CHAPTER 1
Introduction
1.1 Background
The poor are still with us – more so today than ever, in fact. Around one-fifth of the world's population lives in absolute poverty and global disparities in wealth are growing. To those with access to capital and technology, the process of globalization promises rich rewards. Those without, in the 'excluded' portion of the world economy, are in danger of being left ever further behind. With the global economy being driven by the needs of industry and consumers in its richer segment, 'the form and direction of technical change is racing off at a trajectory that is further and further away from the needs and capabilities of the "excluded majority"' (Barnett, 1995).
This is the world with limited access to financial capital, modern technology, and external markets where the dominant form of production is at the micro and small scale. It is where most basic needs – for food, shelter, domestic and production equipment and many services – are met not by the trade-driven global economy, but by local small-scale producers. It is where a growing proportion of the world's population, and especially of its poor, will live.
For several decades, governments and international aid agencies have recognized the importance of directing their attention towards this segment of the economy. Support to small producers has been seen as a key element of policies to alleviate poverty. Furthermore, with small firms demonstrating great dynamism and innovation in the industrialized world, increasing interest has been shown in the small-scale sector as a potential motor of economic growth.
Recent years have seen a significant shift in the nature of support to small producers. Much of this has conventionally taken the form of business development services, such as technology development, marketing assistance, business management training, vocational training, and so on. Such services, however, have largely fallen out of favour in recent years. They have generally come to be seen as expensive, limited in their impact, unsustainable and tending to be supply driven.
Today, the dominant instrument of small producer support has become minimalist credit – that is; where credit is the only service provided. In many respects, this approach has been highly successful. Assistance has been effectively delivered to large numbers of poor, small producers. Moreover, many schemes have been able to generate sufficient revenue to cover a high proportion of their costs, and several may even have achieved full financial sustainability.
Beyond credit?
So can the core problems of small producers now be considered to have been solved? Replication of group-based lending schemes (such as, most famously, that of the Grameen Bank) has enjoyed considerable success. Is the principal function of small producer support henceforth to be limited to the refinement and further replication of such schemes?
This paper argues that this is not enough: that credit on its own, in fact, fails to address many of the constraints faced by small producers. This is not to argue that credit is unimportant in helping the poor to lift themselves out of poverty. Rather, it can be seen as a necessary but not sufficient condition. Indeed, central to the argument here is that the effectiveness and impact of credit schemes are likely to be significantly enhanced if other, complementary tools are available.
The aim then – through a broad trail of relevant literature and the presentation of a number of case studies – is to suggest that credit provision is but one among a number of services that are required by small producers if they are to break out of the cycle of poverty in which they are all too often trapped.
This is decidedly not to argue for a return to blueprint, formulaic approaches or to large-scale, integrated packages of assistance, typically delivered by large, inefficient institutions. Any study into business development services must begin with an acknowledgement that to date they have frequently been expensive and limited in their impact. However, as a review of the British government's aid programme's small enterprise activities argued: 'it seems clear that the lesson to be drawn from this is that there is much to be learned about designing, delivering and paying for such services – not that they are unneeded or prohibitively expensive' (Grierson, 1994).
This paper can be seen as a response to that challenge: an attempt to map out the known terrain, as well as that which remains to be explored, in the development of cost-effective, high-impact support services for small producers. Specifically, our aims are fourfold:
1 to describe the limitations of minimalist credit as a strategy for small producer support;
2 to demonstrate the need for business development services, particularly those of a technological nature, if small producers are to enhance their capacity and productivity;
3 to identify the factors underlying high-impact, cost-effective business development services; and
4 to identify ideas and innovations in service design and delivery that are worthy of further exploration.
1.2 Layout of the paper
Chapter 2 briefly reviews the rationale for support to small producers and traces the evolution of minimalist credit as the principal support mechanism currently employed.
Chapter 3 provides an analysis of the available evidence on the impact of minimalist credit programmes.
Chapter 4 identifies binding constraints on small producers other than access to credit and makes the case for a more complementary approach, with an important role for business development services.
