Entrepreneurship is not easy anywhere in the world. An entrepreneur is called upon to use their own finances—or a loan which has to be paid back—to start something that may ultimately fail. The risk involved is the reason that so many potential entrepreneurs choose to end their business before it even begins.
In economies where free enterprise is limited by low start-up capital and high interest rates for bank loans, dreams of running a business have no chance at seeing fruition.
However, for the brave and industrious, the pursuit of business is still a possibility. This is extremely evident in the case of micro-entrepreneurship.
Micro-entrepreneurship is what we see happening all over Ethiopia in small and big ways. From the elderly woman selling vegetables on the side of the road to the young man shining shoes, these small means of earning an income have the power to create big change when utilized to their fullest potential.
So how can we encourage these practices to have a more successful output? What education needs to occur to maximize the benefits to these entrepreneurs?
One of the primary tools currently under study by developmental economists are the means of savings and micro-finance groups.
A savings cooperative can be formed when a group of people come together to pool their finances, with each member contributing as low as 40 birr per month. This model can take on many forms and the group can decide how many people are allowed in the coop, how often each person is allowed to take from the savings, and whether or not the savings will be used as a small loan, which has to be paid with or without interest, or if the amount is given in turns to each member of the group.
What happens with a micro-finance cooperative is that when each member has their opportunity to take the money that has been saved, they use it specifically to invest in a business start-up or the growth of an existing enterprise.
Micro-finance opportunities have been met with incredible rates of payback. As the loans in these coops are typically required to be repaid in order for the next member of the group to launch their business, community members hold one another accountable.
Studies of micro-finance cooperatives and loan repayment have reported a success rate of roughly 99% according to Grameen Bank and as low as 85% according to the Poverty Action Lab. Additionally, repayment by women is consistently even higher than repayment by men.
Again, these success rates are typically due to social pressures and community-based accountability. As these groups are built around relationship, members help one another to succeed in their business and the entrepreneur feels a stronger desire to honor the commitment to a community loan as opposed to a bank loan.
An important aspect of all of this is simply ensuring that communities have the awareness of these opportunities.
As one of the primary benefits of community-based micro-finance is that it can be completely self-contained, there is no need for any sort of foreign intervention or nongovernmental organization to be involved. However, it is important for local education to be engaged and to talk about these initiatives.
Hearing about different models of micro-finance and how it can benefit micro-entrepreneurship means governing authorities have to talk about strategies. They have to spread the information, provide guides in local languages, and enable schools and religious communities opportunities to come together and discuss how to make it happen.
Terefech*, a single mother living around Kore was given a loan of 500 birr through her church community to start a business creating beautiful women’s accessories from trash. She used the loan to invest in materials to add beauty to the products and was able to make enough stock to begin selling. As people began to see the quality of her work, she quickly sold through her stock and repaid the loan.
Upon repayment of the loan, she was given 1000 birr to expand, which she did quite successfully, rapidly repaying the second loan.
The best part of her story, however, is not simply her own success. It is the fact that she used her skill to train other women, helping them get started in their own accessory making businesses.
This woman has not only changed her own economic situation, she has enabled others to do the same. And just as Terefech made all this happen from a loan of 500 birr, so Abera* used his loan for a business to sew clothing and has trained young men to do the same.
Micro-entrepreneurs have to use ingenuity and creativity to make their businesses happen. And while it is, perhaps, more difficult for them than for many, success stories abound for those who are pursuing these options.
Through community empowerment and business-friendly government policies, we can see men and women changing their communities and transforming their lives from destitution to economic prosperity.
*Names and minor details changed for privacy