: THE ROLE OF MICROENTERPRISE DEVELOPMENT IN POVERTY

THE SOUTHERN NEW HAMPSHIRE UNIVERSITY
SCHOOL OF COMMUNITY ECONOMIC DEVELOPMENT.
ICD 533: PRINCIPLES AND PRACTICES OF DEVELOPMENT.
CENTER : ARUSHA
RESEARCH QUESTION ASSIGNMENT ONE.

TITTLE: THE ROLE OF MICROENTERPRISE DEVELOPMENT IN POVERTY
ALLEVIATION IN LOW INCOME COMMUNITIES.
STUDENT’S NAME: JOSEPH CLEMENCE
Address
Box. 154 Mombo.
Phone: 0713045264.
TABLE OF CONTENTS

1.0 INTRODUCTION 3
2.0 DISCUSSION 3
2.1 Theoretical literature review. 3
2.1.1 Definition of poverty. 3
2.1.2 The Magnitude and level of Poverty in Developing World. 4
2.1.3. Low income communities. 5
2.1.4. Micro Enterprise Development. 5
2.1.5. Core issues to observe in designing Micro and Small Enterprises. 5
2.1.6. Best ways for lending Micro- loans for running enterprises to poor people. 7
2.1.6. 1.Loans should be provided to individuals through self selected small groups. 7
2.1.6.2. Availability of future larger loans is conditional on timely repayment of current loans. 7
2.1.6.3. Interests are charged to cover costs of operation and ensure the program’s sustainability. 8
2.1.6.4. Compulsory savings 8
2.1.6.5.The focus is on the customer needs. 9
2.1. 7.The Role of MED in Poverty Alleviation. 9
2.1. 8. Constraints of MED in low income communities. 11
3.0. EMPIRICAL LITERATURE REVIEW. 11
4.0. POLICY REVIEW. 13
5.0 CONCLUSION 14
REFERENCES 15

1.0 INTRODUCTION
The paper discusses the issue of micro enterprises; it shows the role micro enterprises play in poverty alleviation in low income communities. It discusses the meaning of poverty, the magnitude/level of poverty in low income communities and clarifies what I mean when I say low income communities. In Exposing the theme the paper further discusses core issues to observe in designing micro and small enterprises, best ways for lending micro loans for enterprises to poor people, the role of MED in Poverty alleviation and constraints of MED in low income communities. The topics are organised under Theoretical review, Empirical review and Policy review. The paper is concluded by summarising the major issues discussed in the topic as well as showing opportunities for the growth of Micro Enterprises in low income communities including Tanzania.

2.0 DISCUSSION
2.1 Theoretical literature review.
2.1.1 Definition of poverty.
Poverty is defined as a state of being poor; state of being inferior, poor quality. The quality or state of being poor or indigent; want or scarcity of means of subsistence; indigence; need. Any deficiency of elements or resources that are needed or desired, or that constitute richness; as, poverty of soil; poverty of the blood; poverty of ideas .
As clarified in Wikipedia free Encyclopedia, Poverty is being without things, having little money, not material possessions and in need of essential goods. Poverty is understood in many senses, the main understanding of the term include description of material need, typically including the necessities of daily living ( food, clothing, shelter and health care). Poverty in this sense may be understood as a condition in which person or community is deprived of, and or lacks the essentials for a minimum standard of well being and life. These essentials may be material resources such as food, safe drinking water, and shelter, or they may be social resource such as access to information, education, health care, social status, political power or the opportunity to develop meaningful connections with other people in society.
2.1.2 The Magnitude and level of Poverty in Developing World.
More than one billion people in the world live by less than one dollar a day. Another 2.7 billion struggle to survive on less than two dollars per day. “About 47% of rural households are still using unprotected sources of drinking water in Tanzania. Long distances to sources of drinking water in rural area entail heavy workload on women and children” About 28.6% of Tanzanians cannot read and write in any language. There is more illiteracy among women [36%] than men [20.4%]. This is due to large gender disparities in enrollment in secondary and tertiary levels. The vulnerability of girls to cultural belief and customs, early pregnancies and sexual abuse remain challenges to enrolment and completion of schooling”. Many poor people, children and women in particular, die without ever accessing a health facility, whereas eight out of ten children die at home and six of them without any contact with formal health services. The prevalence of income poverty is still high in Tanzania. According to the household budget survey of 2000/1 the proportion of the population below the national food poverty line is 18.7% and that below the national basic needs poverty line is 35.7%. Currently, Tanzania has not been able to suffice her food security; this is because of low level technology used, depending on rain fed agriculture and inadequate implementation of different agricultural development programs. Most of Tanzania citizens are in abject /extreme poverty level .
Poverty in developing world however goes far beyond income poverty.It means having to walk more than one mile every day simply to collect water and firewood, it means suffering diseases that were eradicated from rich countries decades ago. Every year eleven million children die most under the age of five and more than six million from completely preventable of like malaria, diarrhoea and pneumonia

