Africa's Women Go To Work How to lend small sums to poor Africans to set up small business

Microcredit is an effective way to alleviate poverty. The ineligibility of the poor to borrow from commercial banks due to the lack of collateral, borrowing without security from loan sharks, often at interest rates of 10-20% a day, have made microcredit an essential tool in lessening poverty. Since the 1970s, organizations, such as the Grameen Bank in Bangladesh and Accion International in Latin America, have encouraged poor borrowers to form groups to cross-guarantee each other's loans. In the Grameen model, one of a group of rural women takes out a microscopic loan, often as little as $25, to start a business. Only when she repays it can the next woman in the group borrow. Peer pressure makes sure that default rates are minimal. Approximately 14 million poor people now borrow from micro-lenders, a number that has increased by over 80% in the past two years, according to the Micro-credit Summit Campaign (MSC), a lobbying group. Each borrower is thought to support about five family members. Most borrowers are women. Microlenders prefer to lend to women because they are likely to use additional income to feed and clothe their children. Men, as the proprietors of the Otim bar can testify, may blow the spare cash on booze..

Microcredit works better than handouts for two reasons. First, it fosters enterprise rather than dependency. Second, a well-run microcredit scheme can be self-sustaining. Repayment rates of over 98% are common.

The business plans backed by micro-financiers tend to be breath-takingly simple. Take Pakmogda Zarata, successful micro-entrepreneurs from Burkina Faso, one of Africa's poorest countries. Ms Zarata runs a restaurant in a market place near Ouagadougou, the capital. The place cost almost nothing to build: roughly-hewn logs prop up a ceiling of thatch and old dustbin liners; there are no walls to speak of. The menu is unpretentious. "We only serve rice," she says, "but we do cook it." By taking out a series of small loans from the local branch of the Federation des Caisses Populaires du Burkina Faso, the country's main micro-lender, Ms Zarata was able to buy rice wholesale rather than retail. Her profits rose. She now employs seven people, can pay her children's school fees, and swaggers around town on a second-hand motorcycle.

As micro-finance has globalized, it has run into local problems. Not all poor communities are as tight-knit as those in rural Bangladesh. The urban poor, being more mobile, do not always know their neighbors well enough to act as guarantors for them. In the shanty towns of Africa and Latin America, something called "stepped lending" often works better. A would-be borrower puts up a little money of her own. The microfinancier lends her roughly the same amount again. If she repays promptly, she can raise a larger loan. The better her credit record becomes, the more she can borrow. The carrot of more credit discourages defaults as effectively as peer pressure does in villages.

The MSC hopes to see 100m poor borrowers receiving micro-loans by 2005. To reach such an ambitious target, micro-lenders will need much more capital. Support from donors is buoyant, but not enough. To expand faster, micro-lenders need to tap capital markets. Some, however, are credit worthy enough to borrow at commercial rates. In Bolivia, BancoSol, a micro-lender with over 70,000 clients, has issued $5m in bonds backed by its lending portfolio, $2m of which was bought by foreigners. Commercial banks can sometimes be persuaded to take equity stakes in microlenders, partly to make contact with up-and coming small businessmen with a sound credit history. For example, two Peruvian banks own shares in Mibanco, Peru's first for-profit microlender. According to Accion International, perhaps 50 of the world's 7,000 - 10,000 microlenders can cover their own operating and financial costs unaided.

In many poor countries, however, disease makes this difficult. In Africa, AIDS often causes borrowers to default, either because they are too ill to work, or because their family's medical bills have soared. A survey of micro-borrowers in 14 African countries found that 95% had trouble paying medical bills, 77% had trouble paying for funerals and half had difficulties finding money to look after orphans, usually the children of relations who had died of AIDS.

Microlenders often try to tackle this through education. In Burkina Faso, where diarrohea is a killer, those who want to get their hands on a loan must first learn about washing them. In eastern and southern Africa, many micro-lenders promote condoms.

A more challenging idea is to combine micro-credit with micro-health-insurance. FINCA, a microlender in Uganda, runs a pilot scheme allowing members free treatment for a range of problems at a mission hospital in Kampala, in return for a small quarterly fee. The scheme is popular, but racks up big losses. Before it can be duplicated, FINCA needs to find ways to encourage healthy people to join the scheme, and discourage frivolous visits to the doctor. If micro-insurance can be made to work, the Internet will ensure that the idea is swiftly copied. Globalization is not just for the rich.