Chapter 5 presents case studies of a wide range of projects in Africa, Asia and Latin America which illustrate the potential benefits to be had by looking beyond minimalist credit. These include both projects which adopt a complementary 'credit plus' approach, comprising financial and business development services, and those in which there is no financial component but where there is evidence of interesting innovations in cost-effective, high-impact service delivery.
Chapter 6 examines trends and patterns emerging out of the case studies which underlie the emergence of high-impact, cost-effective business development services.
Finally, Chapter 7 attempts to identify outstanding gaps in our knowledge where further research and project-level experimentation are necessary.
CHAPTER 2
Small producer support and the emergence of minimalist credit
The rationale for support to small producers rests on the premise that the wider social and economic benefits of a well functioning support system will exceed the returns to private producers themselves. Whereas large-scale producers, it is argued, are able unaided to pay for or undertake in-house the acquisition of necessary information, skills and equipment, small producers are necessarily more dependent for these on external sources. However, there exist informational and other market failures associated with the provision of business development services to small producers (Levy et al., 1994).
Among the wider social and economic benefits seen to accrue from a healthy and efficient small producer sector, the following are generally seen as particularly important:
• a positive impact on employment;
• a more equitable distribution of income within countries;
• import substitution;
• a more dynamic, flexible and competitive private sector, with improved domestic linkages of all kinds; and
• enhanced food security.
In view of these potential benefits, it is argued, if governments or other development agencies can intervene in a cost-effective manner to improve the performance of small producers beyond what would be achieved in a wholly private marketplace, they should do so (ibid.).
Following this logic, from the 1950s, governments and international aid agencies subsidized the delivery of services to small farmers and, with the 'discovery' of the informal sector in the early 1970s, similar support was extended to microenterprises. This support took many forms: subsidized credit, technical and technological support services, business and technical training, assistance with identifying and accessing new markets and so on.
The shortcomings of many of these approaches became increasingly evident. Better off and politically more powerful groups were able to use their influence to gain access to the subsidized credit intended for the poor. Many services were offered as a standard, 'blueprint' package, with insufficient consideration of location-specific cultural, social and economic factors. And with scant attention frequently paid to project impact and cost-effectiveness, donors found themselves tied into the long-term funding – often with no exit strategy – of projects whose impact on the poor was uncertain.
The 1980s saw a move towards more market-based approaches. Henceforth, service provision would increasingly be driven by the demands of the target group, and those demands should be expressed in terms of significant beneficiary contributions, sufficient to cover most, if not all, of the costs of service delivery. The subsidizing of services, particularly on a long-term basis, became progressively more difficult to defend.
In this climate, understandable excitement was generated by innovations in the provision of credit facilities to the poor. Contrary to the predictions of many, credit-providing agencies proved able to cover a high proportion of their costs through the use of group lending systems and the achievement of scale by lending to large numbers of people. A small number of schemes may even have achieved full financial sustainability.
The providers of business development services have found it progressively more difficult to compete for donor funds in the face of these achievements. In addition to the problems described above, they face a number of problems intrinsic to the nature of the services they provide which makes financial sustainability more difficult to achieve than in the case of credit:
• services often need to be customized to specific areas or types of clients, making scale difficult to attain;
• frequently, impacts are somewhat dispersed, with 'ripple effects' taking the benefits far beyond the immediate target group, making global impact difficult to measure; and
• the overhead and capital costs involved in certain activities, such as training and technology development and dissemination, are often necessarily high.
Furthermore, since in many cases small producers are largely unaware of the potential benefits of new or improved techniques, effective demand for many business development services is often low. Clients are unlikely to make significant contributions to services of whose benefits they are unsure.
Consequently, in recent years business development services have declined in popularity and credit programmes have taken an ever higher proportion of the portfolio of donor projects targeted towards the poor. The new Consultative Group to Assist the Poorest (CGAP), for example, funded by the World Bank and with funding of US$200 million from various sources, is dedicating its entire programme to credit for very small businesses (ibid.).
But just how successful has minimalist credit been in addressing poverty alleviation and stimulating growth? That will be the subject of the next chapter.
