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Micro enterprise credit changes lives

by Martin P. Connell, Calmeadow
August 14, 1996; Canadian FundRaiser

We all know that Canada is in the middle of an economic transformation. As we move into the open competition of free global markets, we have traded firm ground for anxiety. On the one hand, we have created unlimited opportunities - for about a third of the workforce. But for the rest it's been shrinking pay cheques and an increasingly uncertain future. We've also seen our governments hitting the debt wall, scrambling to reduce their deficits and, in the process, dismantling our safety nets. It's hard for us to believe - especially for those of us who entered the workforce in the 60s and early 70s where there were a couple of jobs waiting for each of us.

A third of our workforce has picked up "non-traditional" jobs - part-time, or multiple part-time, temporary, contract, and - more and more often - self-employment. Right now, over one-fifth of us work from home. Part of that is due to technology, but it does show the changing nature of how people make a living.

One in three new jobs is self-employment

It's not all bleak. We're all familiar with the term "the New Economy" - that innovative, high-tech world of semi-conductors and communications, and must of us are aware of the dramatic growth of our super-efficient export industries. Many of us, however, are not aware of the explosive growth of self-employment in this country. More people now draw their pay cheque from self-employment than from government payrolls. Over a third of all new private sector jobs created in the past five years - 250,000 to be precise - have been in the self-employed market.

Self employment is nothing new to Canada. In fact, if you go back in history, almost everyone was self-employed, including our farmers, trappers, lumberjacks, fishermen and prospectors, hairdressers, dressmakers and handymen. It's still very much alive, but it's visibility has been over-shadowed by factories, super malls and office towers. Not, however, for much longer. The pace and scale at which our economy is moving towards self-employment is making itself visible once again. In most respects, this growth is a rational response to an economy where big business and government shed workers to stay alive.

For those being squeezed off welfare, self-employment is the only option. For our new immigrants who come with their skills and the promise of opportunity, it's the same thing - the only option. Every one of us knows someone who's lost a job in the last five years. Some may have landed full-time positions, but many - certainly some of the ones I know (including my five oldest friends from high school) - are now self-employed.

My interest in this subject goes far beyond intellectual curiosity and personal concern. It ties directly to my experiences with Calmeadow and how our organization works with the self-employed. My travels with my wife in the Third World, including India, Bangladesh, and Brazil, and visiting many grass roots projects showed me what worked and what didn't, what could be locally sustained and what depended on foreign aid and private charity. We were left impressed, hopeful, frustrated and challenged. Even the most aid-dependent project made a difference; people's lives were being changed and, in some cases, saved. What struck us most, however, was that poor women face incredible challenges just to survive. This convinced us to focus our efforts on their lack of economic opportunity.

Micro-enterprise credit the answer - without collateral

Shortly after we organized Calmeadow, we found an answer - it was called micro enterprise credit. We found it first in Latin America through ACCION, a Boston-based nonprofit, and later in Bangladesh through the Grameen Bank. Both were successfully making small loans to low income people with amounts ranging from $50 to $300. They were lending money at commercial rates and getting paid back 98 per cent of the time. All without collateral. They were banking the poor as a business, not as charity.

To help you get an idea of how small, yet how effective, these loans can be, consider the actual case of a woman in a village in Bangladesh who received $1 to help her invest in half a chicken owned by her neighbour, and from there to earn one-half of the eggs. Again, in South America, we saw that $50 to $300 could be loaned to a woman hawking potatoes in the sidewalks of La Paz, to a man recycling broken glass bottles into oil lamps, and to another man cobbling shoes on a sidewalk workshop.

No charity, thanks

We saw these loans in action, helping people change their lives. and when we did the math of financial sustainability of the loan funds, we knew we had found our niche. Here was a concept that worked and could be sustained. It could cover its own cost of operations from interest on earned loans. Here was an investment - in people, and their dignity. It was certainly not charity - and it worked.

A decade later, Calmeadow has a budget of $3 million a year and a professional staff of 30 under the leadership of our executive director, Mary Coyle. We are definitely playing a prominent role in this global revolutionary movement … a movement to bring financial services to the poorest of the economically active.

We helped to establish the world's first fully commercial micro enterprise bank in Bolivia in 1992. We created the first North American micro enterprise loan funds in three native communities in Ontario in 1988. And we continue to remain in the vanguard of these pioneering efforts. With institutions like the World Bank now on board, there is an accelerated awareness that this cost-effective way of activating stagnant economies works. We're on a roll, and the next decade will see a revolution in the financial markets of developing countries - a revolution that will bring opportunity for a better life to hundreds of millions of struggling people.

A large unserved market

In our work in Canada, we're every bit as enthusiastic. Since 1988 we've been actively initiating micro credit funds, first in Native communities, and more recently in Vancouver, Toronto, and Nova Scotia. In addition, we are providing advisory assistance to over half a dozen other community funds across the country. As we experiment and learn from our experience, we come to see a large, and to-date unserved, market for micro-credit and other financial services in our country.

We estimate that a quarter of a million Canadians will have capital requirements of less than $5,000 over the next five years. How many thousands of ready, willing and able Canadians will have to sit on the sidelines, dreaming of self-reliance, held back by a system that will give a person charity or put them on welfare before giving them a loan? How can we begin to measure the cost of this incredible lost opportunity?

