The Microgrant / Microfinance Gap

As I mentioned briefly in the last post, my experience at the microfinance training yesterday combined with my experiences meeting VEF businesses in the field has convinced me that there is a significant gap that exists between the level VEF businesses reach as a result of the grant and the level that businesses need to be at to benefit from microfinance.

VEF itself makes no claims to be a substitute for microfinance. The organization targets the poor, and more specifically the poorest of the poor. The small grant that VEF gives can go amazingly far towards getting a group of people on their feet by enabling them to start a business instead of relying solely on subsistence farming. Thinking in terms of the proverbial ladder of social strata, VEF can get someone off the ground and onto the first or second rung just by virtue of providing business training, a small grant, and ongoing mentoring.

Microfinance, however, is structured in such a way that only businesses that are on the sixth or seventh rung of that ladder can benefit. The complexity of receiving a loan, the necessary planning it takes on behalf of the loan recipient, and the risk involved requires that the recipient already have a stable business, room to grow, and a solid sense of security for the foreseeable future. Reaching that point is hard for anyone, and particularly so for the poorest of the poor who are just getting their feet under them.

The journey up the ladder from the second rung to the sixth rung is filled with obstacles. For businesses still in their infancy, one bad season of rains or one unexpected illness or death in the family can be the end. Even if the business manages to avoid or survive those potential hazards, however, it is not a given that everyone possesses the necessary entrepreneurial skills to responsibly manage a business. Even those with the best of intentions can find themselves sidetracked by one distraction or another. If there is one thing I have learned from my time here, it is that poverty makes long-term decision-making especially hard. Furthermore, even if the entrepreneur (or the group of entrepreneurs) possesses the requisite skills and manages to avoid the obstacles, the scalability of the business in the communities in this area is limited by the customers’ poverty, too.

So for a business group around here to grow from infancy to that sixth or seventh rung, it must have an unbelievable amount of determination, responsibility, and luck. And that group must achieve this on its own. VEF has a particular mission which it sticks to (and achieves admirably). MFIs have their own missions which they stick to (although I’m not in a position to say how successful they are). In between those two, however, lies a group of businesses that are forced to fend completely for themselves in the fight to expand and thereby climb up the ladder out of poverty. As far as I know there are no organizations that focus on assisting those businesses develop and grow to the point where microfinance becomes a feasible option. As far as I know, it is an opportunity open for the taking.