Growing the Wealth of the Poor - World Resources Institute

W O R L D R E S O U R C E S 2 0 0 8environment that both attracts new financial institutions intoareas where loan availability is still restricted and spurs competitionamong loan providers in areas where microfinance isalready well established.In addition, government plays a critical role in providinginformation and training for lending institutions. Lack of stafftraining is a serious obstacle for many smaller microfinanceproviders. Subsidizing staff capacity-building could helpmicrofinance institutions cut costs, maximize their investmentimpact, and diversify their product portfolios. With the highvolume of capital flows pushed through microcredit institutionstoday, it is important that this educational element is notneglected. Government, with its research, technical, andoutreach capacities, is the logical entity to assume this task(CGAP 2007:11; FAO 2005b: 84–85).182dized by donors and coordinated with the government to addressmore complex poverty issues in the poorest segments of thepopulation (BRAC 2005a, 2005b). The second type packageshealth care and various kinds of skills training with the loan sothat recipients gain the capacity for enterprise—and for loanrepayment. A high percentage of those receiving these loans“graduate” to conventional microloans later (Matin 2004:7–9).Major Role for GovernmentOther innovative programs explicitly target enterprise developmentamong groups. Nepal’s Micro-Enterprise DevelopmentProgramme (MEDEP) is a government initiative that partnerswith the Agriculture Development Bank of Nepal to provide loansto “microentrepreneur groups” composed of low-income individualsselected primarily for their business potential. Before receivingloan funding, the group receives a staged series of business consultingservices and entrepreneurship training that helps them assesstheir potential market, gain marketing skills, and connect to appropriatetechnology. In Nepal’s rural Parlat district, almost 40percent of MEDEP’s loans have gone to small-scale forest enterpriseslike beekeeping, bamboo craft making, soap making, or theprocessing of various medicinals and forest plants. Among thesebusinesses, the loan recovery rate stands at 99.7 percent. The highrepayment rate is a testament to the strength of packaging loansand business services together. Although MEDEP’s loan administrationcosts have been high due to the expense of its training andsupport services, the net profit appears sufficient to sustain theprogram, even though the loan rate is fixed at 12 percent—a verylow rate for microfinance (FAO 2005b:51–58).A major role for government in spurring the continuedmaturation of microfinance is to provide a stable investmentMeeting Increasing NeedsAs microcredit scales up and rural enterprises begin to grow, oneemerging issue is how well the industry will serve mid-sizebusinesses. Will an industry geared to loans of less than US$1,000be able to provide larger loans as enterprises expand? Microfinanceinstitutions tend to hesitate to underwrite such larger loansbecause, ironically, there is greater risk associated with largerenterprises due to their high capital costs and longer paybackperiods. It would seem that these mid-size businesses may face anew credit shortage as they succeed (Farrington 2002:6).Yet competition and the natural evolution of the microfinanceindustry seems to be filling this void. Where themicrofinance market is already saturated, institutions will lookto the less-crowded mid-size market to continue their growth, asis already happening in Bolivia. Institutions like BRAC are alsobeginning to include business loans, ranging from US$20,000to US$300,000, in their product lines (BRAC 2005a). Thepresence of successful medium-size businesses may even attractbanks to rural areas in order to service this sector. An importantrole for government in this period of growth will be to developand manage a credit bureau that assembles and disseminatesborrower information, so that businesses with good credit historiesat the microfinance level are more visible. Having such asystem in place can provide one more incentive for microfinanciersto take on bigger borrowers, propelling theseenterprises to the next level (Mylenko 2006:3–9).Encouraging MicroinsuranceFostering small rural enterprises requires not just greater accessto credit but also a reduction in the substantial risks that theseenterprises face from accidents, natural disasters, and the illhealth of the owners. Without credit, rural entrepreneurs cannotbuild their businesses; without insurance, however, they may notbe able to survive hard times. Insurance is another way thatbusinesses make themselves more resilient in the face of threats.Conventional businesses typically combine insurance into thepackage of financial services they rely on to stay in business, and