Global Policy Forum

By Tim Weiner

Guadalupe Castillo Ureña was widowed at 31, left alone with five children when her husband died trying to get to the United States from their hut here in the foothills of Mexico's southern Sierras. She was among the poorest of the poor — scraping by, like half the people in Mexico, and half the world's six billion people, on $2 a day or less, barely surviving.

Then an organization called Finca came to the village. It asked the women there — and only the women — whether they would be interested in borrowing a little money, at the stiff interest rate of 6 percent a month, to start their own businesses.

Change came. With a loan of about $250, Ms. Ureña, now 35, started making hundreds of clay pots this winter. With Finca's help, they were sold in bulk to a wholesaler, who sells them in the city. She pocketed $15 to $20 a week in profit. That sum, the first real money she had ever earned, was enough to help feed her children and pay their school expenses.

"It's exhausting," she said, "kneading the mud, stoking the kiln. But it's something. An opportunity."

These small loans, known as microcredit or microfinance, are not a charity. They are a growing business that is producing wealth in some of the world's poorest countries. Experience has taught the lenders to make nearly all their loans — 95 percent or more — to women, and preferably those like Ms. Ureña who are single mothers.

"Why only women?" said Alejandra Ayala, 36, a participant from this village 100 miles southeast of Mexico City. "Everyone knows women have the capacity to do this. Running a family, running a business, what's the difference?"

Carlos Labarte, director general of Compartamos, a larger group loaning to the poor in Mexico, had his own answer: "The men are not here. They've gone to the United States. Or maybe they're just gone. Or they've died. This is not philosophy. This is reality."

In Mexico alone, companies making these loans are reaching hundreds of thousands of women and children. Those women borrowed and repaid tens of millions of dollars in the last two years. Their default rate on these loans averages 2 percent, considered unusually low in the developed world.

The sums loaned are tiny by most standards, a few hundred dollars in most cases. But they represent a chance for the poor to acquire a little bit of wealth. The money the loans help generate can ensure that a child can attend school or that her mother can buy medicine.

That counts for something in a world where rich and poor nations are undergoing financial shocks, wealthy donors are suffering from compassion fatigue and governments everywhere have thrown up their hands at the failure of antipoverty programs and development schemes.

In Mexico, the best-run little village lenders have grown into something closely resembling banks. That is something new in Mexico. Commerical banks in this country are for rich people. They almost never serve the middle class or the poor, rarely if ever providing them with savings accounts, much less loans or credit.

"People who have nothing to eat and no table to eat on have no trust in institutions," said Serapio Reyes, who oversees 10,300 Finca clients from Cuatla, a two-hour drive southeast of Mexico City.

"They need an institution like us to have a semblance of an economic or financial life," said Mr. Reyes. "They certainly do not have access to a commercial bank. But they have us. And we are an institution based on trust."

Most of the 32 small loan institutions now operating in Mexico started in the 1990's. For many, seed money came from private American foundations or, in at least one case, the United States Agency for International Development. Many are modeled on the Grameen Bank of Bangladesh, run by an American-educated economist named Muhammad Yunis, which now lends roughly $1.2 billion to 2.4 million poor people, overwhelmingly women.

Thousands of village banks based on Mr. Yunis's model have started around the world. But the most successful of these are now outgrowing their modest beginnings.

Compartamos, which is based in Mexico City and whose name means Let's Share, started making loans in 1990. With 140,000 clients today — 98 percent of them women — it has a loan portfolio of $45 million and a default rate of just over 2 percent. Compartamos may not be Citibank, but it has the potential to offer more poor people more financial services than any commercial bank in Mexico ever has.

"People don't just need credit," said Mr. Labarte, Compartamos's director general. "They need financial services. They need savings accounts. They need insurance, life insurance, education insurance. These are things that no middle-class person, no poor person, has ever had in Mexico."

Like big banks, institutions that make these small loans can be damaged or destroyed by financial crises or by fraud. Finca's Mexico operation had to restart seven years ago, its managers say, after the peso collapsed and one local manager quit unexpectedly.

The established small loan groups like Finca, whose name means farm, and Compartamos have learned some fundamental lessons about what works and what does not work when it comes to fighting poverty.

What works, first of all, is loaning money to women.

"When you walk into a village, you do not consult the mayor and you do not consult the priest," said John Hatch, Finca's executive director. "You ask, `Who is the woman in this community that everyone most respects?' Then you ask that woman, `Would you be willing to convene a meeting at your house?' And at the meeting we start the bank."

The women in San Marcos Acteopan said they reacted with a rainbow of emotions after Finca came to town last year, from fear to fascination. The idea that someone was going to lend them money to start businesses was riveting.

What is also working — and this is very new — goes beyond lending money to providing poor people with the ability to save and invest. This has become possible under a new federal law in Mexico providing a legal architecture and regulations for village banks and small loans.

Those measures help combat the fiscal amateurism that had financially threatened some lending organizations, said Mary O'Keefe, who helped start Finca's operations in Mexico 10 years ago and now works as a consultant to the World Bank.

The breakthrough under Mexico's president, Vicente Fox, she said, "is the realization that poor people are deserving of financial services."

"The trick", she said, "is to create savings. The fact is that poor people can save money."

This fact qualifies as something of a revelation to economists: that given the chance, poor people would put their money into a certificate of deposit, rather than spending it, stashing it under a mattress, or fattening a pig for market.

What does not work in this kind of war on poverty, experience shows, is letting the government run things. When Mr. Fox announced that he was starting a government small-loan program back in December 2000, a week after he took office, Mr. Yunis, the godfather of microcredit, talked him out of it. "Politicians are interested in the votes of the poor," said Mr. Yunis, whose Grameen bank now has three branches in Mexico. "Politicians are not interested in getting the money back."

Mr. Reyes of Finca Mexico said demand for the loans was so great that he anticipated serving 58,000 clients by 2007, up from 10,300 today.

Among those clients is Escolástica Medina, 43, of San Marcos Acteopan, who borrowed the equivalent of $500 from Finca late last year. With the money she bought mud and firewood to make about 1,600 clay pots. She sold them over 15 weeks for about $800, with $110 in interest going back to Finca, an effective annual rate about five times higher than any United States credit card company could legally charge.

She kept about $190 — "a little money for when my children need something — enough for food, for school, for their health." Now, she said, "I feel equal to anyone."

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