> Posted by Elisabeth Rhyne, Managing Director, CFI

The following post was originally published on USAID’s microlinks.

Elisabeth Rhyne joined USAID shortly after the seminal PISCES (Program of Investment in the Small Capital Enterprise Sector) studies were completed in the 1980s. From 1994 to 1998, she was the Director of USAID’s Office of Microenterprise Development, where she developed and led USAID’s Microenterprise Initiative.

The breakthrough innovations that sparked the birth of microenterprise credit in Latin America occurred in the early 1980s, and USAID was very much the driving force. Through PISCES, the Program for Investment in the Small Capital Enterprise Sector, operational from 1979 to 1985, USAID and its partner organizations began to discover the principles of success for lending to the poor, opening the way for the microfinance industry.

To understand the origins of this microfinance strategy, it helps to visualize PISCES at a time when three streams of thought came together. First was the “Spring Review” on directed agricultural credit carried out by the rural finance gurus of Ohio State University, Dale Adams and Claudio Gonzalez Vega, with J.D. von Pischke of the World Bank. Their work revealed the waste and dysfunction of subsidized agricultural credit doled out by bankrupt government credit banks. These banks were swallowing hundreds of millions of development dollars annually. The Ohio State team’s manifesto was that financial institutions must make credit decisions based on risk assessments, not politics, and charge interest rates that would allow operations to be sustainable. That review launched a gradual shift by USAID, the World Bank, and other aid agencies away from public development banks. But, if public development banks were sidelined, who would serve the poor?

At the same time research mainly by the International Labor Organization (ILO) revealed the importance of the “informal sector,” small-scale businesses operated by low-income households. These were especially important in urban areas as a source of livelihood for a vast portion, and sometimes even the majority, of the poor in developing countries. (Why this was a revelation was a mystery to me – one has only to stroll through the poor areas of a developing country to see the scale of the informal sector.) The ILO’s work excited the interest of USAID’s Office of Urban Development. Michael Farbman and his colleagues there wanted to figure out how development organizations could assist the proprietors of small and microenterprises to improve their businesses and work their way out of poverty.

Finally, with the election of Ronald Reagan to the White House in 1981, USAID adopted a pro-private sector stance. Although the businesses of the informal sector were small, interest in them received a political boost from the Reagan Administration’s new team, as did experiments in supporting vehicles other than government to deliver services.

With all those ideas fermenting among the staff and partners of the Office of Urban Development, it was only natural to design an action research project to push insights toward practice. USAID charged three organizations to go forth and search the world for entities that were doing a good job in supporting the enterprise credit needs of the poor, and to identify success factors. Accion, the overall lead, was assigned to investigate organizations working in Latin America, the Development Group for Alternative Policies in Africa, and Partnership for Productivity in Asia.

This work bore fruit in Latin America, because it was through the work of PISCES that Accion began to learn what it needed to know to build successful microfinance institutions across the region. Jeff Ashe, Accion’s lead researcher, made the following fundamental observation, which set the stage:

Once it is recognized that business owners are the best qualified to decide how to use the credit provided and that business advice will be provided informally by other business owners in the community, the process of designing programs to assist existing micro-enterprises translates largely into how to provide the right amount of credit to the small business owners quickly and economically while ensuring that the loans are paid back promptly*.

With this perspective, Ashe identified organizations in several countries that made loans quickly and economically and that had high repayment rates. In El Salvador, FEDECCREDITO, a local NGO, made very small loans to solidarity groups of five to eight people. Using that methodology, it offered credit to 2,735 businesses in 18 months, vastly more than the usual few hundred beneficiaries of most programs – and with much higher repayment rates.

While writing up the results for the PISCES report, Ashe was busy inside Accion arguing for the solidarity group approach and urging the program to test the methodology on the ground. In PISCES II, he got the chance.

To read the rest of this post, visit microlinks.

*“The Pisces Studies: Assisting the Smallest Economic Activities of the Urban Poor”, Michael Farbman, editor, USAID, 1981, p. 29.

Note: This blog post title was inspired by Galen Hull in Experiments in Small and Microenterprise Development.

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