CHAPTER 3
The effectiveness and impact of minimalist credit: a review of the evidence
Until recently, few evaluations of micro-credit schemes have, in fact, attempted to measure the impact of credit programmes at the household, enterprise or subsectoral level. Even now, this is rarely attempted by project implementers. Impact evaluation at these levels has generally been considered to be unnecessarily complicated, time consuming and expensive to achieve. Instead, a number of proxy indicators have been used to measure impact. Those most commonly employed are levels of repayment, the number of borrowers and the subsidy-dependence index (a measure of the sustainability of the financial-service institution) (Yaron, 1992).
However, impact, even in the presence of very high coverage and repayment rates and positive sustainability ratings, cannot be taken for granted. In fact, it has been pointed out that: 'the preference for direct credit programmes has developed despite little evidence of the net impact of these programmes on poverty' (Berger, 1989).
So, what of the recent evidence that is emerging? Most studies into the impact of credit agree that it has a generally benign impact on poverty. Interviews with borrowers record an overwhelmingly favourable reaction from the clients themselves while impact analyses point to increases in income and in employment within the family of the borrower (see, for example, Chen, 1996; Hulme and Mosley, 1996; and MkNelly and Dunford, 1996, for recent cross-country case studies).
Many studies, however, temper their enthusiasm with two serious reservations. First, while there are obvious immediate benefits, these are in many cases neither particularly deep in terms of their impact nor sustainable over time. Second, the poorest often derive few or no benefits and can, in fact, be disadvantaged as a result of credit schemes. Let us examine these two arguments in turn.
3.1 Credit and growth
The finding that the short-term benefits generated by microcredit programmes are often neither strong nor long term in their impact recurs frequently in studies. A study of an agricultural credit project in Gambia, for example, found that while almost all interviewed borrowers were very positive about the benefits of the loans: 'it appeared the resulting increases in yield had not reduced the length of the hungry season and there was no evidence that these improvements had enabled processes of accumulation and expansion of agricultural production to take place over subsequent seasons' (Johnson and Rogaly, 1997).
A USAID review of 32 research and evaluation reports found that while credit can have an important role to play in enabling micro-enterprises to survive in the face of economic crises, few 'experience sustained growth [while] a majority grow only a little and even out, or maintain their operations at a constant level' (Sebstad and Chen, 1996). This finding is mirrored in another major cross-country study: 'it was unusual for credit to trigger a continuous increase in technical sophistication, output or employment: it was much commoner for each of these variables to reach a plateau after one or two loans and remain in a steady state' (Hulme and Mosley, 1996).
The employment impact of minimalist credit appears to be particularly weak. Hulme and Mosley's ( 1996) study found that while there had been an increase in employment among the family members of borrowers, employment impacts outside the family were small. They concluded that this is a natural result of limited technological change.
Another overview study found that minimalist credit programmes tend to preserve and diversify the self-employment of entrepreneurs rather than create additional employment opportunities for others (Berger, 1989). The USAID study referred to above came to similar conclusions:
Of the 20 studies which focused on [employment], most found positive but small impacts on the number of paid employees ... and these impacts were concentrated among a small proportion of the borrowers. These findings indicate that the most significant employment impacts were related to increased use of family labour, or increased hours of work by owners or current workers. It is common for increases in either family or paid employment to reach a plateau after several loans and then remain steady. (Sebstad and Chen, 1996)
3.2 Credit and poverty alleviation
There is also evidence that the poorest have derived little benefit from minimalist credit programmes and even in some cases that they have been disadvantaged by them. The Hulme and Mosley (1996) study concluded that the poorer the borrower, the less was the increase in income from a small loan, and at the bottom end of the scale some of the poorest borrowers became worse off as a result of receiving loans. This point is echoed by a recent study in India which identified strong limits – in terms of skills, technology and marketing opportunities – on the ability of the poorest to absorb credit (Mayoux, 1995). An evaluation of a credit programme for poor women in India found that they were maintaining good repayment rates, but the small profits they made were used primarily to pay the interest due on the loans (Berger and Buvinic, 1989).
