Financing Small-scale Entrepreneurs in Brazil: The Question of Sustainability

Financing Small-scale Entrepreneurs in BrazilMinistry of the Environment Coastal Agency Universidade de São Paulo (Economics Department, FEA and PROCAM)

Financing Small-scale Entrepreneurs in Brazil: The Question of Sustainability Ricardo Abramovay – Tenured professor, Economics Department, FEA and PROCAM/USP – CNPq researcher www.econ.fea.usp.br/abramovay Reginaldo Magalhães – MA, PROCAM/USP microfinance and development consultant –reginaldo-sm@uol.com.br

São Paulo, March 05

Financing Small-scale Entrepreneurs in Brazil: The Question of Sustainability Ricardo Abramovay* and Reginaldo Magalhães**

1. Presentation For the majority of the world’s poor, survival depends upon multiple, unstable sources of income, the most important being self-employment: those who find themselves close to the poverty line rarely manage to acquire salaried employment and, on the few occasions they do, conditions are generally precarious. In cases in which poverty is the result of salaried labor, it can be combated with wage increases and the redistribution of employer’s profits.

What is most difficult about fighting poverty, however, is that it depends, above all, on the attribution of a aggregate of assets to those who can find and create the conditions to use these assets in ways which are productive and useful for society. The root of the majority of problems confronted by poor people lies in finding ways to organize and take advantage of the assets they have at their disposal.

Clearly, this problem must be dealt with in light of the historical circumstances and structures within which it has been created. However, understanding the sociological order which generates poverty is just as important as understanding how individuals and social groups organize themselves to face the challenges of survival and development. The poor must deal with circumstances which are largely beyond their control and but also engage in a permanent struggle to confront these difficulties and transform them, if at all possible.

Amartya Sen (1981) was one of the first analysts to emphasize that poverty cannot be reduced to a question of income: it also involves the capabilities and entitlements which individuals and families use in the struggle to improve their life conditions.

This approach was also adopted by Robert Chambers (1995) and widely utilized in the British literature under the rubric of livelihood (1). This term involves a critique of the conventional vision of “poverty reduction” which sees the poor as passive victims. The concept of livelihood (survival, sustenance, way of life) focuses our attention on “...the poor themselves, emphasizing that these have assets, options and strategies and that they are decision makers,” (Hospes and Lont, 2004:6). Policies based upon this point of view aim to tie the distribution of assets to the poor to the different uses to which these will probably be employed. What is important in this approach is that the beneficiaries of public policies are not understood as passive receptors, inert vis à vis their environment. Rather, they are seen as actors in making attempts to gain permanent individual, social and family freedoms. Policy formulation must thus take into account not only the existence of these actors, but their probable reactions.

*

Tenured professor at the Economics Department, FEA and the Programa de Pós-Graduação em Ciência Ambiental PROCAM/USP – CNPq researcher– www.econ.fea.usp.br/abramovay/ ** MA from PROCAM/USP, consulant in microfinance and development. reginaldo-sm@uol.com.br 1 See, among others, the interesting article by Bebbington (1999).

The greatest challenge facing microfinance’s potential public is to reduce this public’s social vulnerability while simultaneously improving its capacity for generating income and increasing the productivity of their labor. The current text has two basic objectives. First, it seeks to offer a summary characterization of small-scale entrepreneurship in Brazil while presenting entrepreneurs’ primary sources of financing. Secondly, it offers some initial reflections on how this financing may work to stimulate the environmental sustainability of anti-poverty initiatives.

It is important to emphasize that the linkage between the two main terms dealt with here – livelihood and sustainability – is more desired than real. Doubtless, numerous situations exist – above all among traditional populations – in which the struggle for survival was won in conditions which permitted the continued resilience of the surrounding ecosystems.

The Beijer Institute of Sweden has financed research which abundantly demonstrates this possibility, linking ecosystems and the traditional knowledge (Berkes and Folke, 1998/2000). Riverside populations (Begossi, 1998/2000, pastoral populations (NiamirFuller, 1998/2000) and populations involved in extractive activities (Alcorn and Toledo, 1998/2000) often base their social reproduction upon the communal use of natural resources and frequently establish rules and restrictions whose basic goal is the preservation of the natural elements upon which their productive systems are based. The different systems of slash-and-burn agriculture and various historical cycles of land rotation studied by Éster Boserup are classic examples in the field of ecological anthropology, and demonstrate the capacities of traditional populations to balance their population growth while protecting the resource base upon which economic reproduction is sustained. Even though these capacities are not generalized and there are many crisis and even collapses in which environmental factors play an important role, there are also many examples of traditional societies that have been sustainable over the long run through the preservation and protection of their resource base.(2) Three of the most important specialists in this area have synthesized this idea in the following manner: “There are places and societies which practice the sustainable use of resources, not just of species but of entire eco-systems. Some of their adaptations survive up to this day. For this reason, ancient cultural practices of resource use are more than just anthropological curiosities: they are part of the richness of human adaptation which can also be useful in the contemporary world.” (Holling et al.

1998/2000: 351).

Among contemporary societies, however, it is much more difficult to achieve this sort of balance, given that it is not part of the cultural basis upon which modernity was created.

Modernity emphasizes the intensive use of resources and humanity’s infinite capacity – to use Francis Bacon famous quote from the 17th century – to transform scientific knowledge into an instrument for dominating nature (Norgaard, 1995). In 1995, the Nobel prizewinner in economics, Kenneth Arrow, began the publication of a text-manifesto in Science magazine with a trivial statement which nonetheless expresses quite well the contrasts between societies which have achieved a certain balance between their own reproduction and that of the natural resources upon which they survive: “Inter- and national economic policies have ignored the environment. In those areas where the environment has begun to 2

Jarred Diamond last book (2005) is currently the most important reference regarding this theme. However, an in-depth analysis of Diamond’s theories are obviously beyond the scope of the present work.

have some influence upon policy, such as in the GATT or in NAFTA, it is still understood as a tangential subject wherein it is frequently presumed that economic growth and liberalization (including the liberalization of international commerce) are good for the environment”. The text is a warning – and an important one, given the number of leading scientists which signed it. It points to the fact that economic growth alone is generally not sufficient for the creation of environmental improvements and that the planet’s resource base does not have an infinite capacity to sustain the necessities of economic growth.

(Arrow et al., 1995:520).

Even in those cases where multilateral donors have begun to reflect on environmental questions, the results have been extremely tentative, as a 2001 document of the World Bank demonstrates. According to this report, the recognition of the environment as a strategic priority in planning has not been carried over into practice (World Bank, 2001). This affirmation is even graver in the light of the development policies carried out by four countries (Norway, Denmark, Finland and Great Britain) during the end of the 1990s which are exposed in this document.

If the large international and multi-lateral organizations have had a difficult time implementing a coherent sustainable environmental policy, it is not surprising that the theme has not been incorporated into national economic policies and even less into credit and micro-credit policies. Sustainability is a new theme and Brazilian and international reflection upon it is yet incipient.

