Microcredit is attracting more and more private investors, motivated by the desire to create a form of social financing that is useful for micro-entrepreneurs and at the same time profitable. But this enthusiasm for microcredit is not unanimous, and many are questioning its effectiveness in lifting micro-entrepreneurs out of poverty. To its detractors, microcredit is just a highly lucrative financial instrument for investors that contributes significantly to creating overindebtedness on the part of the poorest, who are crushed by excessively high interest rates.

We are students from the EDHEC Business School who are finishing our degrees and are passionate about this subject. We have created Les Routes du Développement (Roads to Development),  a not-for-profit association under the French Law of  1901, to set up micro-loans for Peru and to try to measure the social impact of microcredit by conducting field studies with micro-entrepreneurs.

To carry out this project, we have partnered with several companies including BNP Paribas, and have worked on site with a cooperative of artisans (Central Interregional de Artesanos del Peru) and a Microfinance Institution (Edaprospo), to which we have loaned € 3,000 to finance various micro-enterprise projects. This experience has enabled us to make contact with artisans working in a variety of professions (textile artisans who make hats and clothing from alpaca wool, ceramicists, decorative woodworkers, shoemakers, jewellery makers, street food vendors, etc.) in different regions of Peru, primarily in Puno, Lima and Piura.

We met with the 60 recipients of our loans, who make up our research sample. Among these recipients, this was the first micro-loan for 20 of them, while the remaining 40 had been using micro-loans for 5 years. We observed and attempted to measure the impact of microcredit on the social sphere of the micro-entrepreneurs on 4 levels (individual, family, business and community).

Our surveys and interviews with the micro-entrepreneurs enabled us to draw some conclusions.

The loans, which are primarily used for purchasing raw materials, often make it possible for the borrowers to overcome barriers associated with start-up costs, payment delays and the irregularity of orders. While it appears that in most cases microcredit has undeniably accelerated the development of the borrower’s business, the social impact at the individual (self-esteem, savings, etc.) or family level (household income, food, health, etc.) is not always proven. The limited and highly variable level of income makes it impossible to save. One could reasonably expect that micro-loans, by accelerating the development of the business, would generate a surplus of income that would be used to improve living standards, cover school fees, improve health or food and could create a small savings fund for emergencies… Unfortunately, this virtuous circle of development does not appear to exist, for two main reasons: the low amount of the loans, and the lack of financial education of the micro-entrepreneurs.

The loan amount is too low, even after several years, to hope for significant business growth. Micro-entrepreneurs, disappointed in the amount of money they receive, settle for simply buying their raw materials, manufacturing and selling their products and repaying their loan with interest, only to find themselves more or less back where they started. This can create a tendency to take out loans one after the other, without there being any genuine, observable growth in the business.
The other major problem is that a banking service is being provided to individuals who have no money management skills: no expectation of future repayments, poor management of income, no knowledge of operating costs, no understanding of the principle of interest rates, and so on. Borrowers are, of course, aware of the cost of borrowing, but they have no understanding of what this represents and, often, what its actual value is.
Rather than lower the level of interest rates (3.5% monthly for our sample), it seems more appropriate to us for MFIs to invest time and money in providing training in basic accounting and management to the micro-entrepreneurs.

When one addresses the difficulties associated with a loan, the word “sacrifice” often comes up. A loan and its repayment demands sacrifices from the artisans in terms of cost management and use of income. On the other hand, micro-entrepreneurs working together have often developed a strong sense of solidarity. Beyond the fact that solidarity is a “contractual” pillar of the association, solidarity becomes an almost natural growth vector. This solidarity is seen not only in the event of a default in repayments by a member of the group but also in case of illness, problems with children, etc.

Thus among the potters of Puno, it’s not uncommon to see them go to fire their objects in each others’ kilns if their own is in worse condition than their neighbour’s.

The aim of the Les Routes du Développement association is now to continue, with the support of BNP Paribas and its other partners, in its study of the social impact of microcredit, in particular by including new borrowers in our sample and thereby identifying the key levers for ensuring social improvement through microcredit.