Michael Pisani, CMU international business professor, is no stranger to Central American entrepreneurship. He has walked the streets of some of the poorest and most dangerous neighborhoods in Nicaragua and El Salvador, stopping to speak one-on-one with many of these business owners.
The devastation is difficult for him to witness, but he has a goal to help increase their quality of life. He has witnessed more directly than perhaps any other international business expert how access to small loans has impacted the lives of countless Central Americans by enabling them to start, expand, and develop businesses. Pisani explains how many of these low-income Latin Americans – the ones with virtually no collateral and who are technically unbankable – have received loans starting as low as $30 to start businesses.
Microfinance, or micro-credit, was pioneered through Grameen Bank by Bangladeshi economist Muhammad Yunus, who along with the bank was awarded the Nobel Peace Prize in 2006 for the ambition to eliminate poverty around the globe.
Microfinance came to prominence in the 1980s and has since grown rapidly worldwide. Due to its growing popularity, the market for microfinance lenders also has grown, especially throughout Latin America, Asia, and Africa. These lenders provide basic financial services to the working poor, who are regularly ignored by traditional commercial banks, and include nongovernmental organizations, credit unions, full-service financial banks, and everything in between.
As microfinance borrowers receive their loans, they are required to immediately invest that money into some sort of income-generating activities such as in-home stores. When business owners’ first loans have been fully repaid, they have an opportunity to borrow more. The more loan cycles they go through, the more they prove themselves as good borrowers, increasing their access to larger loans.
Beyond business as usual
Presupposing that microfinance automatically improves borrowers’ quality of life and that it has a positive impact on businesses, households, and communities, Pisani began to intensively research the loans regularly distributed to this understudied population. He started in 2005 by surveying 500 small business owners in Nicaragua and another 500 in El Salvador, half of whom had received microfinance support and half who had not.
Pisani’s survey included 90 questions, nearly half of which focused on learning about aspects of the business – start-up, business operations, inventory control, price mark-ups, and the storeowner’s business outlook. The remaining questions focused on the respondent and the household, which helped determine the family’s well-being.
“We hope to better understand the impact of microfinance not only at the micro level, which includes the business and household, but also at the sectoral level, which involves the market sector for these stores,” Pisani says. “We know that for some of these entrepreneurs, microfinance improves cash flow, but for others, they don’t need the loan.”
The research shows that most borrowers are in their fourth loan cycle or higher, and 95 percent of them are planning to request yet another loan. Most people go through a dozen or more loan cycles, which last approximately six months to a year each.
Pisani has found that microfinance provides for a more predictable and stable annual income stream. Inventories in these stores have grown nearly 400 percent since their inception, and these entrepreneurs average more than seven years in business. In addition, three-quarters of those surveyed feel that their business prospects are good, and of more importance, their children are going to school, which may possibly be the biggest long-term gain for their endeavors.
“Microfinance is a wonderful option, but some do better with it than others,” Pisani says. “This is their ticket out of extreme poverty and is just another tool in their poverty reduction toolkit.”
Aiding a global economy in meltdown
Pisani’s research will undoubtedly have a strong impact well beyond the Latin American region, particularly in light of the worldwide credit crisis. Pisani believes the crisis should not have an immediate impact on microfinance because it reaches people who are basically “unbankable.” But microfinance institutions do obtain capital from the global credit markets and philanthropy, both of which are threatened by the crisis.
“Regardless, the need to push finance to those at the bottom of the pyramid remains critical to global poverty-reduction initiatives,” Pisani says. “Abandoning the poor now because of the global credit crunch would be unwise and short-sighted.”
As a true believer in microfinance as an effective tool to reduce Third World poverty, Pisani feels it should be a key player in helping solve the crisis.
“Indeed, the world’s microenterprises may be the very engine of entrepreneurship that is needed to assist the global economy in this time of economic peril,” he says. “I see a bright future where many microfinance institutions step up to serve the needs of the poor and previously unbankable population. Access to credit, as a basic human right, will ultimately be achieved.”
• By Heather L. Smith