The current text is divided into four parts and an introduction. Initially (in Part 2), it gives a summary overview of small-scale entrepreneurship in Brazil. This presentation permits us to discuss some of the basic social characteristics of the microfinance’s public. Part 3 presents these entrepreneurs’ fundamental financing necessities and how these are met today. Part 4 discusses the possibility of incorporating environmental themes into microfinance policy. The text’s final section presents our conclusions and the proposals which have resulted from this work.

2. Small-scale entrepreneurship in Brazil What is the potential public of Brazil’s microfinance institutions? What financial resources do they really need in order to carry out their operations? One of the main obstacles to the formulating and implementing adequate measures for increasing the supply of financial services lies in the inadequate legal and statistical definition of the universe of actors which these services are directed towards. Law 9,841, of 5/10/99, classifies companies with less than R$ 244,000 of resources as “micro” and those with less than R$ 1.2 million as “small”.

According to the “scale classifications” adopted by SEBRAE (http://www.sebrae.com.br/br/ued/index.htm, Table 1) “micros” are industrial businesses which employ at least 19 people and commercial service businesses with at least 9

employees. A “small” industrial enterprise has from 20 to 99 employees, while its counterpart in the service and commerce sector employs between 10 and 40 people.(3) These statistical universes, however, are quite distinct from that described the IBGE in its study of Informal Urban Economy, or ECINF (IBGE, 1999). When criterion based upon the number of employees or upon Law 9841 are applied to the information furnished by CEMPRE (Estatísticas do Cadastro Central de Empresas, IBGE, 2002) and the Annual Commerce Survey (PAC, IBGE, 2003) – both of which are produced by the IBGE and which deal with Brazil’s formal economy (defined as companies which are inscribed in the National Register of Legal Entities/CNPJ) – one concludes that 95% of the formally registered companies in Brazil could be classified as “micro”. But when this universe of statistics is compared with that pertaining to the Informal Urban Economy, a social chasm becomes visible. This chasm could seriously hinder policies aimed at improving the financing and capitalization of companies. Given these current definitions, we must conclude that public policy does not affect the vast majority of small-scale enterprises, precisely those businesses which have the least access to the credit from the formal banking system.

The Informal Urban Economy (ECINF) survey conducted in 1997 and published in 1999 is currently the most important basis for analyzing the activities of self-employed workers laboring outside the agricultural sector in Brazil. ECINF’s primary value is that it examines dimensions related to both enterprises and families “breaking with the rigid barriers between domicile surveys and business establishment surveys” (IBGE, 1999:17).

ECINF studied businesses employing five workers or less. In spite of its name, the survey also included workers whose companies where registered in municipal and state entities and even with CNPJ. For this reason, the survey focuses upon the formal status of businesses, but rather builds a picture of what we might call “nano” enterprise: activities of self-employed laborers or family enterprises working in situations that are almost always precarious.

ECINF estimates that in 1997, there were approximately 9,5 million of these kinds of enterprises in Brazil, classified according to total receipts rather than liquid profits. Of this total, almost half – 4,7 million – are companies which made less than R$ 500 during the month of October 1997. ECINF did not research receipts for the other months of that year.

A simple extrapolation of the results of that month, though arbitrary, provides us with a reasonable base for calculating an annual receipt total of R$ 6000. Applying the IPC/FIPE referent to the period stretching from October 1997 to March 2005 (54,57%), we arrive at a current annual receipt total of around R$ 9274. In other words, fully half of the enterprises described by the ECINF (always keeping in mind the assumptions we’ve used above to arrive at our numbers) currently make less than R$ 10.000 per year. The units which made more than R$ 5000 in October 1997 – a little more than R$ 7500 when adjusted for March 2005 and which, multiplied by 12 months, correspond to an annual income of around R$ 92.730 – amounted to only 475.000 companies: less than 5% of the total. In other words, 3

The information presented in this section is partially drawn from Carvalho and Abramovay (2004) and Abramovay et al. (2003).

even the upper 5% of the social pyramid described by the ECINF are far below the legal size limits which define a micro-enterprise (Table 1).

MORE THAN HALF OF ALL OWNER-OPERATED BUSINESSES IN BRAZIL MOVE LESS THAN R$ 9500 PER YEAR TABLE 1. BRAZIL: Informal sector businesses, according to the earnings 10/1997.

Earnings October 1997 (R$) 1 to 500 501 to 5.000 5.001 or more

Corrected annual value (R$)*

Number of Percentage of businesses businesses**

Up to 9,273

4,777,961

52.07

9,273 to 92,730

3,924,136

42.76

9,730 or more

474,535

5.7

No declaration

236,430

Sem declaração

64,912

Total

9,.477,973

Source: IBGE – ECINF 1999. * Corrected according to IPC-FIPE for percentage increase from October 1997 to March 2005. ** Companies which didn’t pay or declare taxes were not included in the calculations presented in this paper.

What are the basic characteristics of small-scale entrepreneurship? Even if the ECINF does not quite correspond to this universe, it offers decisive information regarding its behavior.

Five characteristics can be clearly described.

2.1. Small-scale entrepreneurship involves single person or family activities Of the 9.5 million businesses studied by the ECINF, 7.5 million employed only one person.

Another 1.2 million employed two people while those which employed more than five people accounted for only 81,000 businesses, or some 1.4% of the total. Here is yet another important difference between the reality described by the ECINF and the definition of micro-business offered by SEBRAE (4).

4

This is not meant as a criticism of SEBRAE’s criterion. Rather, it is the recognition that these describe a universe which does not even touch upon the base of the social pyramid of small-scale entrepreneurship in Brazil.

THERE ARE A VAST NUMBER OF BUSINESSES WHERE THE WORKFORCE IS MADE UP OF ONE PERSON OR IS FAMILY-BASED TABEL 2. BRAZIL: Informal sector businesses, according to the number of people employed - 1997.

Number of Number of people businesses Percentage* employed 1 7.545.317 79,62 2 1.155.450 12,19 3 to 5 695.049 7,33 More than 5 81.114 0,86 No declaration 1.043 Total 9.477.973 Source: IBGE – ECINF 1999. * Companies which didn’t declare the number of their employees were not included in the calculations presented in this paper. They represent 0.011% of the total.

In this kind of business, it is practically impossible to separate the family’s income from the business’s capital. It is true that economic activity and family are less integrated here than they are in, say, family-based agriculture – the dominant form of small-scale entrepreneurship in rural regions. But it is interesting to note that of the 9,5 million businesses estimated by the IBGE, only 2,7 million have their activities based in the home and a further 464.000 both within the home and outside of it. Stores and workshops, however, account for only a further 2,2 million businesses (Table 3). In these conditions, it is exceedingly difficult to separate a business’s money from the family’s.

A SIGNIFICANT NUMBER OF BUSINESSES ARE BASED IN THE HOME Table 3 – Informal sector businesses, by type, according to workplace – Brazil - 1997

Total

9.477.973

Exclusively outside of the household

6.315.147

Store or workshop

2.221.250

Exclusively in the household

2.698.161

In and out of household

464.115

Source: IBGE – ECINF 1999.

