HUANCAYO, Peru – For each of the past five years, the Economist Intelligence Unit’s Global Microscope on the Microfinance Business Environment has ranked Peru as the world’s best climate for microfinance.
But what does that mean at a grassroots level? Some say that this environment benefits creditors more than it does debtors. The ability of microfinance to create jobs in developing countries will be addressed next week at the World Economic Forum Annual Meeting of the New Champions’ session “Building Capacity for Employment.”
Serei Spickman, one of the directors of Blue Sparrow, a nongovernmental organization (NGO) in Huancayo, a midsize city in the central highlands of Peru, explained: “Many ‘microfinance’ banks in Huancayo are very much for-profit institutions. They benefit from microfinance because their interest rates are extremely high.”
According to Hugh Sinclair, author of Confessions of a Microfinance Heretic: How Microlending Lost Its Way and Betrayed the Poor, microfinance is a $70 billion industry, with around $30 billion paid every year in interest. Institutions such as Lift Above Poverty Organization (LAPO) in Nigeria, which charges interest rates of over 100 percent, are shifting the reputation of microfinance away from Nobel Prize winner Muhammad Yunus’s intention to create an affordable lending platform for the poor. Such groups are rampant in Huancayo.
Blue Sparrow is quick to differentiate itself from profitmaking banks like LAPO. Spickman’s microfinance experience comes from supplying $200 loans to low-income families and schools to jumpstart guinea pig farms. These small farms often fund computer labs in isolated rural communities.
“Guinea pig farms are a great business because they have a low start-up cost and a fast turnover,” said Spickman. “The local economy creates high demand; therefore, the loans can be paid back quickly.”
Blue Sparrow focuses on borrowers who “are not able to receive other forms of microlending because they lack official identification, government property titles or previous loan experience.”
“We have a three-month grace period for loans,” continued Spickman. “This gives businesses time to achieve profitability. After the first three months, we charge an interest rate of ten percent. We used to offer interest-free loans, but found that it resulted in borrowers not prioritizing our loans. They would fall behind as they paid off other debts from traditional lenders, which have 30- to 40-percent interest rates. By charging a lower rate, there is still a sense of responsibility, but we aren’t exploiting people in order to make a profit.”
Do for-profit microfinance institutions (MFIs), such as Caja Huancayo, a 25-year-old company with nearly 200,000 depositors, have any words in their defense? According to Caja Huancayo’s Administrative Director Jose Nunez Porras, his organization targets a different audience than Blue Sparrow does. “We extend loans to people of all income levels, from small to medium-sized enterprises,” explained Porras.
Caja Huancayo fosters entrepreneurship on a larger scale by providing average loans of $5,000 to $7,000. For the most part, Caja Huancayo’s clients can afford to pay higher interest rates in order to grow their businesses. Higher interest, says Porras, enforces accountability, protects Caja Huancayo in the event of defaults, and ensures that borrowers take their commitments seriously.
The people behind large MFIs like Caja Huancayo and smaller NGOs such as Blue Sparrow agree that it is hard for small-scale entrepreneurs to transition to growth-focused business production. “Many people don’t try to export their products because they lack knowledge of how to access other markets,” Porras said. “There are organizations – for example, Camera de Comercio de Huancayo – that provide consulting for large enterprises, but none that dedicate time and resources to entrepreneurs who are just starting out.”
Blue Sparrow tries to fill this void by bringing in volunteers from around the world to conduct business and technical training with loan recipients. “Many of our volunteers have financial, development, and education backgrounds, so they are seen as knowledgeable and Peruvians are willing to take their advice,” said Spickman. “They add an outside perspective and can see systematic flaws that we might not notice in our daily work.” Since Huancayo is not normally on tourists’ radar, international volunteer programs are one of the only ways for cross-cultural exchanges to influence the city’s economic development.
From my own experience starting a youth microenterprise incubator in Huancayo, I have seen firsthand how microloans and vocational training can change the lives of marginalized groups, such as unemployed women and teenagers. Today, most young people in Huancayo aspire to attend university, thanks to higher income levels and increased access to information and computer technology. This marks a stark change, as educational opportunities did not abound for their parents’ generation. Since enterprises in Huancayo are typically family businesses, many current shopkeepers learned about recordkeeping and sales from their parents.
“In Huancayo, I would say that around half of the population pursues a traditional career and the other half pursue entrepreneurial ventures,” estimated Porras. “It is easier for people without university degrees to start businesses with microcredit than to get hired in careers with fair wages.”
Unlike in far too much of the developing world, barriers such as lack of credit history do not usually keep Huancayo’s aspiring entrepreneurs from receiving financial assistance, nor do suppliers of goods and services struggle under the heat of competition. When Juan Perez Zevallos, a local retailer, was asked about the opening of several stores selling identical products within a few blocks of his shop, he did not raise a concern. “People buy based on price, not on quality,” he said with a shrug.
Porras added: “One day, a person might visit one shop. The next day, he or she will visit another. There are enough customers to go around.”
Although MFIs like Caja Huancayo face harsh criticism for their seemingly exorbitant interest rates, both Caja Huancayo and Blue Sparrow fulfill important needs in Huancayo. While Caja Huancayo targets groups and individuals willing and able to pay higher rates for larger loans, Blue Sparrow offers business development support and a lower-risk alternative to families in extreme poverty.
Clearly, microcredit isn’t a perfect solution to Huancayo’s economic problems, but few other tools have, to date, been as successful fostering entrepreneurship and generating employment.