In a country like India, where over half the population scratches out a living in a manner that could be called ‘self-employed’, access to loans was going to be the magic bullet that was going to catapult them to greater economic gain. Microfinance for microentrepreneurs. Never mind that in the end most who borrowed never spent the money on a real business. What about those who did?
In any other realm of entrepreneurship, investors and lenders do extensive due diligence on past financial records and make laboured assessments of business plans and management teams. In the case of the microentrepreneur, every transaction is in cash, accounts are rarely recorded and there is hardly any reliable evidence available of their past success or data with which to assess their future potential. Furthermore, most ‘microenterprises’ are not profitable when you factor in the cost of their own labour and, therefore, rarely grow beyond the subsistence context. So how can we possibly know who is poised to succeed and how to facilitate that success?
Many of the more development-focused microfinance programs internationally and in India have focused on two things: skills training and financial literacy. Teach people tailoring and how to keep their accounts and then with a loan the job should be done. That should put them squarely on a path to success. Indeed, a skill can be useful and keeping track of money important. In our own research at Madura Microfinance, we have found that financial and numerical literacy are extremely low. Hardly 15 percent of microentrepreneurs could correctly do percentage calculations even with a calculator and less than a third could subtract a larger number from a smaller number. And that was despite having been to school up to 10th standard or even beyond.
The right place
However shocking this was, none of these factors—the skills, the financial literacy or even the loan—appear to be the key drivers of success. These factors can be useful catalysts but microenterprise success derives from other things. The most profound influences of success are ecosystem or location and mobility. When you consider that most of India’s subsistence microentrepreneurs are rural, this is very easy to understand. If you live in a small village and are not willing to leave it very often, or don’t have the means to do so, no amount of training in tailoring or account keeping can help you. Those who have made the journey out of the subsistence context to the next level of enterprise are those who have been in the right place or have been focused on seeking out new markets. The same person with a shop in a high traffic urban area with far less financial literacy, skill and financing support will far outperform the highly trained rural entrepreneur who is afraid to leave his village.