The great majority of businesses do not conduct any sort of formal accounting. 4.4 million units do not register their activities at all and another 3.7 million organize their own accounts. Only 1.3 million rely on the services of a trained accountant, a fact which reinforces the hypothesis that domestic and business budgets are thoroughly mixed in this sector. See Table 4.

INFORMAL ACCOUNTING Table 4 – Informal sector businesses, by activity group, according to the type of business and the form of accounting used – Brazil - 1997 TYPE OF BUSINESS AND FORM OF TOTAL ACCOUNTING Total

9.477.973

No accounting

4.380.871

Accounts organized by business owner

3.727.072

Accountant controls accounting

1.296.704

Other forms

41.447

No declaration

31.879

Source: IBGE – ECINF 1999.

This fusion between the home and the economic enterprise (5) is one of the social bases of the concept of microfinance (Abramovay, 2004): as we shall see in Part 3, it isn’t possible to clearly separate family finances from those which serve to support the business. Family events (sickness, marriage, death, accidents) can decisively influence the success of the business itself. At the same time, the organization of the business depends upon the availability of resources, labor and opportunities offered to and by family members.

For this reason, as we shall see in Part 3, microfinance policies conceive of their clients not only in terms of “productive” credit, but also in terms of their general needs for financial services which are simultaneously geared towards the family and business. Aside from credit, savings and insurance are also essential elements for the survival of those who find themselves near the poverty line. As Stuart Rutherdord, one of the most important international specialists studying the topic, explains (2004:264), the poor are in a curious situation with regards to financial services: “on the one hand, they are the least well served within this area. On the other, their need for financial services is more intense than that of any other social group. This especially intense need is due to a very simple circumstance.

5

The great Russian theorist of peasant economies, Alexander Chayanov studied this sort of activity at the beginning of the 20th century. According to Chayanov, the characteristics of the peasantry are applicable to all forms of economic activity in which family and business fuse into an organically indissoluble whole.

The poor have incomes that are lower, more irregular and less stable. Consequently, more frequently than other groups, they find themselves in situations in which they want or need to buy things, but do not have the necessary cash immediately to hand”. The important point here isn’t the obvious fact that the poor have lower income, but the fact that they have an especially great need for varied financial services in order to confront the adversities which face them. But before we explore this theme in item three, let us continue our overview of the traits of small-scale entrepreneurship in Brazil.

2.2. Much more than a refuge against unemployment Informal economy is an expression popularized by the International Labor Organization, beginning in the 1970s, in order to indicate the growing importance of individual or familybased economic initiatives in the struggle for social reproduction (ILO, 2002). The definition of this term is interesting: “very small-scale units which produce and distribute goods and services and which largely consist of independent, self-employed producers in urban areas of developing countries, some of which also employ family members and/or salaried apprentices; these units operate with very little or no capital; they utilize a low technology and capacities; they operate with a low level of productivity and produce low and irregular incomes and unstable employment for those who work in them” (ILO, 1991:4). The ILO’s definition clearly does not confuse informal economy with crime, as is frequently the case today.(6) One of the most important characteristics of this form of production is that the barriers to engaging in it are much lower than those for salaried labor (Dasgupta, 2002). This may inspire an image of ephemeral activities, from which the great majority of people withdraw as soon as their perspectives for salaried labor improve. The information provided by the ECINF throws some doubt upon this habitual hypothesis, however.

When asked about the motives which lead them to begin their own business, only 2,5 million out of 10,2 million business owners(7) claimed to be self-employed due to being unable to find another job(8). It is interesting, also, to observe that 2 million of these owners emphasized the independence that self-employment offers. 837 thousand spoke of being involved in a “promising business” and another 872 thousand spoke of “having experience in the area”. When these responses are added to those citing family tradition, business partnership opportunities and flexible hours, we find that a significant part of these

6

McKinsey Consultants have produced a recent report on this theme which was widely divulged by the media and which has contributed to this confusion. It is not organized crime which characterizes the millions of economic units whose degrees of formality and legality are quite varied and which guarantee the reproduction of millions of families through offering useful goods and services to society. It is obviously in the sense meant by the ILO (and also the IBGE) that the terms small-scale entrepreneurship and informal economy are employed in the present text.

7 Some of the 9.5 million establishments surveyed are owned in partnership. For this reason, the number of owners is greater than the number of businesses.

8 It is important to mention that among the public which composes the São Paulo city government’s microcredit program (São Paulo Confia) no fewer than 37% of the borrowers declared being unable to find a job as the reason for opening their own business (DIEESE, 2004).

businesses posses characteristics which make entrepreneurial activity an attractive option (Table 5).

UNEMPLOYMENT IS NOT THE ONLY REASON WHY BUSINESSES ARE STARTED Table 5 – Informal sector business owners sorted according to the reason why they began their own business Reason for beginning own business

Total

Total

9.477.973

Couldn’t find a job

2.531.932

Partnership opportunity

245.348

Flexible hours

214.049

Independence

2.036.317

Family tradition

857.236

Adding to family income

1.786.860

Experience in the area

871.902

Promising business

837.337

Secondary work

206.891

Other reason

516.715

No reason declared

13.375

Source: IBGE – ECINF 1999.

This impression is reinforced by the number of years which the current proprietors of these businesses have owned them: 60% of them have been in business for more than three years and more than half for greater than five years (Table 6)

A PROFESSION FOR MANY, AND NOT JUST A SECONDARY JOB Table 6 – Informal sector business owners according to time spent in business Time since first became proprietor

Total

Total

9.477.973

Up to 1 year

1.818.921

More than 1 to 3 years

2.043.189

More than 3 to 5 years

1.193.992

More than 5 to 10 years

2.262.281

More than 10 years

2.798.784

No declaration

793

Source: IBGE – ECINF 1999.

The economic activities of an expressive portion of Brazil’s poor are not ephemeral activities which (dis)appear in accordance with the oscillations of the labor market. Of the 9,5 million Brazilian micro-businesses, 7 million will continue with their activities for the foreseeable future, according to what their owners have told the IBGE’s researchers. Of this total, no less than 3,5 million have declared their intent to expand their business (Table 7)

PLANS FOR THE FUTURE Table 7 – Informal sector businesses, by activity groups, according to the type of business and its owner’s plans for its future.

Type of business and plans for its future

Total

Total

9.477.973

Expand the business

3.543.836

Continue at the same level

2.843.884

Change activity but continue independent

885.272

Abandon activity and seek employment

1.145.466

Other plans

228.420

Don’t know

827.550

No declaration

3.548

Source: IBGE – ECINF 1999.

The businesses reproduce themselves in spite of their marked precariousness. 9,5 million informal businesses employ 12,9 million people, of which 10 million are business owners.

Of this total, 4 million are older than 40 years old, which practically invalidates any chance that the labor market represents a consistent alternative for their social reproduction. 1.1 million have no formal education and 5,8 million have only an incomplete primary school education. More than half of this statistical universe is composed by people who began working before they were 14 years old (9).

This is only some of the information which demonstrates the permanency of the universe which makes up small-scale entrepreneurship in Brazil. It is a diversified set of very small units which exist in unstable conditions but which seek to stabilize themselves through the markets with which they interrelate, achieving, in this way, the necessary means for maintaining the families of their owners. This portrait implies decisive consequences for financing initiatives.

