Transformation Lending: Helping Microenterprises Become Small Businesses

This paper reviews five lending institutions that provide loans and training to support microenterprise transformation, analyzing their program design, lending methodology, financial performance and impact.

It summarizes the key lessons learned:

• Microenterprise lending programmes can serve the needs of transforming enterprises in a financially viable way;
• Successful transformation lending programmes have characteristics in common with successful providers of credit, such as simple procedures and good information systems;
• Successful programmes have developed lending methodologies or policies that differ from programmes that provide only short-term capital;
• Although methodologies for lending to expanding firms differ from those for lending to transforming firms, the same institution can still serve both sectors;
• Transformation lending programmes have developed two different methods for identifying microenterprises that can successfully undergo transformation;
• Targeted training programmes may support microenterprise transformation but they are not necessary parts of successful transformation lending;
• Lending institutions can support microenterprise transformation and still reach a large number of beneficiaries at low cost;
• Preliminary evidence shows that transformation lending programmes do support growth in assets, employment, and productivity of microenterprises, helping them to transform into small businesses .

[Author's abstract]