could not improve their lives without access to credit, so he helped found the Grameen Bank. The bank provided small loans to poor Bangladeshi entrepreneurs and, although they had no access to collateral, they turned out to be reliable borrowers.

About 98 per cent of those who borrowed money through microfinance repaid their loans. As a result of Grameen's success, microfinance spread throughout the developing world and Yunus and the bank won the Nobel Peace Prize in 2006.

But the Grameen Bank wasn't the only microfinance pioneer. Other not-for-profit microloan institutions have also been providing access to credit for the world's poor for a number of years.

FINCA, founded by two former members of the U.S. Peace Corps, has helped provide more than 750,000 loans to entrepreneurs in more than 23 countries for more than two decades. FINCA's model is somewhat different than other microfinance organizations. For one, it is a registered charity and people give money away, unlike Pellital and other larger organizations -- like Kiva, an online microloan provider -- that lend the money.

FINCA donors receive a tax receipt for their contributions, but do not receive their money back like they would with other microfinance organizations.

Instead, their donations contribute to a pool of capital that is distributed to a network of village banks around the world that handle the loans locally, says Mike Green, who sits on FINCA's board and helped launch the Canadian branch in November.

When a loan gets repaid, the funds are returned to the village bank's capital reserves where they can be lent to other entrepreneurs. While some microloan organizations charge no interest or only a small amount to cover processing costs, FINCA loans have interest charges, often at higher rates than those offered by banks in the region.

"That's the only way to keep it going," Green says, adding the rate is much lower than those offered by loan sharks, usually the alternative to banks for poor people in need of credit. By providing the village bank with a source of income from interest payments, the bank can directly create jobs (loan officers and bank clerks) and it becomes an autonomous financial institution, managed by villagers for villagers. "We don't decide (who gets a loan). They decide. Twenty women gather at the village bank and you can't get into that village bank without an invitation from the other women," says Green, a software entrepreneur who volunteers his time with FINCA.

"They vet themselves and FINCA doesn't worry whether it's a great business idea or not. If the other women say they trust this (entrepreneur), that's good enough." And while Canadians can now donate rather than lend money, tax savings are likely the last reason people would give to FINCA.

"The underlying subtext is alleviating poverty. It gives people a hand up," says Green. "They pull themselves out."


Who are the working poor?

While most people understand the phrase refers to individuals and their families who earn an income that's too low to escape poverty, the criteria vary from nation to nation. The U.S.-based, non-governmental organization (NGO) Corporation for Enterprise Development provides microloans to American families and defines the working poor as people and their families who work at least part-time and fall below the poverty line. But the poverty line also changes in each country. In Canada, for instance, there is no official poverty line. Instead, Statistics Canada provides a low-income cut-off measurement. Families that spend 20 per cent more of their gross income than average Canadian families on essential expenses such as food, shelter and utilities are below the cut-off.

In the developing world, clean water, electricity, health care and other essential services are often unavailable to large portions of the population, so the definition of working poor is much different. According to the World Bank's development indicators issued in 2008, more than five billion people live on less than $10 a day. About half live on less than $2 a day. Those numbers may sound low enough, but in a New York Times article published in September, the UN defined the working poor as those earning less than $1.25 a day.


Microfinance organizations

Several microfinance institutions provide small loans and other financial services around the world to individuals who are too poor to qualify for traditional banking. Here's a look at three organizations, all using slightly different models.

Kiva: An online community that allows individual lenders to provide small loans to struggling entrepreneurs in the developing world. Kiva works with field partners, various microbanks around the world. These institutions vet the entrepreneurs seeking loans and upload qualified borrowers to the website to find lenders. The average loan to borrowers is about $402 and the average amount of money lent by lenders is $175.

-- www.kiva.org


FINCA: This NGO provides banking services to the world's lowest-income earning entrepreneurs. Using donations, FINCA International provides $5,000 capital each to small micro-lending institutions called village banks. A typical village bank consists of 20, mostly women, entrepreneurs in need of financing to build their businesses. Because these individuals have no collateral, all members of the group guarantee the loans. In addition to loans, microbanks provide other financial services such as savings and insurance. As the loans get repaid with interest, the banks can grow, providing loans to more entrepreneurs in need, as well as expanding services.

-- www.fincacanada.org


Pellital: A microfinance lending institution set up by University of Winnipeg student Adama Diop to provide small loans to entrepreneurs in Agnam-Goly, Senegal. The Pellital village bank is one of many initiatives of the Smarter Village project, aimed at developing social and economic infrastructure in Agnam-Goly. Karen Keppler is the director of innovation at the Virtual Business Innovation Centre, a joint initiative of the U of W and the Aboriginal Business Development Centre, and she helped Diop develop the Smarter Village project.

-- vbic.squarespace.com/pellitals/


Microfinance in the developed world:

A microloan in Africa is much different than one in Canada. While a $65 loan to an entrepreneur in Senegal can help her business tremendously, an entrepreneur starting out in Canada requires about $30,000, says Nigel Mohammed, manager of community services at Assiniboine Credit Union, one of a handful of financial institutions offering microloans to Canadians.

"With small, microbusinesses, a lot of institutions find that it's too much time and work with not enough profitability to manage a portfolio of $30,000 loans," says Mohammed, who manages Assiniboine's microloan portfolio.

To streamline the process and reduce costs, most institutions provide loans to individuals based on their credit scores alone. But with a microfinance mandate, Mohammed looks at the viability of the business instead. "We look at the business plan for a start-up or financial statements for an existing business and we're able to make a decision -- yes, we can give you credit, or no we can't -- based on our determination of the viability of the business."

Republished from the Winnipeg Free Press print edition December 19, 2009 B14

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