2.1.3. Low income communities.
These are communities found in developing countries or third world countries. The countries include Africa South of Sahara, Asia and Latin America. They poor countries and fall under the poverty line category, living between one and two dollars a day.

2.1.4. Micro Enterprise Development.
Micro Enterprise Development (MED) includes a wide array of programs designed to facilitate business start ups and growth. MED programmes always often involve educating in entrepreneurship and business management principles as well as provision of consulting or advisory services. Some MED may also assist in providing for the new business although micro lending is generally regarded to as a separate service and even those organisations that offer both services tend to separate them. MED is directed at encouraging the inception of very small businesses most of which have only one owner/employee. Small enterprises are the ones employing 10 to 49 employees while Micro enterprises are those with 1 to 9 employees.

2.1.5. Core issues to observe in designing Micro and Small Enterprises.
The policy and institutional environment. A countries legal frame work, current business practices, Government policies such as tax breaks or seed grants for Micro Small Enterprises (MSE), bureaucratic and administrative procedures, may all act either to encourage or impede MSE development . Another factor is the availability and strength of local financial services. Commercial banks, microfinance institutions, micro leasing companies and also non financial services providers such as business counselling must be adequate to support the MSE growth. The business opportunities and evolving demand in the area, This involve the Agriculture related (agro processing, input selling, food trade) and non agricultural MSE opportunities (carpentry, metal working, transport, shops, handcraft, other amenities) should be present together with government commitment to an identified target clientele. There should also be general indications that financial returns from typical MSE are attractive to this clientele. The institutional Mechanism for MSE promotion. Support needs of potential MSE entrepreneurs require identification. Business development services such as entrepreneurship training, management and planning advice and improved market information and access are likely to be needed. Assistance in making loan application and advice on dealing with financing agencies will be required. Micro and small enterprise unit may need setting up if institutional mechanisms are inadequate. Such units may incorporate teams of rural business advisors (RBAs) to strengthen links between MSEs, producers or producer organisations, other market intermediaries such as traders, processors or transporters and rural or urban businesses. Related infrastructural needs and constraints. Means may have to be found to address non- commercial constraints to MSE growth such as the poor quality of the rural roads needed to link MSEs to markets, inadequate water and electricity supplies and ineffective communication networks .

However the development of micro finance institution is needed to carry on micro loan programs for the effective development of MED in developing countries as most of the people in this area lack initial capitals for running MED. Following this, micro credit operations will also be discussed in this paper. Micro finance is one of the practical development strategies and approaches that should be implemented and supported to attain the bold ambition of reducing world poverty by half by 2015 .

