Tuesday, April 10, 2012

Making ends meet: How enterprise services put lending in the right hands to help more borrowers

This is the first of a three-part blog series exploring “enterprise services.” Support for small enterprises falls into a category of wraparound services provided by microfinance institutions in addition to lending. Kiva’s mission is to encourage its Field Partners to introduce and expand non-loan offerings that improve lives and strengthen communities.

In the first part of this series, we defined enterprise services as services that help low-income individuals make a living through small enterprises. These services, provided by both specialized professionals and nonprofits, range from the basic -- financing, input supply, marketing, account and compliance with regulations -- to the more advanced, like skills training, technical support and branding.

In the growth of any business sector -- whether it be agriculture or mobile phone repair -- entrepreneurs need capital to both start and expand their enterprises. In Part 1 of this series, we took a close look at how enterprise services provided by development consultancy EDA Rural Systems have helped small honey producers in rural India.

In 2008, EDA reported that while many beekeepers took advantage of microloans, over half had to continue borrowing from informal moneylenders -- mainly to cover large household expenses such as weddings or funerals, or to cover seasonal enterprise costs like the transport of bee hives.

The EDA survey was designed to measure the economic status of beekeepers in the Muxaffarpur region of Bihar, India. It showed that beekeepers in the region still needed to borrow between 15,000 rupees (about $300) and 75,000 rupees (about $1,500) to both support their enterprises and keep life running smoothly.

Banks are generally reluctant to lend such small sums of money. Not only is it expensive to appraise and administer a loan of this size, commercial banks in India also perceive micro-enterprises as high-maintenance and likely to fail. Smaller loans are, therefore, regarded by the banking system as not worth the time and risk.

Documentation and “credit camp” for micro-entrepreneurs.

EDA’s work with the region’s bank branches led to a shift in attitude toward beekeeping as a viable enterprise. The Central bank of India, which had previously provided credit to just a few beekeepers, even started conducting training programs on beekeeping, and extended credit to a number of new beekeepers. The State Bank of India, the country’s largest commercial bank, also sanctioned a number of loans. Overall, EDA’s program paved the way for the approval of 400 loan proposals in six months.

Bankers’ workshop.

Nevertheless, beekeepers’ needs for credit were still not satisfied. EDA’s survey of beekeepers in 2008 showed that their outstanding loans from moneylenders, at the time of the survey, averaged 42,000 rupees (about $840). This is 65% higher than the average of 25,400 rupees owed by the 100 beekeepers working with banks -- though respondents said that their dependence on moneylender loans has decreased since.

There is clearly far more potential for microfinance institutions (MFIs) to be funding micro-entrepreneurs. Because micro-borrowers constitute their entire business, MFIs understand the risk environment far better than banks and are generally more confident in their ability to recover repayments.

So why can’t MFIs meet the full needs of micro-borrowers? Why were EDA’s beekeepers still forced to find funds elsewhere?

Basically, MFIs confront barriers when it comes to lending very small amounts. To limit their risk with individual borrowers, they must limit the size of the loans they disburse. The average amount lent to a new individual borrower in rural India falls between $150 and $250. But the minimum amount required to establish even a small viable beekeeping business is $300, and most need more like $500 to $1,000. You can see the disconnect.

Some MFIs have gotten around this by encouraging borrowers to join groups. That way, group members assume each other’s liability, providing a collateral substitute and eliminating the need for pricey and time-consuming loan appraisals. This is one way several entrepreneurs could ban together to finance a $1,000 beekeeping operation.

Fortunately, MFIs’ ability to provide more funding to more micro-entrepreneurs is improving with technology and awareness of financial tools. Enterprise services offered via MFIs and other organizations could go a long way toward connecting these borrowers with a full range of options -- allowing them to build sustainable businesses regardless of location or starting income levels. Kiva is excited to support the expansion of these services for entrepreneurs worldwide.

For quick links to each part of this series, go to: Introducing Kiva's Nonfinancial Services Blog Series.

In Part 3 of this enterprise services series, we'll look at Kiva Field Partners that excel at providing entrepreneurial support to their clients.

This post is by Sanjay Sinha, managing director of Micro-Credit Ratings International (M-CRIL) and co-founder of EDA Rural Systems -- one of the world's leading development sector consultancy, research and capacity building organizations. He is also a member of the United Nations Advisors Group on Inclusive Financial Sectors.