Operational Activities
Operational Activities
ANTAL SZABÓ, Regional Adviser on Industry and Technology
PREPARED FOR THE MICROCREDIT SUMMIT HELD ON 2-4 FEBRUARY 1997 IN WASHINGTON, DC
Geneva, January 1997
MICROCREDIT EXPERIENCES IN ADVANCED ECONOMIES
MICROCREDIT EXPERIENCES IN DEVELOPING COUNTRIES
MICROCREDIT IN COUNTRIES IN TRANSITION
SUGGESTIONS FOR IMPLEMENTATION OF MICROCREDITING IN CITs
The Microcredit Summit, held in Washington on 2-4 February 1997, is the first step of a decade-long campaign which seeks to ensure that 100 million of the worlds poorest families will be receiving credit for self-employment by 2005. The number of poor is also increasing in the 27 countries in transition (CITs) of central and eastern Europe and the newly independent States in the European Commission for Europe's region[1], where the registered 14 million unemployed in 1996 are living below the poverty level. The ECE is being represented at the Council of UN Agencies for the Microcredit Summit highlights that besides an emphasis on developing countries also reference to the countries in transition should be included. The business potential for microcredit programmes in CITs is very high. However, both financial and human requirements are different because of the unique traits of these economies.
The promotion of widespread entrepreneurship through the setting up of small and medium-sized enterprises (SMEs) is crucial for the transformation to a market economy and the democratization of society in the countries in transition (CITs). SMEs are recognized as an engine of economic growth and a source of sustainable development. Within this sector micro and small-enterprises are of special importance because they are considered as the cradle of entrepreneurship, particularly in environments facing high unemployment and poverty.
Within the framework of the Regional Advisory Services Programme, ECE launched a Programme for the Development of SMEs in CITs. In spite of the tremendous interest from the CITs in the Programme, ECE activities are modest because of lack of financing. This is why ECE welcomes the idea of the Microcredit Summit and is ready to cooperate with all international, national, government and non-government institutions and business community in this field. In order to better utilize the limited resources available to the UN, in January 1997 an UNCTAD/ECE intersecretariat task force on enterprise development in transition economies was established.
The majority of external financing for SMEs within the EU is provided by banks. The banking system for the financing of SMEs has always been characterised by a short-term approach to secure lending and minimize risk. Small enterprises usually have to pay higher interest rates than their larger counterparts [2].
In almost all industrialized countries, Governments have implemented a wide spectrum of programmes promoting SMEs. Governments generally consider financial support as the major component of promotion policies for the development of entrepreneurship and SMEs.
At the end of the 1920s the Netherlands was the first country to create a special financial institution exclusively for SMEs. The Netherlands Bank for Small and Medium Business was created with the participation of 25 small banks and the Government as the major shareholder. Following the second World War, in Austria the Bürges Förderungsbank was established to assist start-ups by providing SMEs with special loan guarantees.
In the majority of the OECD countries loan guarantee schemes exist for financing start-up businesses. Loan guarantees seek to overcome the high risk faced by financial institutions when lending to micro- and small businesses.
The OECD Industry Committee's Working Party on SMEs, analysing "best practice" in SME policy, stated that through the loan guarantee scheme more financing is being provided to this sector by both the banking and public sectors than would have been the case without the scheme [3]. It is also argued that this additional financing enables jobs to be created.
Loan guarantees operate by a percentage of the loan being guaranteed by the Government so that, in the case of a default, the loss to the financial institution is only a proportion of the sum at risk. However, the borrower has to pay interest charges on such loans which in general are higher than normal arrangements since an additional premium is paid to the Government's financial institution to cover the expected losses.
Special microcredit programmes exist in the United States and Canada for poverty alleviation targeting of particular market niches (low-income entrepreneurs, minorities, women, etc.) through microcrediting to increase individuals' economic independence and develop self-employment to overcome economic and social hurdles. These programmes often provide entrepreneurs with credit through a revolving loans fund and also management assistance.
When adapting programmes and experiences from developed countries to CITs it should not be forgotten to consider also the specific history and practice in those countries which differ significantly from those applied in the market economies whether they are developing or developed economies.
