Volume 2, Issue 4
May/June 1999

In This Issue

Inter-American Development Bank Focuses on Reducing Poverty

Bankers Trust Vice Chairman Eugene Ludwig Speaks Out

Measuring Impact on the Lives of Clients

CRECER: Promoting Credit and Education in Bolivia

What's Happening

Finding Refuge Through Credit

1999 Meeting of Councils Plenary Papers Available

Back Issues

Volume 2, Issue 3

Volume 2, Issues 1/2
Special Double Issue, 1998 Meeting of Councils

Volume 1, Issue 4

Volume 1, Issue 3

Volume 1, Issue 2

Volume 1, Issue 1

Inter-American Development Bank Focuses on Reducing Poverty

Despite recent turmoil in the financial markets, the countries of Latin America and the Caribbean have recovered a lot of the economic ground they lost during the 1980s and are stronger as a result of structural reforms. But as we begin the next millennium, many of the deeply rooted social problems of the region remain to be resolved. Perhaps the most compelling task our societies face is the imperative of significantly reducing the unacceptably high levels of poverty founded, in large measure, on an unequal distribution of income and assets. In its search for the most effective means to address poverty, the IDB continues to sharpen the focus of its lending to support areas that have a proven impact on reducing poverty. Today, the Bank has a greater focus on poverty reduction than at any time in its history. Lending to the social sectors is at an all-time high, the range of poverty-reducing initiatives is growing, and the Bank has built-in mechanisms to advance the concerns of women, children, indigenous groups, and minorities in its lending operations. In a region such as ours, characterized by great inequalities, one cannot hope to reduce poverty without creating economic opportunities for those at the bottom of the socioeconomic ladder. We see microenterprise development as an important tool for strengthening the livelihoods of the poor and creating new opportunities for business development and employment.

The IDB’s current Microenterprise Development Strategy was conceived and elaborated in the mid 1990s through a series of consultations with policy makers and practitioners from Latin America and the Caribbean and experts in the field from around the world. The overall goal of the Strategy is to expand economic opportunities in the region through sustainable microenterprise development. The Strategy was approved by the IDB’s board of directors in 1997 and served as the basis for a 5-year program—MICRO 2001. The specific goals of the strategy are: (1) to create a favorable policy and regulatory environment for microenterprises; (2) to build sustainable institutions capable of providing financial and non-financial services needed by microenterprises; (3) to improve access of low-income and disadvantaged microentrepreneurs (especially women and indigenous groups) to credit, savings, and business services; and (4) to serve as a catalyst for expanding the flow of private sector resources for investment in microenterprise development. MICRO 2001 commits us to invest over US$500 million in microenterprise development in our region between 1997 and 2001.

Not many people realize that for years, the IDB’s Small Projects Program was the only multi-lateral development bank program targeting this sector. Before microenterprise became widely recognized as key to the developing economies of the region, the Small Projects Program had targeted precisely that sector for its activities. Today, organizations that received concessional loans and grants from the IDB’s Small Projects Program are attracting equity investments and financing on commercial terms from the IFC, the Andean Development Corporation, and our own Multilateral Investment Fund (MIF), as well as commercial banks and private investors. Last year, on the twentieth anniversary of the Small Projects Program, we carried out substantial reforms to the program and renamed it the Social Entrepreneurship Program (SEP).

To accomplish its mission, the Bank is promoting a new kind of entrepreneurship, where social goals and business effectiveness meet. We call it social entrepreneurship. Non-profit microcredit organizations that are succeeding in Latin America today by adopting more businesslike practices to mobilize funding and better meet their social goals are prime examples of this approach.

How much is funded overall for microcredit each year, and what funding is specifically targeted toward fulfilling the Summit’s core themes of reaching the poorest, reaching women, building financially self-sufficient institutions, and ensuring social impact?

For two decades, our program has had a simple mission: to help the working poor and their communities help themselves. It is an empowering mission. The social entrepreneurship program targets those sometimes left behind in the development process: the unemployed or under-employed, tiny businesses with few assets but lots of potential, young people, women, minorities, and members of indigenous groups. These members of the lowest socio-economic sectors of society—the back room manufacturers, peasant farmers, service providers, and street vendors—have, at best, limited access to conventional sources of credit needed to operate their businesses more productively.

The SEP can now provide low-interest loans of up to US$1 million plus technical cooperation grants, for credit and business development programs run by local NGOs. These groups, in turn, can extend loans ranging from an initial loan of less than US$50 to loans of several hundred dollars in the case of repeat clients who are successful in growing their businesses. Other organizations offer business training, marketing and technical assistance that microenterprises need to improve the quality of their inputs and products and market their output.

Over a million microenterprises have benefitted from this program, but that is a small number compared to the estimated 50 million that exist in Latin America and the Caribbean. Concessional resources for the SEP are limited, and cannot provide support to all the worthy institutions in our region. As the IDB’s microenterprise strategy has evolved, and understanding about the nature and role of microenterprise in the region’s economies has deepened, the Bank has devised additional mechanisms to serve the sector.

