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Microcredit leading to Micro Enterprise: The Challenges

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30 March 2011

By Sunil Daniel


Microenterprise is often talked about and has gained prominence in every conference, but rarely anyone realize that it one of the most difficult stages of development. The projection that it has received by big foundations has created false notions about microenterprise. However, microenterprise is indispensable because it is the ‘medium’ or ‘channel’ in development. Microenterprise decides if the financial service rendered to the poor is ‘microcredit or ‘micro-debt’. If you give microcredit to the poor and do not involve in non-financial services like capacity building, skill development, giving marketing skills, and other needs, the poor are worse off – they have a debt to repay.


It should be borne in mind that microcredit is not always used for Microenterprise activities, at least in the initial stages. There may be other emergency needs for which the credit will be used. Firstly, if they are victims of informal microcredit like that the money taken for high interest rates from moneylenders, then it is better that the microcredit be used for clearing off the debt rather than starting an enterprise. Secondly, the microcredit is often used for consumption needs, which is also indispensable. What enterprise would a person take up if her house were leaking? It would be wise to get the house repaired before taking up an enterprise. It would be wise to buy a mosquito net if there are mosquitoes instead of starting an enterprise. This avoids malaria and actually saves medical expenses. Thirdly it can be used for ‘event-financing’, mostly the lifecycle programs like birth, marriage, death, etc. It is during these crucial times of delivery or death that the poor often take loans from moneylenders. Fourthly microcredit can be used for other profitable needs like the education of the children or health needs. Last but very important is to use it for ‘Microenterprise’ – income-generating activity. So it would be wrong to make the people jump into starting some enterprise when actually there are other needs, and actually taking care of those needs would be much better than starting an enterprise. That is development too! It is often thought that only when an enterprise is started it is development but it is not true.


Having no access to credit is only one of the hindrances to development. But there are other hindrances to microenterprise and thus development of the people. These should be taken into consideration and one should not assume that just by giving loan to the poor they would come out of poverty.

Social Oppression: In a country like India where there is a lot of differentiation on the basis of caste, and oppression by the rich, even if there is the financial source microenterprise may not be successful. There should be a strategy where the people themselves are enlightened so that they can come out oppression and solve their own problems. When the poor stop going to the informal moneylenders and so something innovative the rich/high caste people often try to hinder the activities. The poor should be empowered to tackle such issues.

People’s mindset: The poor are used to looking towards outside sources for help, as contrast to thinking of what they can do with what they have. They may not reveal what they have (for example they may not agree that they can save even one rupee a day), for fear that the outside help may not be rendered. Usually they say that they cannot practice thrift and save money. An enterprise is looked upon by the poor as an ‘asset’ rather than that of a ‘channel for livelihood’ – for example you might give a cow so that they can earn some income, but they look at it as an asset that can be sold in time of emergency. When you try to evaluate them they will always say that the income is not sufficient, except a few, again for fear that the NGO may leave them and not render further help. It should be made clear to them that they are helping themselves and the social workers are not saviours who have ready-made solutions to their problems or a Santa Claus who can grant all their desires.

Not all are entrepreneurs: One might want everyone to be involved in an enterprise but some may not because they feel that they cannot do it. They are not willing to take risks, so are many of us who are forcing them to jump into an enterprise. Those who are entrepreneurial take enterprise as a challenge and those who are not, come up with many excuses even before they start the activity. Many actually prefer jobs where there is a regular income every month, even though it is very less. It should be borne in mind that most of those who are pushing the poor into microenterprise activities are not entrepreneurs themselves but it is expected that the poor should go for and it and that they should be successful. Many of us would not take up an enterprise either!

Not every technology is contextual/viable: As a part of sill development many skill may be taught but not every technology is contextual. Extra effort has to be taken by the NGO working among the poor to see that they are involving in a viable enterprise. Some time NGOs are satisfied by supplying a productive asset, a sewing machine for example, and think that the poor will generate income. It should not be assume that a productive asset will always be profitable. There should be customers who will give clothes for stitching. Also enterprises should be diversified; everyone should not opt for the same enterprise.

Microenterprise leading to small-scale industry: If there are many who are doing the same enterprise than marketing will be a problem. So an effort has to the be taken by the NGO working in that area to start a small scale industry and see that the business is done in a larger scale so that the marketing can be done under a brand name. If this is not done than all the people producing the same product can be a hindrance in the development activity.


Most often ‘hype’ has been crated by the funding agencies because they give the statistics from their viewpoint. They list the number of countries that they are working in or the total number of people to whom they have made credit available, and most often they highlight the success stories which makes people assume that all the people they are working with also have the same success.


Microenterprise is very essential for the development of the poor and poverty alleviation. But it is one of the most difficult stages in development for various reasons as discussed above. It requires patience, research, and commitment to result in the people taking up viable enterprises. Reporting the number of projects given and sharing a report of a few does not mean that the project is successful. If one has failed, then he should be willing to humbly accept it. Otherwise the trend at which microenterprise is promoted will mean nothing in the course of time. Very soon donors may write of microenterprise as an ineffective tool, which is actually not true. It is still an effective tool provided it is implemented the right way.


About Sunil Daniel:

Sunil is a Christian Development Worker based in India.

His focus: Evangelism and Microenterprise Development