Tiny Loans Called Key Tool for Poor

A loan of $60 was all Apolonia Arguello needed to launch what has become a 300-chicken-a-week delivery business, just the sort of success story that Mexican President Vicente Fox needs to deliver thousands of times over to achieve his promised economic miracle.

Though she had no collateral, Arguello started borrowing from a microcredit outfit called Compartamos (Let’s Share) in 1999 and has used increasingly larger loans to buy more and more live chickens from a nearby farmer. She dresses and delivers them to a bulging list of customers in this community about 80 miles east of Mexico City, the nation’s capital.

Now, Arguello owns a store and a pickup truck--and apparently has escaped the grinding poverty that affects the 40 million poorest Mexicans, who earn $2 a day or less. “I had no other resources and now I am working with my own profits,” she said this week in this town near the volcano Popocatepetl. “There is money to be made here.”

At an international gathering of microcredit experts this week in the nearby city of Puebla, Fox pushed his plan for an ambitious loan program that he hopes will produce a multitude of Arguellos by offering credit where none is available. The program aims to double, to 600,000, the number of microloans in Mexico over the next few years.

“Microcredit is the means by which the poor can overcome poverty by their own efforts,” said Fox, who was accompanied by Queen Sofia of Spain. “The world doesn’t have any more time to waste in confronting this problem.”

Fox’s plan is an aggressive--some say too aggressive--attempt to make up for Mexico’s relatively late start in microcredit, which involves making small loans that allow people with little or no collateral to start their own businesses.

Other countries in Latin America and Asia are much further along in channeling government and donor funds into small loans for the poorest of the poor. With one-twelfth Mexico’s population, Bolivia already has twice as many microcredit borrowers.

According to microcredit experts, an estimated 30 million impoverished borrowers, mainly in Asia and Latin America, are receiving small loans designed to make them self-sufficient. The programs for the most part are sustained by government or donor capital, and often include health and vocational training.

The penetration of microcredit programs among Mexico’s poor has been stymied by several factors. There is an innate distrust of any lender among poor Mexicans, especially those who have lived through failures of the country’s banking system. In addition, past rural loan programs under the long-ruling Institutional Revolutionary Party, or PRI, often gave money away in exchange for political support, feeding a culture of loan defaults.

“It’s hard to be a successful lender when the money can be obtained from other sources for free,” said Pedro Arriola Bonjour, director of Caja Los Andes, a microfinance company based in Bolivia, who attended this week’s meeting.

But since Fox took office in December, ending seven decades of PRI rule, he has promised to replace patronage with sustainable microcredit programs to stimulate private initiative among the poor and reduce poverty.

The first major step came in April, when the Mexican Congress passed a law setting up the legal framework for a new class of microfinance companies that can give loans of as little as $50 and also take savings deposits. Regulations for the industry, which will be largely self-governed and self-insured, are still being drawn up, but loans should start flowing in the next several weeks.

Some observers at the meeting, which was co-sponsored by the Mexican government and the private Washington-based Microcredit Summit Campaign, thought the Fox plan might be pushing too hard, saying successful programs have evolved slowly with a minimum of government intervention. Others, such as Arriola, argued for greater intervention, saying that government is inviting malfeasance by setting up a new class of financial institution but abdicating supervisory responsibility.

Muhammad Yunus, the founder of Bangladesh’s Grameen Bank and widely viewed as the grandfather of the microcredit movement, thinks the right approach is as little intervention as possible.

“The bureaucracy only stifles it. You must let microcredit be born and see where it goes wrong,” said Yunus, whose bank has 2.4 million borrowers. “Regulation has never solved anything.”

The Fox plan--which would create up to 650 microfinance institutions that would make loans and also accept deposits at about 4,000 locations nationwide--would answer a critical need among the poor, said one World Bank official.

“The banking infrastructure is usually not where poor people live, and those that are don’t often make poor people feel very welcome,” said Elizabeth Littlefield, a World Bank director and chief executive of a microcredit think tank in Washington called C-GAP. “So they rely on informal places for putting their savings, which are often less secure. Research suggests having a safe place to put savings is valued more by the poor than credit.”

The ability of lenders to accept deposits is the key to the institutions’ self-sufficiency, which must be the long-term goal of any microcredit program to reach an ever-larger number of borrowers, Littlefield added. That goal is still a distant one: only 65 of the 10,000 known microlending operations are self-sufficient. The rest depend on donor funds to continue operating.

On Tuesday in San Baltasar, Arguello and 25 other women organized by Compartamos, the largest microfinance company in Mexico, met to make payments on their existing loans. Peer pressure is high to make good. Less than 0.5% of the loans that the company has made here and elsewhere have defaulted.

Antonia Vargas made the last payment on a $1,000 loan she used to buy a powerful sewing machine, which she uses to earn money making pants and other apparel.

“I would have never been able to buy this without the loan,” she said, pointing to the gray machine dominating her humble living room. “How could I have?”