2.3. The variable geometry of formalization The ILO’s document on “decent work and the informal economy” (ILO, 2002) shows that there is no clear dividing line between formal and informal labor. Instead of a rupture, there is a continuum between two apparently polar situations. Informality, of course, cannot be disassociated with the absence of rights which salaried, registered labor secures for its participants. At the same time, however, until recently, registering a business was such a complicated process that the high degree of informalization registered by the ECINF should not surprise anyone. The effects of the recent legislation which has simplified the registration of businesses with an annual income of up to R$ 36.000 is still unclear.

Preliminary information leads us to believe that their has not yet been a considerable change in the scenario registered by the ECINF. What is impressive in the IBGE’s data is that although the survey had “urban informal economy” in its title, of the 9,5 million units estimated by the IBGE, nothing less than 1,3 million of these (some 14% of the total, or one in every seven) were legally constituted enterprises. It is interesting to compare the degrees of formality, however: though “informal”, some 3,2 million businesses possessed a state or municipal (though these were not registered with the CNPJ) and 1,2 million were affiliated with unions or class organizations.

9

In order to not overwhelm the reader with tables, we will forgo them for less important pieces of data.

THE (IN)FORMAL CONTINUUM Table 8 – Informal sector businesses, according to degree of formalization, Brazil – 1997 Indicator of formalization

Total

Total

9.77.73

Municipal or state license Has

3.92.416

Does not have

6.278.626

No declaration

6.931

Affiliation with union/class organization Affiliated

1.117.643

Not affiliated

8.269.231

No declaration

91.100

Type of legal constitution Individual owner

822.812

Society or cooperative

450.643

Does not have any

8.202.279

No declaration

2.239

Source: IBGE – ECINF 1999.

This information confirms the ILO’s hypothesis that self-employment (the basic dimension of small-scale entrepreneurship) evidently involves extremely varied situations in terms of work conditions, income and even legal status (ILO, 2004:153). It also reinforces the notion that an important part of small-scale entrepreneurship is made up of units whose formalized registry indicates a certain degree of permanency(10).

In the research conducted by DIEESE (2004) regarding the City of São Paulo’s microcredit program, only 9% of the units surveyed have some sort of legal constitution (CNPJ). A 10

It would be necessary to study ECINF’s data in detail in order to learn if these three categories (businesses possessing a state or municipal license, those which are affiliated with unions and those which are registered with the CNPJ) overlap or can be added togather.

further 3% have their constitution papers pending. 46% have no formalization whatsoever and 42% are not interested in formalizing their activities.

2.4. Businesses with high turnover It is well known throughout the world that the people participating in what the International Labor Organization has baptized the informal economy pay interest rates on their loans which are incompatible with those paid by more well-established businesses. The secret here is in a decisive characteristic which defines these economic units: they are in their great majority involved in businesses with a high turnover.

Of the 9,5 million units estimated by the ECINF, 6,2 million (two thirds of the total) are involved with commerce, board and lodging services, repair services and technical and auxiliary services: items whose capital tends to have a rapid turnover. Among the participants of the São Paulo Confia program, no fewer than 83% are involved with commerce (DIEESE, 2004).

One of the most important themes which needs to be discussed by microcredit institutions is the offer of resources with differentiated interest rates according to the turnover time of the capital invested. Industrial activities clearly require slower return times and thus cannot be given the same rates as the entrepreneur who sells meals or sandwiches.

One of the most important recent discoveries in microfinance is that its clientele is “capital constrained” (Araya and Christen, 2002:13). This means “...when they manage to get a loan, their sales increase almost immediately because there is sufficente demand among their clients”. It is in this sense that active “credit” has the potential to generate immense returns.

2.5. Multiple activities Microcredit is only part of a larger problematic which can be called microfinance. Credit is an aspect of the financial life of poor families two which at least two other dimensions aggregate: savings and insurance. Those who live in poverty always seek to save some resources for planned expenditures such as weddings, burials, illness, or for an especially good business opportunity. Being that the separation between business and family is quite tenuous, there is no way to clearly distinguish between the resources used in entrepreneurship and those used to reproduce the family itself. This situation is compounded by the fact that in poor families, the total income is generated by a varied set of activities. A high level of income is necessary if the family is to depend upon the activities of only one member (a liberal professional or a fairly large-scale entrepreneur, for example). Poverty can only be confronted by constantly taking advantage of the diverse opportunities which arise for different family members. This means that financial services directed towards these families must be tailored to have the necessary flexibility to engage with this structural trait engendered by poverty. In the words of two specialists, “depending upon the state of prices, health and other contingencies, [the poor] develop a mix of activities which may include cultivating their own food, working for others, working in their own small-scale production or commercial activities, hunting and gathering, or

accessing loans and subsidies (provided by the State, friends, or NGOs). In terms of economic behavior, they are much closer to the manager of a complex portfolio than to the manager of a firm which produces only one product� (Hulme e Moses, 1997).

3. Demand for and sources of microfinance Understanding the needs of small-scale entrepreneurs is an essential condition for improving the financial and environmental sustainability of their productive activities.

Studies on the financial management in small-scale enterprises and households show, as was discussed in Part 2, a great demand for diversified financial services. The sustainability of these businesses depends on the supply of a variety of financial services by local institutions which are capable of creating close relationships with clients and offering products tailored to each different economic, environmental and social context.

Small-scale enterprises use diverse forms of credit, insurance and savings in order to secure their financial viability. These services are also of fundamental importance when relating these economic activities to the environment. The financial needs of small-scale entrepreneurs are specific to each social, economic and ecological environment. Credit services for investment, working capital, consumption, commercialization as well as payment services utilizing checks, credit cards and simplified checking accounts and insurance are constant and complimentary needs in this universe.

Access to financial services depends upon important institutional conditions which underlie the sustainability of microfinance. Lack of access to information, the cost of accessing banking agencies, resources spent in proving activities, providing credit guarantees and costs related to the forming solidarity groups are the principal barriers which small-scale entrepreneurs face in obtaining credit lines. In order to move towards universal access to credit, especially for the poorer segments of the Brazilian population, such costs must be reduced. These transactional costs, however, are not formed in the same way as production costs. They principally depend upon the local institutional environment.

Institutions which establish close relationships with individuals and organizations, with information and cooperation networks which integrate financing, production and the market tend to reduce these costs.

Financial behaviors within families have specific characteristics which are determined by their different sources of income. Salaried workers, for example, demonstrate very different types of behavior than autonomous workers or producers. The financial behaviors of autonomous producers depend upon the financial characteristics of the economic activities they develop. This is the reason why the second part of this article seeks to outline the basic characteristics of the productive units typically created by self-employed workers.

Understanding the financial needs of small-scale entrepreneurs depends in particular upon comprehending the linkages between financial circuits, systems of production and the commercial flow of economic activities. The financial market oscillates according to the seasons, productivity, the volume of business, business concentration, costs and the results of productive activities and commercial conditions. For this reason, financial services – and

particularly informal financial services – are generally related to commercial services and their principal agents are merchants. The planning of financial services which are directed towards economic activities must thus take into consideration the characteristics of each different market with which they are involved and the commercial agents which operate within these.