2.1.6. Best ways for lending Micro- loans for running enterprises to poor people.
Micro loan programs should be implemented with care in order to reduce possibilities for loan defaulters. For the successful loan operations the following procedures can be observed.
2.1.6. 1.Loans should be provided to individuals through self selected small groups.
According to Wendy Neill (2005), In the loan groups each member is liable for her own loan but mutually liable for the loan made to all group members. For this reason members are very careful about who they enter into a group with. In effect, the borrowers, not the lender, have primary responsibility for evaluating the credit worthiness of prospective group members. In a conventional loan setting, the borrower submits an application and makes a judgement on the basis of the intended use of the loan funds as well as relevant characteristics of the borrower such as character collateral and cash flow. The group model is an indigenous and critical feature that significantly reduces the cost of credit analysis to the lender. Each member ability to service her loan depends not only on her dependability and trust worthiness, but also on the success of the enterprise being financed. Following this a group members are also interested in the nature of the project and the ability of the group member to complete the project successfully . In his on micro credit to women Chowdhury (2004) found this group method to be very effective in maintaining higher loan repayment rates in Bangladesh. He found this method to be successful and contributing to 95% repayment rate .

2.1.6.2. Availability of future larger loans is conditional on timely repayment of current loans.
First, A group is provided with a small loan and the next loan can be large upon timely repayment of the former one and so on. This system encourages timely loan repayment, the promise of the future loans is critical to ensuring current repayment. Although group members are familiar they cannot be related. Peer pressure is critical to the process, when a member is unable to make timely payment the other members often make them up from their own resources. When borrowers default the relationships generally suffer. If delinquent borrower’s problems are other than temporarily, it is not unusual for the other group members to go to that person’s place of business or home and take inventory or other items to make up the shortfall. This is a good method but it can also create tension to the borrower when failed to pay his loan, and his/her properties seized by fellow group member, this is happening frequently in FINCA Tanzania.

2.1.6.3. Interests are charged to cover costs of operation and ensure the program’s sustainability.
Providing a loan is costly and is arguably appropriate for those who receive the benefits to contribute toward that cost. Even if the costs for conducting a loan program are negligible, inflation will undermine the value of a loan portfolio and threaten its viability.
Micro loan programmes are costly to operate hence the operational costs must be covered from the interests charged. Interest is simply the rental charge for money and that charge is needed to cover operating expenses and compensate for inflation. According to Harns (2007), for micro finance institution to be sustainable among other things they should have to cover their costs from operational income . Wendy (2005) added that, it is not advisable to offer interest free loans to fund income generating enterprises.

2.1.6.4. Compulsory savings
Individual members must participate in a savings programs as conditions for eligibility for loans. Encouraging discipline and savings mentality, this feature enhances the sustainability of loan program and reduces dependency on donor funding. Savings is a valuable service to the poor. Poor do save but they have to overcome a number of obstacles to do so including lack of secure storage places and cultural mores that regard cash as surplus.

2.1.6.5.The focus is on the customer needs.
This is important in order to ensure the real changes in the community. The customer needs vary as to the types of loans made the repayment terms and the ease and speed of obtaining the loan and the convenience of making payment. Most micro loans are made to finance investments in working capital such as inventory or supplies used in production or goods held for resale. As a result most programs are structured to require weekly payments. While a weekly payment scheme might make sense for a merchandising loan or manufacturing it would not be appropriate for an agricultural loan. It is also important to note that it is costly in terms of productivity if the borrower has to devote excessive time to completing a detailed loan application or to program related meetings. Successful programs find ways to take the programmes to the borrower and to make the application process relatively simple and transparent and to make the approval time frame short. Most micro loan programs are the short term loan, defined as one that requires full repayment within one year. This is due to the fact that most loans are used to define investments in working capital. The short term loans reduce the risks of loan portfolio .

2.1. 7.The Role of MED in Poverty Alleviation.

The majority of poor people in the poor communities depend on Agriculture in getting their daily needs. However factors like soil infertility, drought, and sometimes low prices for crop produce cause people to think of getting alternative sources of income for living in addition to Agriculture. Mike Albu and Andrew Scott (2001) argued that Agriculture’s central role in poor people livelihood is changing fast. Social and environmental trends including rural land hunger, declining crop prices, swelling labour forces, migration and urbanisation increases the demand for the alternative employment and off farm livelihood opportunities. Formal employment in large firms ceased to keep pace with this demand for employment, for example in Zimbabwe 700,000 school leavers compete for 40,000 formal sector jobs each year. So every year millions more turn to small informal enterprises to make a living making it a fastest growing area of employment. Between half and three quarters of those who make or supplement their livings from micro enterprises are women. Women entrepreneurs play an important role in local economies and contribute to major sources of income to their families. Micro Enterprises is seen as a source of economic salvation amongst poorer households providing them with a safety net against shocks and stresses. Rural micro enterprises have usually played a supporting role in the house holds economy, with the profits to meet immediately households’ needs .