Microenterprise financing institutions started their intensive programmes in the mid-1980s. The World Bank's lending for SMEs began in 1973, but was discontinued in 1991. By that time a total of 80 loans had been approved in 38 countries with a total loan amount of USD 3.7 billion. As lending for SMEs dropped off, the number of loan programmes for microenterprises increased dramatically. Micro-lending began as a small component of SME loans in the late 1980s, but shifted to become the centrepiece of poverty-related loans approved in the early 1990s. All direct support for microenterprises in World Bank operations is labelled as "social loans". Loan amounts totalling USD 1.56 billion were allocated to 49 operations in 36 countries over 9 years [4].
The successful institutions in Asia, Africa and Latin-America considered the following main features as key to their results:
Economic performance and growth varied considerably among the 27 countries in transition (CITs) of the ECE region. However, the 14 million unemployed in early 1996 are an increasingly painful problem as traditional safety nets have been weakened under the pressure to reduce public expenditure [1]. Eligibility rules for unemployment benefit have also been tightened.
Due to the collapse of the former centrally planned economies, increasing inflation and economic uncertainty personal savings have been eroded and people lack the financial reserves to start a business. However, in underdeveloped regions, rural and industrial districts facing structural adjustment needs, microenterprises might provide the way out of stagnation. SMEs could play a significant role in these underdeveloped regions because they produce and distribute local products and provide services and in doing this they could generate jobs and create income for the population whether they full or part-time.
The majority of the transition economies have acknowledged that SMEs are crucial for industrial restructuring and have formulated programmes and enterprise development policies. Many countries in transition, especially the Czech Republic, Hungary, Poland, Slovakia and Slovenia have recognized that the development of SMEs is a crucial element of industrial restructuring. In those countries the establishment and promotion of SMEs is an essential part of the privatization process and the economic reform [5], [6].
In addition to those countries, Romania and the Baltic States are considered as followers where the creation of the SME sector is accepted as an important part of the economic reform but its real implementation has only been started recently. A coherent SME policy is still lacking in the Southeast Europe, including Bosnia and Herzegovina, Croatia and The former Yugoslav Republic of Macedonia. The development of the SME sector lags far behind in the CIS countries where the lack of legislation, understanding of entrepreneurship, lack of infrastructure and financial means are major obstacles to its further development.
The promotion of SMEs in CITs should find justification in considerations related to privatization and industrial restructuring. Policy in support of the long-term development of SMEs should be integrated into the overall economic reform and industrial strategy of a country, if the basic objective is to develop entrepreneurship and accelerate the transition process to a market economy.
ECE analysis indicates that many Governments of countries in transition appear to be focusing more attention on questions related to privatization than SMEs [7]. In taking this approach, there is a danger that they might be seeing privatization as an aim of the economic transformation process which is taking place in their countries rather than as an instrument to make the economy more efficient through private initiative and real ownership. At the same time, it is important to note that "SMEs in the countries of central and eastern Europe are the healthy embryos of the new economic fabric of the market economy that transition aims to create and develop. For this reason, the development of SMEs is intrinsically bound up with privatization in general on which, in the last analysis, the success of transition depends. Privatization is often wrongly seen simply as the transfer of existing enterprises from public to private hands. In fact, privatization has far wider importance in that it expands the share of the private sector in GNP"[8].
The promotion of widespread entrepreneurship through setting up of small and medium-sized enterprises (SMEs) is crucial for the transformation to a market economy and the democratization of society. SMEs are recognized as an engine of economic growth and a source of sustainable development. Within this sector the micro and small-enterprise segment (MSEs) is of greater importance because it is considered as the cradle of entrepreneurship, particularly in environments facing high poverty and unemployment rates, and especially where due to the restructuring of heavy machinery plants, military complexes or the closing worked-out mines there is a need for structural and social adjustment. In those districts, MSEs in particular can create jobs, and provide income-generating opportunities to alleviate poverty.
According to an issue paper by the UNCTAD secretariat the magnitude of the problems confronting enterprises in CITs in some aspects is greater than the problems identified in respect of developing countries [9]. For example, in 1989-1990, at the beginning of the political and economic transformation process, the overwhelming majority of enterprises were state-owned enterprises operating within centrally planned economies. Introducing and adapting laws on enterprises and private ownership, transformation of ownership of enterprises, privatization and/or restructuring, creation of small businesses have been an important part of both macro- and micro-economic policies in the transition economies.