Each social and cultural context creates specific organizational alternatives. Credit cooperatives and microcredit institutions have formed in response to initiatives of different social groups, public institutions and social movements. These initiatives constitute heterogeneous organizational models which are inserted in – and are influenced by – extremely different forms of local markets. In this sense, informal financial activities are the result of innumerous alternatives constructed by different communities over time. Each social group sets its own rules and builds its own organizations in order to manage its financial activities.

The flows of resources engaged in commercial and financial activities form integrated and localized systems which possess specific and unique characteristics. Formal and informal financial operations and agents intertwine and become mutually dependent. Informal financial agents use formal services in order to finance their informal transactions. Informal mechanisms are utilized to give people and small businesses access to formal services(11).

The financial decision-making processes of poor families and small businesses are undertaken in an environment characterized by high-risks, high transaction costs and enormous restrictions to credit. The principal result of the five dimensions discussed in Part 2 is the permanent attempt on the part of individuals and families to access financial services, even though they may embedded within highly incomplete and imperfect markets.

These markets tend to be the rule in areas where competition does not exist and access to financial services depends upon informal ties which are generally associated with clientelism and personalized dependency among social actors (Abramovay, 2004). This informal financial market, composed of merchants, suppliers, usurers, social solidarity groups, relatives, friends, neighbors and employers is intertwined with that composed by such formal agents as banks, credit cooperatives, savings-and-loans, micro-credit associations, businesses and commercial enterprises. One of the most interesting recent discoveries in the study of microfinance is precisely this interweaving of formal and informal financial agencies in the attendance of the needs of those families living in poverty (Zeller et al., 1997).

This heterogeneous set of financial agents – who demonstrate no apparent connections with each other – is in reality a dense network of financial and non-financial institutions which regulates the financial relations and flows of information necessary for the markets’ operation. It is very important that plans for microfinance institutions take into consideration this external environment – the local financial markets and social and financial environment in which these organizations are inserted.

11

This theme is further explored in Magalhães 2003 and, especially, in Magalhães, 2005.

The insertion of microfinance institutions into local production networks increases capacity to adequately meet entrepreneurial financial needs by providing an adequate offer of financial services, credit, savings and insurance, depending on the specificities of the local economy and local variables such as management capacities and level of technology.

Services which are adapted to local ecological conditions are also necessary, however, for the long-term sustainability of the local economy. According to Granovetter (2000), the existence of close relationships between financing networks and technical and commercial networks makes possible organizational innovations which may aid the success of small businesses.

Financial institutions inserted in and adapted to local productive arrangement are known in the literature as clusterbanks (Mytelka, 2001). This type of organization’s main characteristic is its capacity to offer low-cost financial services due to the lower level of informational asymmetry created by the proximity of the financial agent to the entrepreneur. The main starting point for the planning of microfinance institutions is thus a diagnosis of the needs of the people which they will be serving. It is absolutely fundamental that these organizations know the socio-economic environment in which they will be working as well as the cultural characteristics of the social groups they will be working with. They must also understand the environmental characteristics of the context in which they will be inserted and the effects these characteristics may have on the people’s social and economic behaviors. Based upon a diagnosis of these needs and factors, (non)financial services can be formulated and offered to local entrepreneurs.

It is essential that wise use be made of management technologies which are appropriate to microfinance in order to broaden outreach and penetrate into the lower stratum of the social pyramid. Microfinance technologies (Parente, 2003) must include specific processes for the analysis, concession and monitoring of credit. Credit officers or local development agents and solidarity groups create social ties, reduce costs, risks and broaden outreach to people who do not have access to formal financial services. Offering training services with credit (“assisted credit”) via partnerships between microfinance institutions and technical assistance and training providers improves the sustainability of businesses which are financed and the security of the microfinance institutions themselves. Committees which are formed to analyze projects and which are composed of local leaders and technicians improve analysis and help construct strategies which are fundamental for the success of businesses financed by the MFI. These systems of microfinance governance are extremely important for the creation of sustainability (Magalhães, 2003).

While banks collect basic data about their clients, MFIs must have access to a dense informational network made up of community organizations, unions, and diverse types of local groups. This information network makes it possible for MFIs to obtain more complete information and thus conduct a more precise analysis of the risks involved in financing a given project. This, in turn, reduces information asymmetry and adverse selection. The information network also permits institutions to operate with lower transactional costs. The frequency and continuity of the relations between financial institutions and their clients as well as the utilization of already existing information and relational networks promotes and strengthens trust between the financial institutions and the individuals they serve. This is one of the greatest virtues of contemporary loan technologies which are based on solidarity

groups. Moreira and Abramovay (2005), writing about São Paulo Confia, demonstrate how existing social ties can be utilized to permit loans at low- cost to the lending agencies.

Understanding needs, the creation of social linkages and the reduction of transaction costs between institutions and individuals are thus the prime challenges facing MFIs in their dealings with small-scale entrepreneurs. In the following sections, we will analyze how these institutional conditions are presented in three different situations – banks, public policies and specialized microfinance institutions – for the financing of environmental projects.

3.2. Banks and the environment Several international organizations are promoting investments in public and private projects which seek to more adequately link financing projects with environmental concerns.

The “Equator Principles” correspond to a network of financial organizations which has developed rules regarding minimum patterns of social and environmental responsibility in financing. The network was originally created by the 10 largest banks in the world and it currently consists of 29 banks based in the USA, Europe, Japan, Africa, Asia and Latin America. It includes the Banco do Brasil, Bradesco, Itaú, Unibanco and several international banks which are active in the Brazilian market, such as ABN AMRO, BBVA, Citigroup and HSBC. The International Finance Corporation, the financial organ of the World Bank, has elaborated social and environmental criterion which condition its credit concessions. These consider such factors as the ecological impact of projects upon flora and fauna, as well as insisting upon cash compensation for populations affected by projects, protection of indigenous communities and prohibitions against financing the use of child or slave labor. These rules are applied to the financing of all projects which cost more than USD 50 million. Financing projects are classified according to their social and environmental risks: A for high-risk projects, B for medium-risk projects and C for lowrisk projects.

This implementation of social and environmentally responsible policies by the banks has been accompanied by the formation of a network and partnerships between banks, companies and NGOs. Banktrack is a network made up of 100 civil organizations and which includes Friends of the Earth Brazil. This network was launched during the Davos Economic Forum in order to accompany the effects of financial operations on people and the environment. The network is orientated by the “Collevecchio Declaration”, a document that establishes financial institutions’ role and responsibilities according to six basic principles: i. a commitment to sustainability, taking into consideration the limits of the environment and social impacts in the evaluation of financing projects; ii. a commitment to not provoking social and environmental damage through the adoption of guidelines which minimize impacts; iii. a commitment to responsibility in which financial institutions should assume responsibility for the social and environmental damages caused by the projects they finance; iv. a commitment to accountability by presenting to all parties directly or indirectly concerned with the financing process (banks, companies, employees, communities and governments) information which allows them to make rational decisions regarding probable

social and environmental impacts; v. a commitment to informational transparency regarding financing with all the social actors, banks, companies, employees, communities and governments impacted by the process; and vi. a commitment to sustainable markets and governance, acting positively so that markets and public policies contribute to sustainability.