Chowdhury studies in Bangladesh on Micro enterprises found, their role played in poverty alleviation to be, employing the majority of unemployed people, empower Women, source of income for children schooling, improve households’ nutrition and develop the private sectors which were the source of income for the majority of the poor people .

The role the Micro enterprises played in alleviating poverty in Tanzania has been found to be contributing to one third of GDP, Create employment, are more effective in the utilization of local resources using simple and affordable technology as well as fostering equitable income distribution .

Ssewamala (2006) who studied the role of Microenterprises in alleviating poverty in America argued that, Micro enterprises acts as a beacon of hope to the poor aimed at reducing vulnerability while affording the poor a basis for self empowerment, respect and social dignity. Micro enterprises help to break the vicious cycle of poverty by giving poor persons an opportunity to diversify their incomes and Accumulated assets. He further maintains that Micro enterprises provide self employment and that has potential to foster social relations/networks, civic engagement, community solidarity, social capital and social connectedness all of which may help to combat poverty .

Micro and small enterprises allow the rural poor including some of the most marginalised and vulnerable strata such as rural women, youth and the landless to diversify their income, creating new sources of economic growth and generate additional employment (including self employment) in rural areas. It is with this reason that Micro Enterprises Development becomes important strategy in alleviating poverty in poor communities. It is very relevant to include the development of Micro Enterprises in the National poverty alleviation strategy of the poor countries and in to the millennium development goals at large.

2.1. 8. Constraints of MED in low income communities.
MED in low income communities is constrained by many factors depending on different community set ups and the community level of development. However many researchers summarised some of the major ones as being insufficient capital, low technology ,illiteracy, low managerial skills, poor infrastructures, lack of adequate and timely availability of credit, limited size of the local market, lack of better ware houses or cold storage system, higher interest rates of microfinance institutions, lack of skills and efficient entrepreneurship., wasteful processing as well as natural effects as floods, drought, cyclones and pestilences diminish the production and supply of goods .

3.0. EMPIRICAL LITERATURE REVIEW.

The Impact assessment study of the Rural Financial Services Programme in Mbeya, Dodoma and Kilimanjaro regions found that, The Money invested in agriculture and small businesses has created casual employment opportunities as demand for labour for crop cultivation increases. This was observed to 55% of programme participating households who had received total loans amounts to 12 billion, some other members were acting as middle men by buying crop produce from their fellow members and sell them to wholesale business people and companies outside the community and get their income out of that. The loans provided by RFSP IFAD funded projects stimulates Micro Enterprises and Agriculture in the said Regions and Increased the Income of the benefiaries. It was learnt in this study that Micro loans services are important for the development of Micro enterprises which in turn develop people economically and alleviate poverty .

The case study of SME development programme which included the integrated programme for Women Entrepreneurs in the Food Processing Industry. The programme was designed by SIDO (Small Industries Development Organisation of Tanzania) and UNIDO, and has been jointly implemented by the two organisations under the sponsorship of the Australian Government. The programme was started in 1993 in Arusha, Dar es Salaam, Iringa, Kilimanjaro, Tanga, and Morogoro regions. The programme trained women entrepreneurs and registered them and launched an association, the Tanzania food processors Association of Entrepreneurs (TAFOPA) .The project was designed in line with UNIDOs established policy to promote employment, raise income, through entrepreneurial development which in the long run will address poverty alleviation. The observed results during evaluation in 1998 were, 70% of women trained in technical and managerial courses were in business practicing what they had learnt, and out of 168 enterprises which were in operation, 24% were business expansions and 70% were new ones. 60% of women who were involved in the programme were found to be able to contribute to basic family needs such as food, clothing, payment of medical care and school fees. Furthermore through the program 320 new jobs were created in six regions .