We have government programs to retrain laid-off fishermen to operate computers and make a hairdresser out of an ex-factory worker. But what about our micro entrepreneurs? They don't want or need charity. The don't want social assistance that keeps them at home and denies them a right to earn an income. They have a dream. They want to contribute. And all they need is capital.

It's time we came to grips with reality. It's not business as usual, and there are no magic solutions. The golden goose is dead. We are not going to be able to create enough jobs, so more and more Canadians will have to create their own. It's resilience through necessity. It's survival economics. It's dignity and self-respect over defeat.

Lending based on trust

Through our lending to micro-entrepreneurs, we've seen what a $500 loan can do. We have seen people without a credit history, without collateral, pay back their loans. Our principle of lending is based simply on trust. This may sound a little mushy these days when bank loans are usually secured by everything from your home (if you happen to have one) to your first-born child, but naive as it may seem, it works. And for us, a well-run loan fund pays back 98 per cent of the time. There's nothing soft and fuzzy about it. A late payment is a serious event for us. If necessary, we'll even go so far as using collection agencies.

There's a catch, of course. It's not as simple as it might sound. We're still learning, still facing challenges, still pioneering. If it were so easy, every bank in this country would be in on the action. So why aren't they?

Firstly, these loans are small and time consuming to look after. Secondly, they're expensive. In fact, if you fully cost out a typical micro-loan, it would require an interest rate of 25 or 30 per cent to make it work - not exactly good politics for banks now earning billion dollar profits. And thirdly, because our loans are unsecured, it makes life complicated for a regulated business like a bank.

Finally, it's not neat and tidy. It's hard to put a face on it. It's not a store front, and office, or a factory, and it's not a sophisticated business plan. It's tens of thousands of Canadians silk screening t-shirts, cutting hair, making birthday cakes, mowing lawns, repairing small motors, desktop publishing, catering and a hundred-and-one other typical small entrepreneurial enterprises. And it works. Time and again we see how a small loan can lift a person up into the world of opportunity, a world where dignity, self-respect, and self-confidence replace fear and despair.

It can work on a larger scale

We also believe it can be managed commercially. Some changes are needed first, however, and this is where we need your help - to create an atmosphere of opportunity for the self-employed, and to bring down the barriers that discriminate against them. In Toronto, for example, as recently as a few weeks ago, it was against the law to edit a book, make a dress for sale or teach a piano lesson in your own home. We've made big progress here, and the city council, led by Mayor Barbara Hall, has favourably amended its by-laws regarding home-based business, but we have to keep pushing to relax these rules whenever we can.

We also need to improve the flow of credit to the self-employed sector in order to foster its growth and potential. This means better systems, a different way of securing loans, and interest rates lowered to acceptable levels.

Major lenders on side

We already have the participation of several of Canada's leading financial institutions, including the Royal Bank, Bank of Montreal, and Canada Trust. We have had the support of the community, through the United Ways of Metro Toronto and Halifax-Dartmouth and our many contributors. And we have a track record. In the twenty years since ACCION and Grameen Bank started lending, approximately $7 billion have been made available in micro credit around the world. Over five million people - from Bangladesh to Bolivia to British Columbia - have received these small loans. And over 98 per cent of the money loaned has been repaid, with interest.

But what is the real picture? More than anything, it is the picture of human possibility. People - some of them achingly poor, and all of them at least lacking the tangible assets to secure credit through normal means - have managed to use a very small amount of money to mount successful tiny enterprises. They have created their own employment and economic viability. Credit was merely the catalyst. The potential was already there and now it's been released. Self-sufficiency has been achieved. Trust has been rewarded.

This is not a question of a few isolated cases of heart-warming success stories, but a global phenomenon. Consider the last twenty years of micro credit as a huge pilot test, a massive social experiment, an international learning experience. What does it show us? It shows us - convincingly - that it is right, that it makes sense, and that it works to give people credit.

This is the theme that underscores all of our work at Calmeadow: Give people credit. Credit, after all, is not just money. The word comes from the Latin, credere - to believe, to trust. We are giving credit to people, people who can provide nothing but their word as security. The money is not a gift. It is repaid. We are giving trust. Trust in their ability to make a go of things; trust in their integrity to fulfill their commitments. Believing in people works.

A belief in people is practical

At this time in history, when we seem to be suffering a dangerous crisis in confidence, when we have lost trust in the ability of our governments, our leaders, some of our most venerable institutions and even the economy to generate collective well-being, and at a time when cynicism and pessimism abound and it seems there is nothing to believe in, we should pay close attention to the profound lesson of this micro credit movement. We can believe in people. It is not only moral; it is practical.

For those of us working in micro credit finance, this simple fact - proven over and over again - is a constant source of inspiration and reward. Yes, we still have miles to go before we're done. We have to reduce costs, increase efficiencies and foster the broad understanding and support that will allow micro credit to move from a marginal to a dynamic force in the economy.

Much is possible when we give people credit. Credit is trust. Trust in the future. Trust in the human capacity to bring about positive results. Calmeadow is committed to sharing that trust as widely as possible.

Based on a speech to the Canadian Club of Toronto, February, 1996.

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