A similar initiative has begun to be organized in Brazil by the Eco-finanças program. This program is coordinated by the NGO Friends of the Earth in partnership with the Centro de Excelência Bancária of the Fundação Getúlio Vargas. Its goals are to stimulate private financial institutions to incorporate socio-environmental questions into their decisionmaking process and to aid NGOs and public interest groups in understanding – so that they may influence – the way in which the private financial industry makes decisions.

Brazilian banks have begun to adopt policies which deal with ecological issues. According to Febraban 39,6% of all Brazilian banks currently take socio-environmental questions into consideration when deciding whether or not to concede credit. 8% of the banks undertake socio-environmental audits of their clients and 16% of them offer products and services with some connection to environmental themes. Within the lines of financing themselves, one finds agro-ecological financing, specific credit for environmental projects, long-term BNDES credit lines directed towards environmental projects and long-term resource commitments to multilateral institutions, special credit for natural gas conversion kits for cars, solar energy, computers in school, the adaptation of cars to the needs of to differentlyabled individuals, microcredit, socially responsible investment portfolios, programs with resources drawn from the FGTS, OGU (General Budget of the Union) which finance urban infrastructure and environmental sanitation programs and projects of the Agência Nacional de Águas in the area of hydro-resources (Febraban, 2005).

According to Carvalho and Ribeiro (2000) EIA (environmental impact study) and RIMA (environmental impact report) exigencies in conceding bank credits are geared towards reducing the credit risks provoked by possible environmental costs created by the financed companies due to improper procedures.

In 1995, a credit concession was implemented for those companies interested in acquiring anti-pollutant technologies. This was named the “Protocolo verde” and it was constructed by an accord between the Instituto Brasileiro do Meio Ambiente e dos Recursos Naturais Renováveis - IBAMA, the Banco Nacional de Desenvolvimento, Econômico e Social BNDES, the Banco Central, the Banco do Brasil, the Caixa Econômica Federal, the Banco do Nordeste do Brasil and the Banco da Amazônia. According to this agreement, companies which seek to obtain financing through the above-named agencies must present an EIA and a RIMA. By incorporating the environment into the criterion for concession of credit, financial institutions play two fundamental roles. First of all, they encourage the protection of their own patrimony, seeing as how taking environmental criterion into consideration lowers the risk of loss due to ecologically dubious activities which clients might engage in. Secondly, they collaborate in the protection of the environment by: a) making decisions which make viable the modernization and improvement of operational technologies, thus contributing to

reducing pollution, and b) making decisions which will eventually lead to the extinction of activities which truly imperil the nation’s ecological patrimony.

According to Febraban, the principal environmental aspects considered in the concession of credit are (i) the risks to profits due to environmental protection fines, (ii) the financing of productive processes which have fewer environmental impacts, (iii) financial support to initiatives which seek to repair environmental damage, (iv) the adaptation of lower impact technologies, (v) the relationship between the company and its surroundings as well as the company’s overall image in society at large.

The BNDES has conducted an evaluation which suggests that the most profitable companies tend to include the environment in their business administration plan: “From the banking point of view, a company which pollutes or one which damages the environment is a less-efficient company than its competitors, thus less competitive and more likely to pose a greater credit risk”.

The BNDES’ environmental policy began in 1986 with the creation of a financial support program with favorable conditions for companies that took the environment into consideration in their operations. In 1990, the Departamento de Meio Ambiente was created and in 1995 the bank became a signatory of the Protocolo Verde. Through its Política de Meio Ambiente, published in 1999, the BNDES adopted the following criterion: conditioning credit to borrowers’ environmental record, offering resources for projects which sought to reduce environmental costs and supporting undertakings which sought to profit economically from the recovery and preservation of the environment.

Up until now, Brazilian banks’ environmental policies have followed the logic of the American model. In the final evaluation of the annual meeting of the UNEP (United Nations Environment Program) whose central themes are financial initiatives and commercial agreements related to the environment, a striking contrast was identified in the way European and American banks deal with the environmental theme. For several years now, the amount of commercial rules which establish patterns related to the environment has grown and this new institutional arrangement has modified the risks of financial activities. Banks’ responses to these modifications have been quite diverse, however. In the United States, the main goal of insurance is to protect the banks’ own assets while in Europe, insurance is generally seen as a financial service offered to clients as a principal means of controlling damages to the environment (Jensen and Telego, 2001).

A study undertaken in 26 financial organizations in 14 countries of central and eastern Europe shows a growing concern for environmental issues in the financial market. The most important conclusion that can be drawn from this study is that the financial sector plays a critical role in ecological sustainability. Financial institutions can work to mitigate environmental problems through the establishment of environmental criterion in their credit policies and they can also take advantage of the opportunities that sustainable projects offer banks. For the European banks, the principle factors favoring the adaptation of environmental policies are improvements in the banks’ reputations, social responsibility, cost reduction, widening competitive advantage, market opportunities access to capital and demands from stockholders. On the other hand, there still exist strong barriers to the

implementation of an environmentally responsible financial policy. These include difficulties in measuring benefits, lack of clarity in business plans, lack of regulamentation and high implementation costs. Even so, the research has shown that there is currently a great variety of financial services offered by banks in order to attend to environment-related demands (UNEP FI, 2004).

An analysis of bank activities in environmental projects shows that the most important factor in the implementation of an environmentally adequate financing policy is the capacity to measure, analyze and manage risks. The problem is that creating access to information regarding environmental problems involves large monitoring and control costs which are currently only economically viable when financing large-scale projects. The principle challenge for a policy of sustainability in offering financial services (especially for small-scale entrepreneurs) is the reduction of costs involved in monitoring environmental impacts. In the two topics which follow below, we will analyze the strategies currently employed to reduce environmental impact monitoring costs in financing policies.

3.3 Public financing policies for sustainable development Governmental and non-governmental programs were both pioneers in the creation of credit lines for environmental projects. In Brazil, the Fundo Nacional de Meio Ambiente, Pronaf Agroecologia and financing for recycling, are – among others – the principal sources of financing for environmental projects. These sources have dedicated specific resources towards sustainable use, technological change, investments in infrastructure and environmental education.

3.3.1 The Fundo Nacional de Meio Ambiente The Fundo Nacional do Meio Ambiente is one of Brazil’s principal sources of financing for environmental projects. FNMA’s institutional mission is to contribute as a financing agent and through social participation to the implementation of the Política Nacional do Meio Ambiente. FNMA organizes finances according to seven thematic lines.