In CITs one of the major obstacles and problems faced by SMEs is the lack of financing. Among the major problems for SMEs in CITs is securing the initial capital necessary for access of potential entrepreneurs to initial credit so as to start their operations. SMEs have limited access to sources of finance for the following reasons [10]:
There is a need to disseminate the experiences and methods of the advanced European countries in the economies in transition with the aim of creating and developing a solid and effective infrastructure mechanism capable of promoting the creation of new SMEs and the economic growth of existing SMEs for the dynamization of the economy as a whole and in particular to cope with the unemployment question by job creation. To facilitate the transition to a market economy in CITs by means of incentives to entrepreneurship should based on the exchange of regional and global experiences. It is necessary to organize a forum for the exchange of views of Governments and private agencies responsible for the promotion of SMEs in the economies in transition. ECE is an appropriate organization for this aim.
In view of the importance of the development of SMEs, the European Union has provided assistance to the development of SMEs through two major programmes: PHARE and TACIS. Between 1990 and 1993, PHARE made available ECU 320 million to support SME development in the 11 PHARE beneficiary countries. Of this, PHARE provided ECU 154.5 million of financial support to SMEs in central and eastern European countries (CEECs) between 1990 and 1993. The micro-loan scheme totalled only ECU 20 million [11].
The microcredit experiences provided within the PHARE aid programme are very promising. The structural shift within the economies, the high demand for job- and income-generating alternatives in rural areas and regions seriously affected by industrial decline and the minimal credit resources available for SMEs have created a strong demand for microenterprise credit. PHARE aid, on average less than ECU 3 million per country per four years and less than ECU 1.5 million per country, for SMEs is not sufficient for the creation of a competitive business environment conducive to the development of SMEs. TACIS, which includes a range of grassroots initiatives supporting the establishment of SMEs in the newly independent States, is even more inadequate.
The ongoing process of industrial restructuring, privatization, market-oriented institution building, and liberalization and foreign market competition have already contributed to emerging market conditions. However, much remains to be done. One important problem is the slow progress in the reform of the banking system in CITs, and the existing cross shareholding between banks and enterprises, which often gives rise to credit allocations on political rather than on commercial grounds. It has led in some cases to insolvency and bankruptcy of banks.
Banks generally show little interest in appraising projects and lending to start-ups and small firms. In spite of the fact that financial intermediaries make loans to the banking system in CITs, the banks do not lend those funds to SMEs basically for two reasons:
The President of the Hungarian Credit Bank stated at the 3rd session of the Advisory Group on Entrepreneurship and SMEs of the OECD held in October 1996 in Visegrád (Hungary) that credit banks do not understand how SMEs operate. He mentioned that his bank lost about HUF 3 bn within a few years of lending to SMEs.
In the advanced CEECs during the last four years special programmes and guarantee institutions have been set up to support the development of entrepreneurship and to promote access to credit by small businesses and startups. These programmes include the following:
However, these institutions prefer to deal with already existing entrepreneurs and stable SMEs rather than unemployed or start-up entrepreneurs without collateral.
The World Bank has launched only one loan in CITs: the Rural Poverty Alleviation Pilot Project in Albania. It relied on local administrative committees to channel credit to final clients. As of 31 March 1994, 40 village credit funds had been established and 1,300 subloans had been disbursed. The average loan size was USD 287. The loan recovery rate is 100 per cent, which indicates the efficiency of the project [4].
A recent report of the OECD undertaken on the initiative at the Programme on Local Economic and Employment Development explores the potential for microcredit and focuses on the MSE sector. The report highlights the successful programmes in the Czech Republic, Hungary and Poland. Institutions created by those programmes are striving to become permanent institutions rather than temporary interventions to fill the existing credit gap for SMEs [12].
Experiences of successful credit guarantee institutions in advanced CEECs show that there are six cornerstones for a good programme:
ECE analysis shows that even in advanced CITs the existing microcredit and credit guarantee facilities cannot satisfy the growing requests for credit in those countries. The weaknesses of these financial facilities are the following:
It is surprising that the EBRD, whose primary aim consists of providing financial means to CITs operates basically with large enterprises and has no programme for SMEs.
