Providing low-income loans

Making available lines of credit and other facilities for the informal sector and improved access to societal resources for the poor so that they can acquire the means of production and self-sufficiency. In many instances special considerations for women are required. Strict feasibility appraisals are needed for borrowers to avoid debt crises.

The poor face many problems in obtaining finance from conventional financial markets. Financial institutions prefer to give big loans. Small loans are not good business. However, the poor cannot afford to take big loans because their monthly incomes are too small for the repayments required. High interest rates make repayment doubly difficult. Eligibility criteria usually require relatively high and regular incomes. Many of the poor have low and irregular incomes in informal employment. Lack of substantial savings which banks like to see before lending is another stumbling block. The requirement for collateral or other security, often in the form of land or other legal property, automatically excludes most poor people.

This strategy features in the framework of Agenda 21 as formulated at UNCED (Rio de Janeiro, 1992), now coordinated by the United Nations Commission on Sustainable Development and implemented through national and local authorities.

Attempts to solve the problem of lack of access to finance for low-income families should start with measures to enhance the creditworthiness of the urban poor and to make them more 'bankable' to financial institutions. Experience suggests that financial discipline may be improved by educating borrowers about basic principles of debt financing, financial instruments and payback requirements, and by using peer pressure for supervision of loan payments. Such arrangement are an important feature of successful credit programmes geared to the poor, such as the Grameen Bank of Bangladesh.

In 1983 in Bangladesh, the Grameen Bank was established. In 1993, the Bank had more than 1,000 branches and 1.6 million borrowers in 34,0000 villages in the country. The banks operating principle is not the standard "the more you have, the more you can borrow" but the "less you have, the higher your priority". The banks lend only to the poorest of the rural poor and half of them must be women. To provide community support and build commitment, prospective clients must have five friends to borrow with. The Bank's average loans are US$100, 94% of them to women; the interest rate high (20 percent), repayment time short (within one year), and there is a mandatory savings requirement. The Bank's founder reported in 1995 that one third of Grameen's 2 million borrowers have already crossed the poverty line and the remaining two-thirds are nearly there but often incapacitated because of chronic ill health. The Bank has a recovery rate of 97 percent, and its bad-debt is less than one-half of one percent.

In 1995, the World Bank joined with international donors to create a US$100 million fund to expand small scale credit programmes around the world through grants and loans to institutions like the Grameen Bank.

The Self-Employed Women's Association (SEWA) in India providing loans, facilitates savings and offers financial counselling to low-income women. The results are an increase in real income (by borrowing at a lower rate of interest, repaying old debts, and by borrowing to buy equipment), an increased volume of business and interest earned on SEWA Bank's savings account.

Enterprise Development International is a non-profit private voluntary organization that enable the unemployed and underemployed poor in developing countries and the USA to become productive, self-supporting citizens. The Microenterprise Project provides small loans and business training to help the poor start income-generating enterprises.