The forest expansion thematic line focuses on financing activities that prioritize the protection of forests’ biodiversity, the development of forestry and agroforestry emphasizing the use of native species, the management of virgin forests and the stimulation of the production of forest products for local and regional markets, which in turn generates jobs and income opportunities for the local populations. The greater part of the projects financed through this line are investments in nurseries, the recuperation of eroded or degraded areas, the preservation of riverside forests, hydrological resources and virgin forest and in the promotion of studies, research, monitoring, the prevention and combat of forest fires, the promotion of environmental education, the implantation of agroforestry systems, organic agriculture, the organization of production and commercialization and the managing of refuse and domestic garbage.

The thematic line regarding the integrated management of protected areas seeks to support the implantation and development of legally constituted public or private conservation units.

The support of the FNMA for protected areas includes giving incentives to shared management projects in conservation units through financing viability studies. It also includes the implementation of conservation units and tourism projects, the elaboration and implementation of forest use plans, support for research, diagnostics, monitoring, mapping and environmental zoning programs, the construction of nature trails and park infrastructure, support for archeological projects, environmental education, solid waste management, the elaboration of business plans and the management and industrialization of biodiversity products.

FNMA’s third thematic line concentrates on the sustainable management of flora and fauna. Its focus is support for conservation and preservation projects involving forest species together with income generating activities. It finances research projects, inventories, infrastructure implementation and the conservation-orientated management of native ecosystems’ flora and fauna, the use of medicinal plants, market and economic viability studies and the elaboration of business plans for the management of products of biodiversity.

The sustainable use of fishing resources credit line supports projects which seek to create integrated management of fishing resources via social participation and the conservation of aquatic biodiversity. This is done through financing research, the elaboration of business plans for fish farming and fishing activities, support for the development of new technologies, environmental education, the implementation of extractive reserves and community organization.

The environmental education line finances projects which seek to promote public awareness and preservation through social participation, promoting sustainable development, the implementation of sustainable management, the diffusion of technologies, development of sustainable tourism and leisure activities, recycling and crafts, the development of argoecology, organic agriculture and agroforestry, the installation of environmental education centers and the training of environmental guides, among other things.

Through its environmental quality line, the FNMA stimulates projects which contemplate control policies for polluting activities, the implementation of environmental emergency plans and the recuperation of contaminated areas.

Finally, the integrated management of solid wastes line prioritizes municipal projects which seek to rationalize the use of resources and programs geared to the collection of preseparated trash and recycling materials. It also implements treatment units and the final disposition of remaining residues.

The wide scope of the social, economic and environmental activities financed by the Fundo Nacional de Meio Ambiente has transformed the Fund into the main financing agent for this

sort of project in Brazil. The Fund’s principal limitation is its relative lack of interest in the economic viability of the projects it finances, thus limiting these projects’ long term financial sustainability. In this case, partnerships between the Fund and organizations that have more experience in analyzing financial management and markets could increase the economic potential of environmental projects.

3.3.2 The agroecology program The Programa Nacional de Apoio à Agricultura de Base Ecológica nas Unidades Familiares de Produção was launched by the Ministério do Desenvolvimento Agrário in 2004. The program’s objective is to give support to family-based farmers who are trying to make the transition from extractive systems of agriculture, husbandry, fishing and aquaculture to ecology-based systems. The program supports technological transition processes and the production, commercialization and consumption of organic food.

This program is subdivided into 6 action lines: training of technicians and farmers, technical assistance and rural extension, inciting research and teaching, credit, support for industrialization and commercialization and a specific line for the promotion of agroecology in semi-arid environments. Management of the program is coordinated by the Ministry and by a forum composed of governmental organs, family farmer organizations, cooperatives and NGOs working within the sector.

The project’s financing policy is implemented through a specific Pronaf, Pronaf Agroecologia. Farmers who present a technical project which proves transition to or the production of certified organic products have their conventional credit limit increased by 50% through this financing service. Forestry projects, agroforestry systems and sustainable extractivism are financed through Pronaf Florestal.

The Ministério do Desenvolvimento Agrário’s credit program for agro-ecology presents the widest scope for actions which favor sustainable production. In the credit operations of this case, the relationship between banks and clients is intermediated by other organizations.

Evaluation of projects’ environmental impacts is made by technical assistance providers, eliminating the need for the banks’ to conduct their own monitoring.

3.3.3 Financing recycling The recycling of solid wastes is an activity which enjoys growing numbers of sources of financing. The reinforcement of the social organization of this activity has also increased the number of support organizations and public policies which, in turn, increase the activity’s economic potential. In this case, several MFIs finance individual collectors, associations and cooperatives without, however, evaluating the activity’s environmental impact. Financing lines for recycling activites are also available through the European Investment Bank, Banco do Nordeste, BID, BNDES, FNMA, IFC and Banco do Brasil, among others. In these credit lines, there also are currently no mechanisms set up to evaluate the environmental impact of the projects in financed.

4. Microfinance and sustainability The fact that there exist few studies of the relationship between microfinance and the environment reveals how this theme is currently viewed by organizations involved in the sector. There are no registers of MFIs in Brazil with specific policies regarding environmental factors in financing projects. This is not a problem which is specific to Brazil, however. There are few experiences in the world which have attempted to deal with the practical and theoretical aspects involved in linking microfinance to environmental sustainability (12). In general, the existence of microfinance programs is considered in and of itself a component of banking institutions’ attempts to create sustainability. However, the role of microfinance services in businesses that depend or impact the environment has thus far been largely ignored.

The Global Development Research Center, an educational and research organization which works with questions related to the environment, is one of the rare exceptions to this general rule. Its Environmental Colours of Microfinance Program promotes and develops micro-financial practices geared towards improving health and the environment in the workplace and encountering economically viable solutions to environmental problems. The Program also engages in the environmental administration of microfinance programs and, through microcredit programs, encourages communal and participatory practices which seek to protect the environment. Finally, it supports technological innovation in microenterprises and the promotion of new microenterprises with environmental emphases.

The small financial margin which small-scale entrepreneurs work with is considered to be the principal barrier to the adoption of more environmentally friendly technologies. For this reason, some international MFIs have adopted cost-reduction strategies in order to stimulate sustainable production. Offers of non-financial services – mainly training and technical assistance – which compliment microfinance services help stimulate the adoption of technologies which have fewer ecological impacts. Another strategy which is often utilized by these organizations is the promotion of linkages between businesses and communities around the main local environmental problems. The objective here is to promote cost reduction, strengthen commitments to environmental quality, focus on long-term objectives and promote cultural change. These partnerships between businesses and communities also facilitate the identification of more adequate options, obtaining in this way economically viable solutions to environmental problems.

According to Srinivan and Pallen, microfinance has an important role to play in supporting sustainable development processes by enabling communities to resolve environmental problems. Financial services produce various effects, but among the most important is their potentially decisive role in reducing poverty while simultaneously reducing pressures on natural resources(13).

12

One of the few exceptions here, given the theme’s embryonic state, is the interesting study by Araya and Christen (2002).

13 This is also the basic argument of the text by Araya and Christen (2002).

A key variable in the environmental administration of small businesses is the capacity to anticipate and analyze environmental impacts. Unfortunately, the high costs involved in reduced scale production or service provision has made necessary the adoption of methodologies currently used for studying the environmental impacts of large projects.