The case study in Mongolia ,UNDP supported a three years Micro finance Programme in Mongolia started in 1998 to 2001, In that project microfinance institution were established to provide loan services to the people for initiating Small and Micro Enterprises (SME). The final evaluation of the project tested the socio economic impact of the project to the people. The standard of living before and after the programme were compared and the result was as follows, of the interviewed people those who responded that their income were not enough to buy basic needs were 10 % before the loans but 2% after the loan schemes, those who felt they could afford to buy consumption items were 32% before the loan scheme but were 41% after loan scheme and those clients who felt they could afford to buy Luxury items were 10% before loan scheme but 24% after loan scheme. The project was found to have raised the standard of living of the clients .

MED is proved to alleviate poverty in low income communities. However the promotion of Micro enters prises has to involve the development of Micro finance institutions as a strategy.
4.0. POLICY REVIEW.
Tanzania developed a policy on small and medium enterprises (SME) of 2002 with the overall objective to foster job creation and income generation through promoting the creating of new small and medium Enterprises and improving the performance and competitiveness of the existing ones to increase their participation and contribution to the country economy. The policy has a mission to stimulate the development and growth of Small and Medium Enterprises activities through improved infrastructure, enhanced service provision and creation of conducive legal and institutional frame work so as to achieve competitiveness. The policy has also a vision to have a vibrant and dynamic small and medium enterprise sector that ensures effective utilisation of available resources to attain accelerated and sustainable growth .

The objectives, mission and vision provides a clear intention of the Government to facilitate the growth of the micro and small enterprises in the country. It is therefore the opportunity for the sector to develop further.

To facilitate the development of Micro finance institutions which are necessary for the development of small and micro enterprises the Government developed a policy for micro finance with the Vision of achieving wide spread access to micro-finance throughout the country, made possible by institutions operating on commercial principles. The policy provides a guide for the involvement of a wide range of institutions in the provision of services, including specialized and non specialised banks, non- bank financial institutions, rural community banks, cooperative banks, SACCOS and NGOs. The development of the Microfinance institution will provide will provide financial intermediation without necessarily relying on injection of external donor or Government funds. The Government considers micro finance system as an integral part of the financial sector that falls within the general framework of its Financial Sector Reform policy Statement of 1991.The Microfinance policy established a basis for the evolution of an efficient and effective micro-finance system in the country that serves the low income segment of the society .

This will again contribute to the development of Small and Micro Enterprises in Tanzania through access for loans and hence contribute to the economic growth and reduction of poverty.

5.0. CONCLUSION
MED is a sustainable strategy for poverty alleviation in low income communities as it creates a self employment and empowerment of poor people in making use of the available resource around them to bring development. Micro finance institutions are vital engines for MED operations as most of the poor people have no initial capitals for running efficient micro businesses. There is a need for every development agency to consider MED as a strategy for increasing house hold income for the poor people to change their lives. MED has opportunities to grow further as it is included in the National Strategy for Growth and Poverty Reduction for Most developing countries and it is also in line with millennium development goals as it is the best means of diversifying sources of income in most low income communities. Furthermore UNIDO- United Nations Industrial Development Organisation provides good opportunities for the development of SME in low income communities. In Tanzania there are great opportunities for the growth of Micro Enterprises as there is a policy formed by the government to provide legal and institutional framework for the development of small and medium enterprises (The National Small and Medium Enter prises Development policy) and The Microfinance development Policy promotes the development of micro finance institutions which provides opportunities for the development of SME. The existence of institutions like Small Industry development (SIDO) ,Community Banks, Cooperative banks , SACCOS and Organisations that are involved with micro enterprises development like FINCA and SEDA provides brilliant chance for the growth of SMEs.

REFERENCES
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