Modernising Micro-Financing to develop Entrepreneurship in Western Sydney and Rural NSW

by Hugh McDermott

As a progressive social democratic party, NSW Labor needs to find innovative ways to assist the urban and rural poor to make the break from long term and inter-generational poverty.  Effective and well designed micro-financing projects have successfully enabled impoverished people to engage in self-employment projects that allow them to generate an income and, in many cases, begin to build wealth and exit poverty. A modernised model of micro-financing will assist the poor in urban and rural NSW break the poverty cycle.

Micro-Financing is the extension of small loans to those in poverty and is designed to spur entrepreneurship. Individuals with a history of long term unemployment or inter-generational poverty lack collateral, steady employment and a verifiable credit history and therefore cannot meet even the most minimal qualifications to gain access to traditional credit. Microcredit emphasises trust building, which can enable micro-entrepreneurship, so generating employment  and helping people to help themselves during enterprise initiation and during difficult times.

Microcredit programs have the potential to transform power relationships and empower the poor —both men and women — improving the standard of living by raising awareness, aiding decision making, and reducing poverty among beneficiaries. Evidence demonstrates a positive impact on enterprise and household income and asset accumulation, household consumption, and positive influence on social welfare indicators (education, expenditure on health and nutrition).

This concept of micro-lending is usually thought of as being only useful in developing nations.  However microcredit projects have been effective in the US, where 37 million people (12.6%) live below the poverty line.Due to the increasing rates of success of micro-finance recipients, a number of significant US banks have recently announced plans to award multi-million dollar grants to nonprofits to use in backing microloan programs.Also a number of non-banking organisations have been able to provide US$117 million in microloans, with an over 90% repayment rate. Other developed countries in which the micro-loan model has gained impetus include Israel, Russia, and the Ukraine.

However, there are lessons that can be learned from examples where micro-financing has failed in developed countries, for example, in Canada, rural Nova Scotia and urban Toronto and Vancouver. These failed for a variety of factors—including difficulties in reaching the target market, the high risk profile of clients, their general distaste for the joint liability requirement, and high overhead costs—made micro-finance lending unviable without subsidies.However, debates have continued about whether the required subsidies may be justified as an alternative to other subsidies targeted to the entrepreneurial poor.

In NSW we seriously need to consider introducing a modernised model of micro-financing to assist in providing a platform for entrepreneurship among low-income earners.  We need to develop an integrated package of services (‘a credit-plus’ approach) rather than just handing out money. When access to credit is combined with other services, such as additional financial services (voluntary savings facilities, non-productive loan facilities, insurance), enterprise development (production-oriented and management training, marketing support) and welfare-related services (literacy and health services, gender and social awareness training) we provide a real alternative for those Australians attempting to break with the cycle of poverty.

6 Examples of Successful Micro-financed Businesses in Developed Nations

One micro-credit recipient established a leaflet distribution service for businesses. The main cost of distribution is time and some travel to the target area if you can’t walk there. It was possible to deliver between 200 and 400 leaflets per hour depending upon the area.  The recipient ran this business by themselves until they made a certain level of profit and then scaled it up by employing other people to do the deliveries and then concentrating efforts on sales and marketing of the service.

Another recipient started a dog walking business. The main costs were advertising and marketing, plus the time it takes to deliver the advertising. The recipient also contacted local kennels as they required regular dog walkers or cover for when theirs were unavailable. The other expense was insurance cover for the dogs in the care of the dog walking business. Once the business was established and profitable the recipient hired extra walkers in order to expand the business.

A part time, home based catering business was another recipient’s idea and targeted the market of corporate lunches, children’s parties, etc. In time, as the business became more successful she targeted larger functions such as weddings and corporate functions. The recipient has to consider and implement public liability insurance, food hygiene training and inspection. She gained assistance and advice from the relevant heath authorities in regard to these issues.

Another recipient established a handyman business. To start the business he needed  two things – a good range of proper tools and a good basic level of skill at most DIY tasks.  He then placed fairly general advert in the local papers, and dropped leaflets to homes.  Once his business was established and he receive his first projects, he found that success continued due to word of mouth from customers.  In time he specialised in decking projects and could charge a premium for his service.

A micro-loan recipient with computer skills established a business working as a “virtual assistant”. That is essentially an administrative assistant who works over the internet. She ran her business remotely from her home for a number of clients. She offered services ranging from word processing and transcribing to a virtual receptionist and call centre and acted as a research assistant. The main expense was a computer, office software, an Internet connection, and a phone line.

Another recipient had studied cosmetology for two years during high school but did not finish because at age 17 she married and began to raise her child. After four years of marriage her husband died and she was left attempting to juggle raising a child and working in low paid jobs.  A micro-loan provided enough money for her to finish her studies and establish a Beauty Salon. The business is home based so she can look after her child with the majority of customers local women and referrals.

More examples can be seen at: