Chapter 7 Small Businesses and International Entrepreneurship
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Aregak Micro-Credit Organization in Armenia
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Mariam Yesayan, executive director of Aregak Micro-Credit, crossed Yerevan’s . Republic Square, walked a few steps down Abovyan Street, and turned in at Arami Street, heading
toward her office next to the Georgian Embassy. She reviewed in her mind the events of the last nine years since she had launched Aregak to provide small loans to low-income women in several small villages in Arme nia The loans were designed to assist them in starting up small entrepreneurial ventures. The nongovernmen tal organization (or NGO, the term often used to describe nonprofit organizations internationally) had met all of her expectations, but it was now 2006 and she knew she must decide whether to remain an NGO or apply to the Armenian government to be a licensed and regulated for-profit organization.
Background on Mariam Yesayan
Mariam Yesayan was a native Armenian who grew up in Yerevan, the capital of Armenia. Mariam was well educated, having received her education in the Arme nian public school system as well as attending Yerevan State University where she got a degree in education. She also·studied at the Gorki Institute of World Litera ture in Moscow, and received a degree in journalism. As was required during Soviet times, Mariam started working immediately. At the age of 21, she was well on her way-touching lives in Armenia. That year she began teaching at the Yerevan State University.
It was not until the collapse of the Soviet Union that NGOs started arriving in Armenia. The first two that Mariam worked for were ASDINOCA (Agency for Promoting Sustainable Development Initiatives) and the Save the Children organization. The main purpose of ASDI was to educate and train individuals so that they could make a living for themselves. Save the Children was worldwide, and Mariam worked for them in many different areas of Armenia. The organi zation strived to create short-term employment for families with the help of community involvement.
After ten years of working for’ the same NGO, Mariam felt she needed a radical change in her career. She yearned for more practical work and
more benefits for her family, so she began the search for a position that would help her meet those needs. Her quest ultimately led to her changing jobs every two years until she found one to her satisfaction. The jobs she had all dealt with U.S./AID programs and community development. Along the way, Mariam worked with companies like the World Bank and UMCOR (United Methodist Committee on Relief), which was the parent of the organization that she would later initiate.
Aregak Micro-Credit Organization
In 1996, Mariam Yesayan began working for UMCOR in Armenia. By the fall of 1997, she had established the Aregak Micro-Credit Organization to provide small loans to economically challenged women in three small villages north of Yerevan.
Her rationale in beginning this program was to supplant the aid programs that came into Armenia after the collapse of communism, which had become permanent t-1-andouts. Many of these pro grams, Mariam believed, made the people depen dent in the long term, and psychologically vulnerable . She believed that it was important to the self-worth of individual women to be empowered to become self-sustaining.
Armenians at this time were very depressed because of the earthquake of 1988 that killed 28,000 people and left many more homeless; by the embargo by Turkey and Azerbaijan, which stopped the flow of all oil and gas supplies into the country; and by the unemployment rate, which had reached 80 percent shortly after the fall of commu nism.1 After the earthquake, there was no electricity throughout the country for a long period of time, leav ing the people in darkness and heightening their sense of being cut off from the rest of the world.
In her earlier work with the United Nations, Mar iam had done research on sustainable projects to support vulnerable population groups, and this was her first acquaintance with microfinance programs. Bank loans at this time were neither accessible nor affordable.
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The Process for Developing Clients Mariam began the organization by applying for loans from UMCOR to fund small loans to prospect ive women entrepreneurs. She got three people to help her, and they all drove up to three small villages north of Yerevan. To make the women feel comfortable, they wore some of their oldest clothes and began conversations with the women to try to change their attitude about being dependent on other people or aid agencies.
They found that the best way to meet large groups of women in these villages was to show·up at some one’s business or home who had a television set and had women crowded around it, watching Brazilian or American soap operas such as Santa Barbara. In these places, they knew they had a captive audience. The psychological work with clients at this stage of development was important because the people faced depression about the high unemploym nt rate in the country, and they believed there was no longer light at the end of the tunnel-unless it was a train barreling toward them. The large Armenian eyes all looked vacant and without hope. Mariam and her coworkers began to talk to the women about developing small, sustainable businesses with the money Aregak would lend them. They were attempting to promote self-confidence and a belief in personalsuccess among the women. Mariam would say to the women, “We can create opportunities together.” Soon the women began to believe and filled
out the papers to apply for a loan.
When the women began to ask about what they would have to put up as collateral for the loan, Mariam replied that they would not need collateral; their own good name and character would be the only collateral they needed. One client said to Mariam, “If I use my car as collateral for a bank loan and I can’t pay the loan back, Imay lose my car, but I can do without it for a while and finally get another one. But if I lose my good character by not paying back the Aregak loan, I can never get that back.” The loans were negotiated at an interest rate between 20 and 25 percent, which was consistent with bank loan rates at the time.