Recent ECE analysis in advanced CEECs shows that because of the high percentage of corporate tax and tax on wages, SMEs prefer to remain informal and in general they indulge in double entry book-keeping. Such financial systems encourage tax fraud and the proportion of the hidden economy could be as high as nearly 35 per cent in those countries.
In CITs, as a consequence of industrial and agricultural restructuring during the transition to a market economy, self-employment has increasingly become an employment option for the many unemployed, including millions of people living below the poverty line. Many unemployed individuals are forced to turn to self-employment as a means to create income for themselves and their families. To facilitate the transition to a market economy in CITs and help victims of the economic transformation process overcome poverty and start life afresh, there is a need to launch microcredit programmes in all CITs.
| The appropriate infrastructure for microcredit institutions has not been developed in response to this requirement. Microcredit organization in CITs need a combination of capacity-building, funding, policy development and performance-based objectives to develop into professionally managed, permanent and self-sustaiable institutions. While establishing long-term capacity-building programmes, experimentation should be encouraged to develop national models, taking into account thorough strategic and business programming. |
Efforts should be strengthened to set up microenterprise development centres in transition economies including business incubators.
| While the Microcredit Summit has stated that approximately USD 21.6 bn will be required to reach 100 million of the poorest families by the year 2005 [13]. ECE estimates that at least 3 million households have to be reached in CITs. The resources needed to achieve and fund the Summit's goal in CITs should be assessed in more precise terms. |
Policy changes may be needed to allow an appropriate portion of the European Union's and EBRD sources of funding into the CITs. The amount of aid for foreign counselling and advice should be decreased and financial funds should be provided for credit guarantee schemes for start-up entrepreneurs. Microcredit programmes should serve as a policy alternative to unemployment benefits and job training programmes, because they contribute to self-employment and economic self-reliance of poor and low-income families. Priorities for the development of microcredit in transition economies are: - capacity-building, especially establishment of micro-credit guarantee schemes: - training of both staff in lending, fund management, as well as start-ups and beginners; and - soft advisory services for entrepreneurs, e.g. through business information centres established by PHARE aid programme or mentoring schemes similar to the system used in Italy in accordance with Law No.44.
Steps to be taken in support of this process might be include the following:
[1] Economic Survey of Europe in 1995-1996. UN/ECE, 1996.
[2] The European Observatory for SMEs. 3rd Annual Report, European Network for SME Research, February 1995.
[3] Best practice policies for SMEs. OECD, 1995.
[4] Leila M. Webster, Randall Riopelle, Anne-Marie Chidzero: World Bank lending for small enterprises 1989-1993. World Bank technical paper No. 311, 1996.
[5] SMEs in CITs. ECE IND/AC.3/1, 14 February 1996, Geneva.
[6] Antal Szabó, "Development of entrepreneurship, small- and medium-sized enterprises in central and eastern Europe". Paper prepared for the Colloquium on Promoting SMEs in central and eastern Europe organized by the Parliamentary Assembly of the Council of Europe, 28-29 November 1996, Budapest.
[7] Industrial Restructuring in Selected Countries in Transition, ECE/IND/1, 1995, New York and Geneva.
[8] Paul H. Dembinski, "From post communist privatization to SME support". Paper presented at the ECE Workshop on Economic Aspects of the Implementation of New Technologies in SMEs, 12-13 September 1995, Moscow.
[9] Enterprise: Issues relating to an enterprise development strategy. UNCTAD TD/B/COM.3/2, 6 November 1996, Geneva.
[10] SMEs in CITs. ECE IND/AC.3/1, 14 February 1996, Geneva.
[11] PHARE: Progress and strategy paper on SMEs, European Commission DGI, Brussels, 1994.
[12] Microcredit in transition economies. OCDE/GD(96)40, 1996, Paris.
[13] The Microcredit Summit: Draft Declaration. Results Educational Fund, August 1996, Washington.
For further information, please contact Mr. Antal Szabó,
to whom you can send your remarks and recommendations.
Telephone: +41-22-917 24 71.
Fax: +41-22-917 01 78.
E-mail: antal.szabo@unece.org
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