In the late 1980s, when Chinese peasants were migrating to the cities in number large enough to alarm the government, Deng Xiao Ping encouraged small towns and villages to start their own enterprises, creating jobs in the countryside so that villagers could stay there. Owned by the local governments, these businesses usually employed fewer than 100 people, making anything from metal pails to silk rugs.

Some of these undertakings were too large to be considered microenterprises, but were far from being big companies. Others employed just a few people. Yet by 1991, they were reportedly contributing about 30 per cent of China's GNP. The number of these countryside enterprises had soared from 1.5 million in 1978 to 25 million in 1997, creating about 120 million new jobs and slowing the migration intocities.

Microenterprises offer an appropriate alternative to the conventional strategy for bringing development to the poor nations - making large loans to governmental organisations and corporate clients for massive infrastructural projects. Such project oriented development is prone to criticism from grassroots activists; who argue that the projects often benefit the contractors, businessmen and the government agencies at the cost of local people.

Larger investments in smaller and local resource-based industries could bring economic and social benefits at far less cost. In recent years, socially-conscious lenders have begun to demonstrate that for people facing economic disaster, the need to feed one's family can be at least as strong as an assurance of reliability as the fear of losing property.

The first major demonstration of this kind of lending came in Bangladesh, a country whose name was virtually synonymous with poverty around 1976. Muhammad Yunus, then a professor of economics at ChittagongUniversity, began an experiment aimed at helping impoverished villagers.

Defying the usual rules, he lent them unsecured money to start up small enterprises such as rice processing, rickshaw driving and weaving. Instead of collateral, the borrowers would form small groups and agree to an understanding of mutual liability - if one defaulted, the others would have to pay. After the first two years, Yunus found he was getting a pay-back rate of 99 per cent. The experiment by then known worldwide as `Grameen Bank', was expanded and became legendary in the development world.

The Grameen prototype was widely watched ; and by the mid-1980s; similar programmes had been established by non-profit aid organisations around the world. A non-governmental organisation called `Prodem' in Latin America, which was hitherto a charity receiving organisation, changed into Bancosol in 1990, and started functioning like a commercial bank, in so far as it does not lose money on its loans and is even able to raise its own fundsby borrowing on commercial financial markets and through the interest collected on past loans.

As it became clear that loans from organisations, such as Bancosol, to small enterprises were getting successfully repaid, more charitable organisations followed suit metamorphosing from grant-dependent bodies into independent financial institutions with no dependence on external aid at all.

In Paraguay, for example, a nonprofit group called the `Foundation for Cooperative Development' has lent $18 million to more than 15,000 microentrepreneurs during the past decade, creating nearly 20,000 jobs. On a single day last year, the Foundation offered $150,000 worth of bonds on the securities exchange to finance a new portfolio of loans to micro-entrepreneurs.

The offering was sold out in just less than 10 minutes. Understanding of what makes micro-lending succeed has improved to the point that the practice may now be on the verge of supporting a substantial portion of the world's smallest business. Nearly threedecades of experience have solidly confirmed the reliability of the high payback rates found by Yunus, which were eventually credited not only to the effectiveness of mutual liability, but to two other techniques he had used ie, externalising credit-check costs, and offering support services to beneficiaries along with the funding.

Externalising credit-checks eliminated what had been considered a serious obstacle to microenterprise lending by conventional banks - the exception that the administrative costs of managing tiny loans could exceed the entire value of the loan. Community development banks found an ingenious solution : making the clients themselves do the legwork. As a result, the loans had remarkably little overhead.

The support services include advice, technical assistance and sometimes even the donated labour or equipment needed to make a venture succeed - all provided both by fellow members of a group and by representatives of the creditor. These services account for much of the success ofmicrocredit - perhaps even more than the loan itself.

With a new proven formula - shared liability, and low overhead and peer support, all contributing to high payback rates - one microcredit institution now states in its promotional literature ; "Collectively these banks are rapidly evolving into a World Bank for the poor."

In addition to reaching the disenfranchised poor of the developing world, these small enterprises offer a growing value to the industralised world.

Many of the inner circles of the United States, for example, emerged from the 1970s scared by riot damage and gutted by extensive middle class flight to the suburbs - leaving the blighted core labeled off limits by conventional banks. Aid to inner cities has been limited largely to such programmes as food distribution, subsidies and welfare, which may be essential, but do not build a long term base for economic well-being or growth. Inner cities may be a fertile ground for microenterprises.

(To be concluded)

The author isa general manager with Oriental Bank of Commerce, New Delhi