Juliana Hernandez has earned her living for 15 years selling shoes and simple crafts in the market in Masaya. Her business took a turn for the better six years ago when she joined with other market venders and obtained a $25 loan. The group has borrowed repeatedly ever since, and Hernandez now makes weekly payments on a $1,100 loan. Her resulting prosperity has helped her put a roof on her home and buy a refrigerator. 
     Hernandez is part of a "solidarity group" that borrows from CHISPA, a Masaya-based nongovernmental organization (NGO) offering microcredit to those long shunned by traditional banks. Instead of traditional collateral, the five group members agree to back each other's loans. "We have to know each other well, because it's a lot of money they're lending us. With so much silver at stake you don't mess around," Hernandez says. 
     Hernandez's series of loans illustrate the typical targeting of microcredit in urban commercial sectors here. Although such loans can generate lifestyle improvements for their recipients, many observers worry that dramatic changes won't emerge from such policies. While the loans may help the poor survive the ravages of neoliberalism, they may not be the key to eliminating poverty. 
     "As much as people have wanted to push credit as a solution to poverty, as something sustainable, lurking behind it there's a hidden form of assistentialism," says Francisco Barquero, a consultant for Prestanic, a loan program administered by the Nicaraguan Council of Evangelical Churches. "Often organizations have given credit knowing full well that people aren't going to pay back a significant portion." 
     Borrowers seem to recognize that in a country where NGOs and churches have long helped the poor survive the ravages of war and poverty. Such historic dependency means borrowers may sign on the dotted line yet have no real intention of repaying since the loan is administered by a charity. "It's difficult to create a culture of repayment. In some sectors only the foolish pay back their loan," observes Julio Flores, an investigator with Nitlapan, a rural development and research agency at the Jesuit-run Central American University in Managua. 
     Rates of repayment have been increasing, however, as microcredit lenders become more efficient and learn to rely more on solidarity associations and communal banks as intermediaries. With such groups, much of the risk gets passed from the lender to the grassroots association, which borrows money as a group. While God may forgive your loan from the parish bank, your neighbors won't be as willing to cover your payments. 
     It's clear that the small loans work. Regular studies by Catholic Relief Services (CRS), a big player in the microcredit industry here, show loan recipients spending more on education, housing, and food than before they borrowed. 
     Yet many alternative lenders wrestle with how to modify portfolios that are inordinately weighted toward urban borrowers. Although the overall amount of credit in Nicaragua has remained constant in recent years, between 1992-1996 credit for rural residents fell steadily. This was caused in part by insecurity over land titles, a post-Sandinista legal knot that has yet to be untied. Farmers living on contested land are both less likely to invest in improving it as well as less likely to receive unguaranteed loans to work it. 
     Despite these problems, Nicaragua has the most democratic distribution of rural land in the region, thanks to the agrarian reform of the 80s, "but it's being rolled back because farmers don't have access to credit," according to Mark Lester, a development expert here. 
     Gabriel Gaitan, microcredit director for CRS, notes that because "urban areas are almost saturated by NGOs providing credit," many alternative loan programs are beginning to use the profit from urban lending to launch more costly and riskier rural lending programs. 
     Lenders know they just can't throw money at the problems of the countryside, however. "Credit isn't the panacea to resolving problems in the countryside," Flores argues. He says credit has worked better when accompanied by legal help with ownership problems. Yet even more important, he says rural lenders need to discern where best to target their funds. 
     At the beginning of the decade, Nitlapan awarded credit to the poorest residents of the countryside, often using community-based revolving loan funds. Yet most of the loans weren't repaid. "We realized that it wasn't really credit and it wasn't helping the most productive sectors," says Flores. 
     Nitlapan researchers then identified the "campesino-finquero"--the small family farmer with a few acres of land--as the motor of rural development and thus the ideal recipient of credit. There are almost 200,000 campesino-finqueros in Nicaragua. They control about 70 percent of the country's cultivated land and are highly productive. "They consume less hard currency yet produce a greater share of foreign earnings than big agroenterprises," Flores says. Nitlapan targeted its credit program to this sector, and last year enjoyed a minimal 2.6 default rate, much better than other rural programs. 
     While campesino-finqueros remain the strong suit of Nitlapan's credit portfolio, rural intermediaries--such as truckers and wholesalers--also deserve credit, Flores argues, as competition between these small businesses will provide a better deal for the producer. 
     The availability of long-term credit is another key to rural development. Nitlapan and Prestanic--both of which invest heavily in the countryside--have over half their portfolios invested in loans of one year or more. This allows rural farmers the leisure to build new fences, install new irrigation systems, or purchase baby bulls--all activities that won't pay off in the short-term but that will increase long-term productivity. 
     Microcredit loans provided to the urban commercial sector are seldom for longer than four months and often require repayment to commence a week later. Barquero says that while this practice provides recipients with "working capital," allowing more goods to turn over more rapidly and thus generate more profit, he notes that it doesn't provide the "investment capital" necessary for long-term improvement in productive capability. "This is a serious problem when small countries confront globalization," Barquero says. "For these small businesses to compete in a global marketplace they'll need technological capability, access to information, and management skills. Those are hard to acquire with small short-term loans." 
     The invasion of the world market--coupled with an end to Sandinista era subsidies to small businesses in 1990--has made it harder for small entrepreneurs to compete. And it's going to get worse. On December 18 President Arnoldo Aleman signed a free trade agreement with Mexico that was celebrated by large agroexporters but which left small business owners trembling before an imminent invasion of cheap products.  
     One of the "great dreams" of microcredit, according to Barquero, is that small borrowers, as they become more prosperous, can "graduate" from alternative microloans to receive longer-term credit from the traditional banking sector, and thus defend themselves better from the ravages of globalization. Yet Barquero says few have done that. 
     What's happened is the reverse. Traditional banks have realized "that microcredit is profitable," Barquero says. "Bankers have noticed that the poor make their payments on time, that they pay more for their credit, and that the level of return on the investment is higher." 
     The problem with this picture, Barquero argues, is that the poor have little say in setting interest rates. "Because the poor have less political and social power, the banks can do what they want without worrying about social and political costs," says Barquero. 
     Banks have been encouraged to move into the microcredit sector by international lending organizations--such as the World Bank--which believe that banks, rather than NGOs, should control lending. So they've provided subsidies, more than $30 million in Nicaragua, to help banks capture the microcredit business. 
     Yet rather than trying to attract small borrowers through the front door of fancy buildings, the banks have formed NGO-like facades to attract market share. Johaida Castillo, CHISPA's director, claims it's "unfair competition." The private banks are offering individual microcredit loans, according to Gaitan, "telling the people that they don't need to organize or save." He terms such practices "unethical," and says they undercut microcredit programs based on communal solidarity and obligatory saving. 
     Several of the country's 14 private banks have also started opening branches in some rural towns, long the domain of the government's Banco Nacional de Desarrollo, which closed last year. Yet observers say the private banks are focusing more on capturing savings than on providing loans, despite the international subsidies that lower their risk. This lets the bankers skim the cream from the rural economy, as well as contribute to a net transfer of capital from the countryside to the city. "The banks serve as intermediaries, taking the money deposited in savings by the poor and placing it in big business," Barquero observes.