SMALL BUSINESS; Tiny Loans Stimulate The Appetite for More

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Published: January 27, 2005

Correction Appended

Photo: Bangladeshi women gathered at a home in Dhaka recently to pay installments on microloans they received from Grameen Bank, which was founded to help the poor become small-business owners. (Photo by Rafiqur Rahman/Reuters)

It used to be that a $50 microloan to start an embroidery kiosk or other modest enterprise was a gateway out of poverty for women in poor countries. Now, some of them are telling aid groups that that is no longer enough. Rather, they want serious money — in some cases, several thousand dollars — to build small businesses, hire employees and establish themselves in a developing marketplace.

After almost three decades, the microloan movement has created a global network of tens of millions of female entrepreneurs and, just as important, a growing subclass of highly sophisticated businesswomen who are collectively helping to lift their nations out of poverty.

As the number of these new entrepreneurs expands, their demand for more capital is prodding microloan companies to rethink the size of their financing packages. Where seven years ago the Asian Credit Fund, a lending institution in Kazakhstan created by the American humanitarian agency Mercy Corps, offered mostly $40 loans, today borrowers can receive up to $10,000 — enough to rent office space, hire a staff, purchase equipment and otherwise expand their operations.

”What started as a microfinance institution is starting to move into small and medium loans” purely out of market demand, said Nancy Lindborg, president of the Washington office of Mercy Corps. In Kazakhstan, 67 percent of the Asian Credit Fund’s borrowers are women.

In Mongolia, XacBank, a similarly expanding lending venture also established by Mercy Corps, helped one woman to expand her bakery from a $100 enterprise into a $75,000 operation with 37 employees in an eight-room building that operates 24 hours a day. XacBank gave her a series of loans of increasing size, starting with $2,000 in 2001 and, most recently, $24,000.

Figures for worldwide microloans vary widely, from 70 million to 750 million outstanding, said Christina Barrineau, chief technical adviser for the International Year of Microcredit 2005, a United Nations initiative to expand microfinancing opportunities.

Whatever the figure, 28 years after the Grameen Bank of Bangladesh helped start the microloan movement in the mid-1970’s, the number of entrepreneurs in poor countries is huge, perhaps accounting for nearly 7 in every 10 adults. The Global Entrepreneurship Monitor, an annual study released this month by Babson College and the London Business School, reported 73 million of 784 million people surveyed in 34 countries were the owners of a new business.

And most of them are women. ”You can say that microfinancing is now reaching 80 million families, 90 percent of the borrowers being women, and that’s just the tip of the iceberg in terms of demand,” said Alex Counts, president of Grameen Foundation USA, a microfinance organization in Washington and an arm of the Grameen Bank.

While microloans have long been a strategy to alleviate destitution among women, many of them widows with no source of income, they also have the broader purpose of pumping up local economies ”by helping to support a vibrant, small-business sector,” Ms. Lindborg said.

Not all that much money is available for the new wave of miniloans of hundreds or thousands of dollars, as opposed to microloans of $100 or less. Grameen Bank, which has so far made loans to 3.7 million borrowers across the globe, 96 percent of them women, has increased the size of some of them, Mr. Counts said.

The problem is that social service agencies often assume their job is done if they help poor women create thriving, if tiny, businesses, he said. But to assure steady, continued growth, larger, more sophisticated businesses must be formed, he said, and many aid organizations are not set up to finance them.

For many impoverished women, like the 11 percent of female entrepreneurs in Kabul, Afghanistan, who are war widows, starting a business is their only hope for survival. But it can be extremely difficult for them to tap into outside financing to expand them from their rudimentary beginnings.

Of the few banks established in Kabul, for example, ”none of them are lending,” said Katrin Fakiri-Wardak, managing director of Parwaz, a Kabul-based microfinancing company. Some larger loans from international organizations have a nine-month application process, she said, and ”most loans by family members are limiting because they don’t have that much money.”

Cultural biases often hold women back from the entrepreneurial path. A lot of private agencies, known in the aid community as nongovernmental organizations, or NGO’s, sometimes restrict the help they are willing to give to women. ”A lot of NGO’s have a very strong, faith-based perspective and they may have a particular slant on what’s appropriate for women to do, which may shape what they help women go into,” Ms. Barrineau said.

On top of that, female entrepreneurs who do find outside capital sometimes pursue self-defeating business strategies, like spreading the money over several microbusinesses rather than concentrating on one.

”Seventy to 80 percent of the world’s poor are running very basic businesses as a survival mechanism,” Mr. Counts said. But those basic businesses are less likely to generate substantial growth.

In some rural areas, a combination of cultural constraints, lack of financing, transportation and basic supplies make starting a business an almost impossible dream for women. And in cities like Kabul, while starting a microbusiness can be relatively easy for women, taking it to the next level can be a daunting task.

But it can be done. In the final days of Taliban rule of Afghanistan, Kamela Sediqi was able to squeeze out a modest income from a small tailoring business in her home with the help of her family, including a brother who could serve as a male front. She even managed to hire several other women to sew clothes in neighboring homes. But there was a limit to her expansion, and a limit as well to her desire to continue in the tailoring business.

Now, after the war and under a new government, Ms. Sediqi runs the New Pimar Construction Company, a growing venture of 250 women that has secured a few public works projects.

By any Afghani’s standards, that would be a small-business success story. But Ms. Sediqi, 28, who recently visited the United States to take part in a business-training program, said she was just getting started. There is only one problem: She cannot secure a loan to expand her company, despite its steady growth into a profitable business that generates $28,000 a year in revenue.

In 2004, Ms. Sediqi secured three building projects, including a dam and buildings on an ox farm. But her goal is to land 10 jobs a year and triple her annual income. To do that, she said, she needs $70,000 to purchase necessary machinery — a gargantuan sum in a country where the average annual income is less than $200. So far, she can find no financial backers.

”More women want sophisticated businesses,” said Ms. Sediqi, who started her tailoring business in 1996 with about $100, and her construction company three years ago with $50,000 that she had painstakingly saved from her tailoring business. ”They have good ideas, but a lot of family problems” — meaning opposition from tradition-minded male relatives — in addition to financial hurdles, she said.

Ms. Sediqi recently completed the training program, Project Artemis, at Thunderbird, the Garvin School of International Management in Phoenix, a pilot program meant to help Afghanistan’s female entrepreneurs learn to market their services better and become more shrewd entrepreneurs.

”There is so much drive and desire to learn” entrepreneurial skills in Afghanistan, said Ruxandra Boros, a consultant in Afghanistan with the International Labor Organization, part of the United Nations. But the training for women is generally absent.

Many loan programs do not take into account the ability of women to spin the experience of these homegrown businesses into something larger. That is a missed opportunity, experts say, since women have a nearly 100 percent repayment record on microloans. That success has helped organizations like Grameen Foundation USA to expand its budget from $100,000 in 1997 to $11 million today.

Last August, Mr. Counts of the foundation visited a woman in India who, through a $50 starter loan, had expanded her 20-chicken farm to one with more than 500 chickens. Her borrowing power has risen to accommodate a $2,000 loan, a huge sum in her community. The success of some of these women, Mr. Counts said, is the ”equivalent of Steve Jobs inventing a computer in his garage.”

Correction: February 10, 2005, Thursday An article in Business Day on Jan. 27 about lending institutions that provide microloans to entrepreneurs in Asia referred incompletely to the origin of one such bank. XACBank in Mongolia was started in 1998 as XAC by two development agencies at the United Nations, not by Mercy Corps. A merger in 2002 changed the name to XACBank and made Mercy Corps the largest shareholder.