Bernardo M. Villegas
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Financial Inclusion for the Poor (Part 3)

          The other fatal assumption that caused the fall of the microcredit movement was that the poor, especially women, could easily establish informal micro enterprises by selling simple items and services to other poor individuals in the same community.  Yunus was of the opinion that as long as the poor could be helped to produce something, they could easily sell it, or even more unrealistically, that the micro enterprise that they put up can graduate into a small or medium-scale business (SME).  As Yunus famously put it: “A Grameen-type credit program opens up the door for limitless self-employment, and it can effectively do it in a pocket of poverty amidst prosperity, or in a massive poverty situation.”    He was a victim of the fallacy of Says Law:  that supply creates its own demand.  As any one can observe in the depressed rural areas in the Philippines, the real problem is not the supply of the simple items that the poor need in order to survive.  It is the sheer lack of local demand, or purchasing power required to effectively buy the needed items—including food—and services.  In poor communities, supply does not create its own demand.

         The so-called enterprises put up by the very poor (sari-sari stores, food stalls, transport vehicles, garbage recycling, etc.) are at bottom just survival measures that will never grow into any real business.  The sooner these poor people can be given the education and the skills to be employed, the sooner they can get out of their poverty.  As Bateman observed, sooner than later, the poor people no longer choose to access micro loans to invest in income-generating enterprises.  They will either struggle to generate sufficient income to repay their loans or the enterprise will fail very quickly.  Most of them will use microcredit simply to ensure their everyday survival. In effect, they are borrowing for consumption, not for investment.

         As long as those involved in the microcredit movement in the Philippines face the harsh reality that the credit they grant to the poor will be used for survival and not to start a sustainable business, they are still rendering a great service to their clients.  At least they are a notch higher than a pure Conditional Cash Transfer.  But analogous to the CCT, they should build into their microcredit operations the requirements that parents should continue to improve their own skills for future employment and that they persevere in sending their children to school to finish at least high school. This is where it is extremely necessary for an honest and efficient State to put up high-quality elementary and high schools in the depressed areas of the Philippines together with such other facilities as rural health clinics and potable water.  

           If we are to build a strong SME base, we have to nurture the entrepreneurs from the middle-class households.  With very few exceptions, the sustainable SMEs do not evolve from micro enterprises put up by the poor.  The SMEs are generally established by highly educated members of the middle-income households who have the required characteristics of innovativeness and the ability and willingness to assume risk.  These are the entrepreneurs who will build the future Jollibees, Liwayway Manufacturing, United Laboratories, SM and other large enterprises which started as small businesses and are now employing tens of thousands of workers many of whom come from the very poor households who have been helped to survive by, among others, microcredit institutions.  That is the kind of symbiotic relationship we should build between micro enterprises and the SME sector.  For comments, my email address is