Outcome of the Program Mariam could hardly wait for a month to pass until the time arrived for her and her coworkers to return to the villages where they had given loans to the women to collect the portion of the principal and interest that was due. She wondered
how many would be there to pay on their loans, so she arrived two hours early and waited. To her great joy, all of the women who had received loans came on time to repay that month’s portion. Mariam would later
discover that the default on the Aregak loans was only 2 percent over the entire nine years of operation. This
was encouraging because the people to whom Are gak had made loans did not have to pledge any col lateral for their credit.
Soon Aregak began offering assistance with business planning and credit consulting, which were programs that Armenian banks could not offer at that time. By 2006, the number of employees at Aregak had increased to 180; there were 27 service centers in Armenia and Nagorno Karabakh (a piece of Armenia cut off in Ajerbai jan); Aregak had developed over 21,000 clients (mostly but not exclusively women), they had over $9 million in their outstanding portfolio of loans, over 450 communi ties were being served, and approximately 35 scholar ships of $350 each were being offered to talented children of the entrepreneurs they had funded.
Alternative Sources of Financing in Armenia
In the early 1990s in Armenia, there was a crisis in the banking sector. Tuis was shortly after the time that the state bank had been abolished and private commercial banks were being established. The newly privatized banking sector was still underdeveloped and fragile. Because many citizens had been financially hurt by the failure of the Soviet banking system and a later currency collapse, they were mistrustful of all lending institutions. In addition, many of the private citizens who established commercial banks did not know how to give loans, and the people did not know how to apply for them.
Only in the late 1990s did banks start to operate independently and give loans, but they were still charging very high interest rates. In the late 1990s, banks were charging 40 percent interest per year. By early 2003, the rate had dropped to 24 percent, and then by October of 2003 it had finally dropped to 20 percent per year.
In addition to high interest rates, individuals and companies who applied for bank loans were required to secure the loans with collateral. They might have to pledge their house or car to secure the financing for their business. This meant that they could lose these valuable assets if they defaulted on their loans. It was very difficult for an Armenian man to get a bank loan at this time, and it was almost impos sible for a woman who possessed few assets.
By 2003, more than half of the private capital of Armenian banks belonged to foreign investors, and this percentage continued to increase. This trend indi cated that the Union of Armenian Banks was becom ing a regional financial center. Armenian financial legislation also assisted in the process by no longer
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hindering CJ.mency circulation inside and outside the country, and there was no limitation on the free sale of currency. The downside was that domestic as well as foreign money was going abroad because it was diffi cult to make investments in such a risky country as Armenia had become.
The Microfinance Industry
Microfinance is said to have evolved as an economic development approach intended to benefit low income women and men. Included in microfinance are both financial and social improvements. Many industries provide education in financial literacy to their clients, training and investing in client confidence development, and teaching on entrepreneurship and management techniques. Thus “microfinance is not simply banking, it is a development tool.” 2
Although the exact number of microfinance institu tions remains a mystery, researchers are able to conclude that the number of such institutions in the early years of the twenty-first century was in the thousands, if not mil lions. In 2005, there were more than 600,000 institutions in Indonesia alone.3 The Microcredit Summit Campaign (MCS) annually published a collection of data, providing an analysis on the current position of the microfinance fight against poverty. According to the Microcredit Sum mit Campaign Report of 2005, 3,164 microcredit institu tions were reported to be serving over 92 million clients, the majority of which lived in Asia. Of those 92 million, nearly 67 million were among the world’s poorest popu lations when they took their first loan. The poorest popu lation was defined by the MCS as “those who are in the bottom half of those living below their nation’s poverty line, or any of the 1.2 billion [people] who live on less than US$1 a day adjusted for purchasing power parity (PpP).”4 As of 2004, it was estimated that approximately 333 million people were indirectly affected by the micro finance loans made to some of the world’s poorest popu lations, a number equivalent to the combined populations of Norway, the United Kingdom, Switzerland, the Nether
lands, Spain, France, Germany, and ltaly.5 Some of the
largest and most developed microfinance programs included the Grameen Bank, ACCION, FINCA, Oppor tunity International, and PreCredit.6
The Consultative Group to Assist the Poor (CGAP), a donor consortium connected with the World Bank, said that in 2004 large development aid agencies promised about $1 billion to the micro finance industry. Additionally, many large amounts were provided by private donors. Other costs, such as technical support, were generally sought after at
low or even zero cost ( The Economist, November 2005).7 Typically, donors focused their support on microfinance institutions with goals to achieve finan
cial sustainability and strong outreach. The industry began in the 1980s and has grown significantly in revenue, market share, and client population.
Remaining steady amid industry changes, however, clients continued to invest newly acquired funds and previously established talents into new trades. Clients could be found in both rural and urban areas, in both developed and developing countries. Generally, clients were self-employed, with work ranging from farming to cutting hair, repairing shoes to sewing handbags, street vending to craft making. Seeking to avoid gov ernment regulations and stipulations, many microfi nance institutions have remained self-regulated, nonprofit organizations in an effort to remain versatile. Their mission has been to show seemingly hopeless people that someone believed in them. For Mariam Yesayan and Aregak, this mission had been the source of motivation for service to their clients-far beyond profit or recognition. Often it was this simple confi dence lenders received that made them successful in doing something for which they had great talent. How ever, many struggling institutions have been forced to seek funding from the government, despite the fact that this put them at risk of being regulated. This was one of the difficult decisions Aregak faced.
