Banking on the enterprising poor
May 5, 2003 | 12:00am
Several entrepreneurial Filipino rural bankers have gone into micro-finance. This type of lending facility targets the enterprising poor. One objective is to give them access to credit. The other objective is to enable them to generate savings and later become eligible to access mainstream credit facilities. This process graduates a livelihood operation into a small business enterprise, or what we call an "L2b".
Because of the particular condition of the enterprising poor, they are ineligible for traditional credit lines and instead avail of loan shark facilities. As an alternative, several socially responsible rural bankers have made micro-financing available to them.
In a recent visit to an island in the Visayas, a rural bank reported its repayment experience in micro-finance loans at 100%. Compared to traditional loans from the banking system, this 100% performance is unbelievable. The explanation for such an amazing collection rate was explained by a micro-finance banker via his dialogue with a traditional banker while they were comparing notes on their differing practices.
Traditional banker: What is your collection efficiency rate?
Micro-finance banker: 99.99%
TB: My collection efficiency is at 50%. What would you do if you were tasked to improve this?
MFB: I’ll look for the biggest helicopter in town, load it with all the cash in the bank vault, fly over the poorest part of town, and throw all the cash out. Then, I will go to the office of the newspaper with the largest local circulation and put up an ad saying: "To those who received money yesterday, that was not money from heaven but is a loan from the bank and will have to be paid by so and so date at an interest rate of so and so."
TB: But how can this be? You are giving the money away?
MFB: That is precisely my point! You make it difficult for them to borrow and they will make it difficult for you to collect. But we make it easy for them to borrow and that is why it is easy for us to collect!
Micro-finance brings banking to the enterprising poor. While the staff of the Visayan rural bank hold their meetings at the village/field level, its counterpart micro-finance bankers go into the villages and meet the community of enterprising poor on a weekly basis. They accept loan repayments and contributions to savings or capital build-up at field level, which, in turn, fund their livelihood activities. The savings or capital build-up will eventually make the enterprising poor acceptable to the traditional banking system. In this process, the micro-finance bankers are transforming the economic lives of the enterprising rural poor.
The final measure of success is when the enterprising poor graduate and become eligible for traditional banking credit facilities. But where would they graduate to?
From livelihood, the enterprising poor can become a small business. As a small business, two things must happen. First, there must be higher value-added compared to livelihood. Second, the enterprise must now create employment for the non-enterprising poor.
As livelihood, the micro-finance loan was used to generate economic activity that resulted in income for the borrower. Upon graduation to a small business, the loan will be used to generate higher value economic activities. It does not only generate income for the borrower but also employment for the non-enterprising poor.
Herein lies the opportunity for current micro-finance bankers to expand their practice of socially responsible entrepreneurship. They must create credit products and savings/capital building systems to cater to small business as well. They must provide a platform for the graduates of livelihood to stand on and eventually move on to the status of a medium business.
However, we must realize that the interventions needed to improve the quality of life and competence of the borrower will be different. Managing a small business is not the same as managing a livelihood. There will be higher value-added and dealing with more people will be a standard. Competitiveness and differentiation will be important. The market will be bigger. Financial management will be crucial to future growth.
As such, creating small business loan packages and savings/capital build-up systems will not be enough. Some form of training and capability-building to ensure the sustainable growth of the small business is just as critical. This requires the micro-finance banker to also become a mentor to the borrower. Credit facilities alone will never suffice.
(Alejandrino Ferreria is the dean of the Asian Center for Entrepreneurship of the Asian Institute of Management. For further comments and inquiries, you may contact him at: [email protected]. Published "Entrepreneur’s Helpline" columns can be viewed on the AIM website at http//: www.aim.edu.ph).
Because of the particular condition of the enterprising poor, they are ineligible for traditional credit lines and instead avail of loan shark facilities. As an alternative, several socially responsible rural bankers have made micro-financing available to them.
In a recent visit to an island in the Visayas, a rural bank reported its repayment experience in micro-finance loans at 100%. Compared to traditional loans from the banking system, this 100% performance is unbelievable. The explanation for such an amazing collection rate was explained by a micro-finance banker via his dialogue with a traditional banker while they were comparing notes on their differing practices.
Traditional banker: What is your collection efficiency rate?
Micro-finance banker: 99.99%
TB: My collection efficiency is at 50%. What would you do if you were tasked to improve this?
MFB: I’ll look for the biggest helicopter in town, load it with all the cash in the bank vault, fly over the poorest part of town, and throw all the cash out. Then, I will go to the office of the newspaper with the largest local circulation and put up an ad saying: "To those who received money yesterday, that was not money from heaven but is a loan from the bank and will have to be paid by so and so date at an interest rate of so and so."
TB: But how can this be? You are giving the money away?
MFB: That is precisely my point! You make it difficult for them to borrow and they will make it difficult for you to collect. But we make it easy for them to borrow and that is why it is easy for us to collect!
Micro-finance brings banking to the enterprising poor. While the staff of the Visayan rural bank hold their meetings at the village/field level, its counterpart micro-finance bankers go into the villages and meet the community of enterprising poor on a weekly basis. They accept loan repayments and contributions to savings or capital build-up at field level, which, in turn, fund their livelihood activities. The savings or capital build-up will eventually make the enterprising poor acceptable to the traditional banking system. In this process, the micro-finance bankers are transforming the economic lives of the enterprising rural poor.
The final measure of success is when the enterprising poor graduate and become eligible for traditional banking credit facilities. But where would they graduate to?
From livelihood, the enterprising poor can become a small business. As a small business, two things must happen. First, there must be higher value-added compared to livelihood. Second, the enterprise must now create employment for the non-enterprising poor.
As livelihood, the micro-finance loan was used to generate economic activity that resulted in income for the borrower. Upon graduation to a small business, the loan will be used to generate higher value economic activities. It does not only generate income for the borrower but also employment for the non-enterprising poor.
Herein lies the opportunity for current micro-finance bankers to expand their practice of socially responsible entrepreneurship. They must create credit products and savings/capital building systems to cater to small business as well. They must provide a platform for the graduates of livelihood to stand on and eventually move on to the status of a medium business.
However, we must realize that the interventions needed to improve the quality of life and competence of the borrower will be different. Managing a small business is not the same as managing a livelihood. There will be higher value-added and dealing with more people will be a standard. Competitiveness and differentiation will be important. The market will be bigger. Financial management will be crucial to future growth.
As such, creating small business loan packages and savings/capital build-up systems will not be enough. Some form of training and capability-building to ensure the sustainable growth of the small business is just as critical. This requires the micro-finance banker to also become a mentor to the borrower. Credit facilities alone will never suffice.
(Alejandrino Ferreria is the dean of the Asian Center for Entrepreneurship of the Asian Institute of Management. For further comments and inquiries, you may contact him at: [email protected]. Published "Entrepreneur’s Helpline" columns can be viewed on the AIM website at http//: www.aim.edu.ph).
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