Gregory F. Casagrande: Creditworthy way to combat poverty

As the leaders of the Pacific Islands Forum meet this week in Port Moresby, one proposal should be on the discussion table.

At the United Nations International Year of Microcredit Conference in Melbourne last month, I proposed the development of a region-wide micro-enterprise development fund. These microfinance institutions (MFIs) would in turn train, fund and provide guidance to poor yet aspiring micro-entrepreneurs. At the conference the proposal received strong support from Australian government leaders and leading regional development NGOs.

Specifically, I propose the initiation of a NZ$25 million fund to finance MFIs throughout the Pacific Islands. The fund would help them to reach an additional 100,000 aspiring micro-entrepreneurs living in poverty. The Pacific Island Forum could administer the fund, to be spread over 10 years in $2.5 million instalments to be shared by New Zealand, Australia and possibly the United States, European Union, France, Japan and China. New Zealand's likely contribution would be 10 per cent of that, $250,000 a year, and could be funded through offsets in NZAid's current budget.

Microfinance is the practice of providing poor people with small, unsecured loans at market rates of interest, to start a small business to work their way out of poverty. Microfinance has brought millions of marginalised people into the economic mainstream, boosted their self-esteem and empowered them to tackle other stagnant issues including poor nutrition and lack of access to clean water, proper sanitation and education.

These new small businesspersons are achieving loan repayment rates often exceeding those of clients of Western commercial banks. As a tangential benefit, microfinance stabilises volatile areas by creating bright futures and destroying seeds of hate and fanaticism.

MFIs are the organisations responsible for training and delivering credit to the poor. There are thousands of MFIs and the best generate sufficient loan interest income to cover their costs. In the Pacific, while there is not the problem of starvation, there are hundreds of thousands of families who face a poverty of opportunity. This is driven by the fact that most Pacific economies are too small to produce significant meaningful employment opportunities and commercial banks do not provide unsecured lending to the poor. This poverty of opportunity contributes to poor housing conditions, weak childhood education, substandard nutrition levels and low self-esteem.

Fortunately, though, two Pacific organisations have shown that microfinance can be sustainably operated in the Pacific. Organisations such as South Pacific Business Development Foundation (SPBD) of Samoa and Vanwoods of Vanuatu have proven that the poor of the Pacific are both creditworthy and able to successfully start and sustain small businesses. These micro businesses do wonders for improving living conditions, children's health and education and the self-esteem of the primarily women entrepreneurs.

Before these two organisations, there had been well over a dozen Pacific-based microfinance efforts that had failed and development professionals had concluded that for cultural reasons microfinance could not succeed in the Pacific. None of these failed attempts had reached more than 100 persons.

SPBD and Vanwoods have demonstrated that previous failures were associated with mismanagement and not inabilities of the poor. As founder of SPBD, I can attest to that fact that we, too, faced problems of embezzling staff members, corrupt tribal chiefs, and slanderous accusations.

However, we faced each trial head-on and have managed to build an organisation around proven microfinance and management practices and through sheer determination. Since January 2000, SPBD has helped more than 5000 poor Samoans build a wide variety of small successful businesses including food processors, sewing ventures, taxi services, traders, tourism operators, agricultural and livestock growers to name but a few. Additionally, we have helped return children to school and to significantly upgrade homes.

Perhaps more significantly though, we, along with Vanwoods, have provided a model for others in the region to replicate. And that is the opportunity that this Pacific Island Forum summit should be eyeing. The greatest constraint facing organisations like SPBD and Vanwoods and other microfinance organisations around the world is access to ample funding - $25 million would enable Pacific-based MFIs to reach 100,000 poor families. Ultimately, MFIs must secure commercial funds to achieve real outreach. However, today only a few large self-sustaining MFIs are creditworthy. SPBD is just now beginning to receive its first commercial funding.

The proposed Pacific Islands Forum microfinance fund would address this funding constraint by providing a catalyst to grow small and medium-size MFIs so that they can eventually secure commercial bank financing and reach out to tens of thousands.

The fund would exclusively lend funds to qualified MFIs for on-lending to poor micro-entrepreneurs. It would in essence be establishing institutions permanently dedicated to meeting the financial needs of the poor.

The fund would not try to be an operator of an MFI.

Support for the proposal could be bi-partisan. It may be supported on the one hand for the direct meaningful assistance it provides to the destitute and on the other for its market-based approach of promoting personal responsibility and grass roots economic development. It should be hailed as "capitalism with a heart".

James Wolfensohn, former president of the World Bank remarked, "In our post-September 11th world, the need to address poverty has become not only a moral imperative, not only a social and economic necessity, but also a central concern for everyone who strives for national and global security and peace."

This microfinance initiative would show that its sponsors are serious about eradicating poverty in our backyard.

It would generate no additional costs and it would affirm New Zealand and our allies as a beacon of hope by advancing capitalism and empowering the poor with a hand-up and not a handout.

* Gregory F. Casagrande is the Founder and President of South Pacific Business Development Foundation (SPBD) of Samoa and serves as the South Pacific regional representative on the United Nations International Year of Microcredit Board of Patrons.