Global loans ranging from US$10 million up to US$100 million provide lines of credit to financial institutions that lend to microentrepreneurs. Hundreds of thousands of microenterprises have benefited from this form of financing. The credit is channeled mainly through commercial banks, credit unions and finance companies, but some of the global loans also provide financing for NGO microcredit programs. Although they are not exclusively targeted to the poorest, they help to broaden outreach of formal financial institutions and promote policy reform that expands the microcredit market overall.

Equity investments, loans, and technical assistance grants are provided by the Multilateral Investment Fund for financial and nonfinancial service programs. MIF funding has helped some well known NGOs transform themselves into regulated microfinance institutions (MFIs) capable of dramatically expanding their lending and offering savings and other financial services to microentrepreneurs. In addition, the IDB engages in policy dialogue and supports various reform efforts to assist microentre-preneurs. In Jamaica and Trinidad and Tobago, for instance, MIF is helping the government develop new regulations to strengthen the credit union industry, and in Bolivia it is supporting the development of the regulatory agency that oversees the microfinance industry.

Last year we approved over US$107 million in microenterprise development programs, divided among the Small Projects/Social Entrepreneurship Program (US$10 million), Multilateral Investment Fund projects (US$31 million), Technical Cooperation programs (US$1 million) and Global Microenterprise Loans (US$65 million). These are the projects that directly target microenterprise and contribute to the Summit’s goals.

How does the Bank measure success in its microfinance programs?

Our microfinance programs have a dual objective: expansion and deepening the reach of financial services, both credit and savings to microenterprises; and promoting sustainability of MFIs so that they can continue to provide loans and deposits long after our funding runs out. We measure success based on these two objectives. In recent years it has become much easier for us to measure success in the latter category: we receive detailed financial reports on the institutions we finance, and these can be verified relatively easily by our staff. The first area, however, presents a greater challenge. We conduct periodic ex-post evaluations of the projects we finance to measure the outreach of our operations. So far, we have conducted three such studies, and a fourth is now underway. What these studies reveal is that our programs do expand the reach of MFIs to new clients with lower levels of income, and they reach a broad range of microenter-prises, clustered around the poverty line. We tend to be more successful in providing direct access to microcredit for the poor in the Social Entrepreneurship Program and have greater success in generating jobs in microenterprises for the poor through the global microenterprise loan programs. The MIF programs are too new to have been evaluated in this area, but I assume we will find them somewhere in the middle.

I would like to go back to my question of how much IDB lending reaches the Microcredit Summit’s focus of the bottom half of those living below a country’s poverty line. Would you estimate that 15 percent to 25 percent of Bank lending reaches this group—or is this something you can’t answer at this time?

Ensuring that financial services reach down to the poorest microentrepreneurs is one of the primary goals of our microenterprise programs. We promote this goal directly, by expanding the supply of financial services to the poor, and indirectly, through policy reform and institution building. In this context, the share of microcredit that reaches the poorest varies by type of program and country. It is highest in the programs supported by the Social Entrepreneurship Program and in the poorest countries of our region—Bolivia, Haiti, Honduras, Nicaragua, and Guyana—followed by other Central American and Andean countries. In those countries the majority of microentrepreneurs are below the poverty line, and access to credit in IDB-supported programs reflects this.

Is there anything you would like to add?

The Bank’s microenterprise programs have demonstrated again and again that innovative partnerships and relatively small investments can bring substantial improvements in the lives of poor people and others who have been marginalized from the development process. These human success stories are ample proof of the resourcefulness and creative energy of this sector, and an inspiration for future activities.

FUNDING
How would an established microfinance institution apply to IDB for funding?
The IDB funds microenterprise programs in 26 countries of Latin America and the Caribbean, under three distinct programs: the Social Entrepreneurship Program (SEP), the Multilateral Investment Fund and Global Microenterprise Development programs. The Social Entrepreneurship Program (SEP) provides a limited number of soft loans and grants for up to US$1,000,000 to MFIs, NGOs and other institutions specifically targeting the poor or marginalized groups. The Multilateral Investment Fund (MIF) provides loans, equity and technical assistance grants of up to US$2 million to well-established, mature programs for policy reform, expansion and upgrading of MFIs, training and other business development services for microenterprises. Its focus is on private sector development. Intermediary institutions interested in applying for funding from the MIF or the SEP should apply directly to IDB offices in Latin America and the Caribbean. Contact should be made with the Microenterprise (or Finance) Sector Specialist. Contact information for each country office may be obtained at the following website: www.iadb.org/dpa/phone/fieldoff.htm or through the Microenterprise Unit in IDB headquarters: Chief of Operations, Microenterprise Unit, Inter-American Development Bank, 1300 New York Ave., NW, Washington, DC 20577, USA. e-mail: sds/mic@iadb.org; fax: 1 202 623 2307. Regulated financial institutions may qualify to participate in IDB-funded Global programs in the following countries (at the present time): Bolivia, Brazil, Colombia, Guatemala, Peru and Paraguay. Applications must be made through the national executing agency in each country. Inquiries about the programs can be directed to the IDB country office in the country.