In rural communities, many small businesses are invisible to outsiders, but if you live there you know the local cabinetmaker, chimney cleaner, daycare operator, welder and baker. For many communities, this network of self-employed people is a vi tal component of the economy. And small home-based businesses occasionally grow to become crucial sources of jobs and income for others in the community.
Self-employment is important to individuals, families and communities for many reasons:
* it provides people with income and employment in areas where jobs are hard to come by
* it provides goods and services close to home
* it passes on skills through informal apprenticeships
* people can get started in business without havin g a lot of money because start-up and operating costs are low, especially for home-based businesses
* hours of work can be flexible around childcare and other household duties
* it gives people a sense of pride and self-esteem
* it strengthens the local economy by bringing in money, and re-circulating that money in the community
Important as these businesses are to a community, self-employed people often have trouble getting small business loans. Banks aren't interested because processing costs make loans under $5,000 unprofitable. Even if the bank does agree to a small loa n, it demands full collateral. Many government programs may loan small amounts of money, but they usually have very restrictive criteria, and they still require the paperwork of a large loan. To the person who needs only a few hundred dollars, this is a very complicated and time consuming process.
And often a few hundred dollars is all that is required to buy or fix a piece of equipment, purchase some materials, or use as working capital in expanding or starting up a small business. A very small loan can have a profound impact and boost a smal l business from subsistence to self-sufficiency.
A two year old joint initiative of the Lockeport, Nova Scotia branch of the Royal Bank, and the Calmeadow Foundation -- a Canadian non-profit community development organization -- is providing relief. The goal of the project, called Partnership Assist ance for Rural Development ('PARD', a commonly-used term meaning friend), is to provide small business loans to self-employed people in Shelbourne County, Nova Scotia who currently do not have access to bank loans. In the process, Calmeadow and the Royal Bank hope to develop a replicable model of small-scale credit delivery which can be used by other branches throughout the country.
PARD, officially launched in 1991, is an attempt to offer small loans, at regular commercial rates of interest, to self-employed people without the need for collateral, credit ratings, business plans or equity. Instead, four to ten self-employed indiv iduals who want loans to start or expand small businesses form a PARD group, which together approve each member's loan.
These are not legal partnerships where the partners all co-own a single business. Under PARD, the partners all have their own businesses, but form a credit partnership for the sole purpose of borrowing money. The members guarantee each others' loans, meaning that members tie their own access to loans to the repayment rate of the other members of their borrowing group. If one member does not repay his/her loan, none of the other partnership members will get any more loans until the money is paid. Pa rticipants are limited to $500 on their first loan, $1,000 on the second, and so on up to the maximum $5,000 on their sixth loan.
PARD loans are based upon the borrower's character rather than on what s/he owns. To borrow money through PARD, all a person needs to do is join or form a credit partnership. The key is to find trustworthy group members who will pay their loans. In a sense the borrowers become bankers; they assess each others' loans and screen out the poor credit risks without the paperwork that banks require.
The partnership is more than just a peer pressure mechanism -- it is also a mutual support group. Partners meet monthly to monitor repayments, to approve new loans, and most importantly, to provide advice and support to each other as friends and fello w business people.
There are two main reasons to bank on the so-called 'unbankable'; the first is that there is a need for these efforts. People need jobs, and communities need products and services that would otherwise be provided by outside companies. The second is t hat it works. With 122 loans to 60 people in 14 PARD groups, there hasn't been a single default.
In a case of South to North transfer of ideas, PARD and other peer lending initiatives in Canada owe much to the Grameen Bank of Bangladesh. Grameen is the brain child of Dr. Muhammad Yunus, a Professor of Economics at the University of Chittagong, wh o was struck by the appalling poverty all around him. He remembers vividly walking through nearby villages, observing and talking to the people. One woman, working at a decrepit loom in front of her corrugated tin shack, spoke to him of the few cents sh e earned a day weaving, most of which she had to give to the merchant who rented her the loom and to local money-lenders who charged 50% interest. Another told him that she earned two cents a day making stools. When he asked her how eight hours or more of work could bring her so little, she explained that she had to buy the raw materials from the same trader, who then bought the stools; he set the margin of profit as low as possible and charged her interest on the cost of materials, leaving her next to nothing.
These experiences and others like them made Yunus determined to do something concrete to emancipate his countrymen and women from the crushing poverty and debt which ruled their lives. Convinced that the most effective way to accomplish this was to en able them to realize their productive potential, he persuaded a local commercial bank to set aside some funds for an experimental loan program -- and the Grameen Bank was formed.
The Bank's five major objectives are:
1. to extend banking facilities to the poorest men and women in the community
2. to eliminate the exploitation of moneylenders
3. to create opportunities for self-employment for the unemployed and under-employed
4. to provide an organizatio nal structure which the poor can understand and in which they can participate fully, thereby increasing their economic, social and political strength through mutual support
5. to reverse the age-old vicious cycle of "low income, low savings, low inves tment, low income" to an expanding cycle of "low income, investment, more income, more investment, more income."
The experiment has succeeded largely because its goals are addressed to the needs of the people, and because it combines a unique approach and a novel system of loans and repayment:
* Small groups of five members are formed at the village level. They decide who among the members will get loans, for how much and for what purposes. There are now over 241,000 members spread throughout almost 5,000 villages.
* A decentralized, m obile, highly dedicated staff brings the Bank directly to the people. The Bank currently has a staff of about 3,200, over 90 per cent of whom work in the field.
* Repeated small loans, at standard commercial rates, are repaid on a weekly schedule. L oans average between $64 and $68;
* Compulsory individual and group savings are used for personal emergencies, and social obligations;
* A particular emphasis is given to reaching women, 69% of the total membership.
The success of the Grameen Bank can be measured in a number of ways but the most obvious is a consistent record of more than 98% loan repayment. It has now been shown that people with low-incomes -- whether in Bangladesh or in Nova Scotia -- are less likely to default on their loans than the rich.
Written Sean Kelly, March 1994.
From the "How to Live in the Real World" education kit, created by the Nova Scotia Environment & Development Coalition..
Grameen Bank information excerpted from VIDEA Newsletter, October 1991