Industry Servic: Women and Men More than
66 million people among the world’s poorest have been served by a microfinance institution. Of those, nearly 56 million were women-a total of 83.5 percent. Microcredit programs have generally marketed their services to female entrepreneurs. One reason for this has been that men in developing countries, or even developed countries, have been more likely to find employment without third-party assistance. Some
organizations, such as Pro Mujer, are solely “dedicated to women’s development through provision of credit.” 8 However, many institutions have also offered loans and
financial assistance to men, even in developed nations such as the United States.
NGOs and For-Profit Operations Many nongov ernmental organizations (NGO) specializing in micro finance have been faced with a major decision: to seek government funding and be subject to its regulations or to forego state assistance and remain self regulating. Some organizations have remained non profit, while others have chosen to become for-profit entities. In some cases, a nation’s government has required all microfinance institutions in that country to become regulated for-profit entities. In nations
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where this is not a requirement (such as Armenia), organizations have still chosen to exchange their non governmental status for any or several reasons. The first such reason was the opportunity to mobilize sav ings. Most unregulated nongovernmental micro finance institutions around the world and in the United States have been unable to collect savings in order to prevent consumers from fraudulent activity. Second, most regulated microcredit programs have been able to tap into formal capital markets, including commer cial banks and global investment funds, which nor mally would not contribute to unregulated or · nongovernmental microcredit institutions. Finally,sub mitting to the government’s operational regulations supported governmental efforts to prevent scamming and poorly practiced programs from developing.
Government restrictions against NGOs typically included, but were not limited to, laws against non
profits conducting financial transactions or a require ment for all money lending 1agencies to be state
owned. The controlling officials have indirectly cho sen to change ‘the mission of the organization from a service-oriented enterprise into a for-profit firm. Whether an organization became government regu lated or not determined the path of the organization. Microfinance in Developed Countries versus Developing Countries Microfinance institutions’ mar ket in developed nations has been fairly substantial. The Microcredit Summit Report 2005 stated that 3,044 microcredit programs reported doing work in the developing world, serving a total of more than 92 million clients. The 120 institutions that reported work in the ind!Jstrialized, developed world claimed to reach almost 233,000 people. Armenia fell into the “Europe and NIS (Newly Independent States)” cate gory, which was said to have 72 programs at work. According to Microcredit Summit Campaign Report 2005 statistics, approximately 3.5 million of the world’s poorest families lived within Europe and the Newly Independent States, yet only 60,000 of these families were reached by microcredit projects. In other words, as of 2005, only 1.7 percent of the poorest families living in Europe and the Newly Independent States, including Armenia, had been reached by established
microfinance institutions.9 According to Mariam
Yesayan, Aregak controlled about half of Armenia’s microfinance market, reaching about 10,000 clients.
The Decision
Mariam Yesayan walked past the Georgian Embassy next to her office and entered Aregak’s headquarters
at 42 Arami Street. She waved to the person sitting at the reception desk on the right and then began climb ing the stairs on the left to the third floor. After reaching her office, she put the materials she had worked on at home down on her desk and sat in her desk chair. She immediately continued the thoughts she had begun while walking across Republic Square. She knew she must decide soon whether to let Aregak retain the sta tus it had held as a nonprofit organization for the past nine years, or file papers to let it become a for-profit organization regulated by the government. She knew the decision was important because it would shape the strategy of the organization in the future.
C A S E D I S C U S S I O N Q U E S T I O N S
1. Summarize the process Mariam Yesayan used in approaching women about loan opportunities through Aregak.
2. Compare opportunities for funding for women entrepreneurs through the commercial banking system in Armenia with funding opportunities avail able to them through the Aregak program in the late 1990s.
3. Explain the reason for a default rate on loans of only 2 percent with Aregak in spite of the fact that the loans were not collaterized.
4. Discuss the importance of microfinance programs in the progress of developing nations.
5. In what way might Mariam Yesayan be considered a “social entrepreneur”?
6. Debate the issue of whether Mariam Yesayan should take steps to license Aregak as a nonprofit organization in Armenia, which would bring with it regulation by the government, or remain an NGO (nongovernmental organization) as it had been originally structured.
C A S E N O T E S
1 Benedetto, Joe. 2002. “Where will the jobs be?’ Design Engineer ing, April, 48(3): 14.
2Ledgerwood, J. 1999. Microfinance Handbook: An Institutional and Financial Perspective. Washington, D.C.: World Bank.
3Daley-Harris, S. (2005). Microcredit Summit Campaign Report 2005. http://www.microcreditsummit.org.
41bid. 51bid.
6Economist. 2005. ‘The hidden wealth of the poor: A survey of microfinance,’ and ‘From Charity to Business.’
71bid.
8Pro Mujer. http://www.promujer.org.
9Daley-Harris.
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