Stop conflating microfinance and entrepreneurship
Bogota, Colombia – Although the phone rings incessantly, Carlos Moreno is not distracted. He continues to talk, not just about his life as a slightly graying 78-year-old pastor but also about how he became what some consider to be the world’s first microfinance recipient. It wasn’t as an entrepreneur.
“My life is dedicated to the Lord,” he says. Although Carlos had launched a tea and spice business in the early 1970s, he hadn’t aspired to be an entrepreneur. That is the case with most microfinance recipients. Yet the movement that extends small, uncollateralized loans to the poor to start businesses has marketed itself as being about entrepreneurship. That is a mistake. While microfinance may have helped Carlos start a business, it did not make him an entrepreneur.
Carlos’s dream was to build a Protestant ministry. To get there, he took out a loan in 1971 from the Institute for International Development Inc (IIDI), the precursor to Opportunity International, a Chicago-based microfinance institution. That transaction appears to be the first loan in modern microfinance history, though as Center for Global Development Senior Fellow David Roodman notes, “people have been making small loans to help the poor for 500 years.”
Opportunity International was one of the first organizations to experiment with making financial services available to the poor to help them launch enterprises. Accion International began making loans in Latin America in 1973. Nobel laureate Muhammad Yunus perfected the model and succeeded in scaling up the movement with the launch of the Grameen Bank in 1976. All inspired millions to rally behind entrepreneurship.
What has held them back has been the ability to make a go of those businesses. According to Inc. magazine and the National Business Incubator Association, 50 percent of new U.S. businesses fail within the first five years. Lack of capital is largely to blame. In Africa, Latin America and many parts of Asia, banks are unwilling to lend, and venture capital and angel investing are virtually nonexistent. Microfinance can fill this gap, but it’s often not enough to sustain a business. Moreno says that it is a mistake to believe that everyone in the developing world is interested in running a small business. “Most people just want a job.” In a country like Colombia, where there are limited educational and employment options, that is hard. Everyone is forced, out of necessity, to create his or her own livelihood.
“Necessity entrepreneurs,” as professor Zoltan Acs has dubbed them, rarely have the skills and resources to sustain, let alone scale up, their ventures. The majority fail. Failed enterprise after failed enterprise feeds into the continued cycle of poverty – and cynicism. Al Whittaker, the former Bristol-Myers Squibb executive who started Opportunity International, vowed to break that.
He along with an associate, Ross Clemenger, had agreed to experiment with extending loans to the poor to start businesses. They would only lend to those they believed could succeed. Carlos Moreno qualified.
“I visited Carlos at his factory, which was his house,” Clemenger says. “What he was doing with his wife looked like it worked well.” He needed confirmation, however. “I asked to see his books,” he says. Carlos did not keep any. “I gave him a scribbler, told him ‘write down what you sell over the next three months, then write down what you spend.’” When Clemenger returned, he was amazed to find that Carlos was “making money hand over fist … That’s when I told Al, ‘let’s go for it.’” It worked. Carlos scaled up his business to employ 16 people and become the coveted tea and spice supplier to local butchers, grocery stores and even one of Colombia’s biggest supermarkets, Carulla.
After eight years, however, Carlos sold the business to focus on his ministry full time. Continuing “would have been a distraction from the church,” he says. His business was a means to a better end. That, many say, is exactly what microfinance is about. “Microloans are often used to ‘smooth consumption’ – tiding a borrower over in times of crisis,” writes James Surowiecki in The New Yorker. It is a stopgap that borrowers use for sustenance rather than to create the next Google.
Reuben Abraham, executive director of the Center for Emerging Market Solutions at the Indian School of Business, says that that same stopgap exists in the United States as well. “It’s called the credit card.” Just like the credit card, notes Abraham, microfinance is “useful for consumption smoothing” and “cash flow problems.” It is less useful to categorize it as a means to replicate Silicon Valley’s story. “People misdiagnose survival as entrepreneurship,” he says. “The guy selling tea in a shop outside in Hyderabad has no intention of becoming the Starbucks of tea. He would prefer a formal sector job.”
That is exactly what Carlos says as he points to a photograph on a mantle. “Those are my grandchildren,” he beams. He then excitedly details the work each one’s parent does. One repairs radio transmitters. His daughter works for the government. Another works in an office. “None are entrepreneurs,” I remark. “No, no they have good jobs with good salaries,” he says. Entrepreneurship doesn’t guarantee that. And a guarantee where there is no other is precisely what microfinance is. That it is billed as anything else is curious.
Microfinance is, above all, a development tool. Entrepreneurship is not. While it can have great social benefits, ultimately it is about business. Entrepreneurs are immersed in the world of commerce, competition and risk. To most recipients of microloans, this world is foreign and even frightening. Yunus made this clear when he joined protests against the listing of an Indian-based microfinance firm on the Mumbai stock exchange last year. “Microcredit is not about exciting people to make money off the poor,” he said.
Loans like the one Carlos received have pulled many families up from poverty, yet they do little to build substantial businesses. “It’s our duty to help the poor,” he says. “Let business do its business.”
PHOTO: Carlos Moreno in his home/Elmira Bayrasli