Environmental administration by MFIs basically depends upon access to information regarding the social, economic and environmental conditions of the context in which their clients work. Local indicators of the environmental impact of economic activities are thus the fundamental tools in the planning of microfinance services. Rational use of natural resources, pollution control, recycling of waste, diversification of activities, efficient use of energy, risks to bio-diversity, the adequate location of activities, erosion control, sanitation and impacts on the rural or urban landscape are thus the principal factors which need to be monitored by microfinance agencies in their criterion for the concession of financial services.

The involvement of the communities within which small businesses are located in the control of environmental impacts is a strategy often utilized by microfinance institutions in order to reduce monitoring and control costs. In these cases, consideration of local values, habits, traditions and knowledge regarding the surrounding ecosystems is absolutely fundamental (Pallen, 1996).

Promotion of sustainable development can also be stimulated through financing small businesses which use the environment appropriately. This depends, however, upon the development of new markets and technologies for environmental products and services.

The promotion of agro-ecological productive activities, recycling, eco-tourism, craftwork and renewable energy, for example, offers great potential in reconciling income/job generation and the preservation and valorization of natural resources.

Sustainability is thus not the result of technological changes alone. It is the product of a series of transformations in institutional contexts which redefine the social conditions of production, financing and commercialization. Networks of social relations form specific institutional contexts in each territory and historical processes lead agents to organize themselves in given ways. The institutional environment systematically interacts with ecosystems and production systems and for this reason, sustainability must be understood as a complex system which can only be developed through integrated actions in these different and specific spheres which surround productive activities.

Technological change is always related to changes in the economic administration of units of production. When new technologies are incorporated into production, changes also occur in the types of necessary investments and the resources needed for the financial turnover of productive activities. These simultaneous changes create new liquidity conditions and needs which, in turn, generate new risk factors and situations.

The financial administration of these productive systems is the result of processes which slowly develop through collective constructs. Changes in specific parts of these systems produce significant imbalances in the entire construct. The complexity of these changes makes for a long apprenticeship process, as new practices are internalized within producers’ behaviors and rational processes.

Production systems are also related to a set of community relations – both economic and non-economic in nature. Community services, labor and product exchanges, collective work, informal financial networks and relationships involving reciprocity, cooperation and solidarity are all present in communities and are important sources of the resources which sustain businesses and households. Technological innovations which do not incorporate changes in these communities can suffer from a lack of resources, as much of these are not mobilized by individuals, but instead depend upon social interaction.

Small business sustainability also depends upon the interrelationship between the results of the financial administration of productive activities and household management. The distribution of labor and resources which are made available for productive and domestic activities is specific to each kind of production and each social condition. It follows rules constructed over time depending on the social, cultural and economical patterns of each community. Changes in production systems can mean profound alterations in the balance between productive and reproductive resources.

Another sphere which is integrated into production systems is that of commercialization.

Access to markets is itself a condition which is socially constructed according to specific configurations of interests and rules. The rules regarding access to and the functioning of market institutions depend in turn upon the characteristics of the commercialized products.

Sustainable production depends upon changes which imply differentiating products and creating new forms of relationships with consumers. Such modifications transform the configurations which support local institutions, which are themselves only effective to the degree in which they adapt to the conditions of market access which characterize the new products.

In other words, sustainability depends largely upon the support given to the transference of new technologies. It is above all the result of conforming a new institutional arrangement so that this will integrally promote technological, financial and commercial changes, as well as transformations in systems of production and even culture itself.

The relationship between nature and financial services is thus doubly constructed. Nature is economically relevant to productive activities and their organization, as it impacts heavily upon administration and upon resource availability. On the other hand, society’s relationship with the environment and its resources is economically conditioned because it is strongly influenced by the ways in which financial institutions and other markets behave.

For these reasons, the formation of organizations which offer financial services tailored to the environmental, social and cultural conditions of each territory is a fundamental condition for the sustainability of new systems of production. Microfinance institutions geared towards family agriculture in specific environments, for example, are the product of three basic factors: economic viability in the administration of the microfinance institutions, wide access of farmers to these services and the profitability of the productive activities which are financed. To these three factors, we must add a fourth: the sustainability of the natural resources upon which the production system itself rests. Ayala and Christen (2002) speak of three decisive dimensions to sustainability when dealing with microfinance: “1) the sustainability of natural resources; 2) the sustainability of the poor who depend upon

biodiversity for their livelihood and 3) the sustainability of the institutions which serve these two objectives�.

The main problem of the vast majority of the microcredit programs which have up until now been implanted in Brazil is that they only emphasize increasing outreach and reducing interest rates. Not much has yet been done to promote the sustainability of the financed businesses. These programs’ limited vision can provoke negative external factors with regards to the effects of credit upon the environment. The limited criterion and evaluation methods applied to finance projects and the absence of social and environmental evaluations impede the interaction of actions and goals. The lack of technical assistance, both in implementing new technologies and in the financial administration of production units reduces the production systems’ capacity for sustainability. This incomplete offering of financial services, coupled with the lack of consumer credit, commercialization and insufficient means for saving and insurance, provokes constant imbalances in family assets due to oscillations in income and unforeseen expenses for necessities, limiting, in turn the sustainability of the families themselves.

5. Conclusions and recommendations In general, the lack of knowledge regarding the realities of small-scale entrepreneurship is one of the main obstacles in formulations a financing policy which can adequately meet this public’s needs. This problem is even graver in the case of those activities which have a close connection to environmental problems. Linking the social reproduction of the poor (their livelihood) with the resource bases which support their activities and the viability of the economic exploitation of these resources is not something which is currently part of the culture of the organizations dedicated to microfinance. With the exception of those dedicated to agro-ecological projects, there are not enough studies or adequate methodologies to analyze the ecological impact of these activities. The pulverization and diversification of these activities also impedes the implementation of cost-effective environmental impact monitoring and evaluation methods in small-scale rural and urban enterprises.

Reduction of these costs can be obtained through sector- or territory-based monitoring systems, through the formation of professional networks and through the active participation of the communities involved. Programs which establish partnerships between financing and support, certification, technical assistance and international reference organizations seem to be the main strategy for reducing costs and enabling banks, cooperatives or microfinance institutions to use environmental criterion in project financing.

Another problem which must be taken into account is the lack of economic rationality currently observable in the administration of environmental programs. The establishment of economic criterion for the evaluation of project sustainability is fundamental in order to give entrepreneurs access to regular credit lines. To do this, it is necessary to train financial agents and formulate credit analysis procedures which take into consideration both economic and environmental criterion as well as the training of entrepreneurs in administration techniques and project elaboration.

The definition of environmental criterion for the financing of projects is a complicated topic given the vast variety of environmental conditions and productive activities currently found in Brazil. The formulation of directives and criterion for the analysis of environmental impacts must be preceded by research which evaluates the principal interactions existing between small businesses and the environment. The formulation of a system of environmental impact indicators for small enterprises will also be important in establishing a process of continuous evaluation of environmental impacts.

From these conclusions, we can formulate some recommendations for introducing a microfinance policy in Brazil which considers environmental impacts and the sustainability of the financed projects.

5.1. Suggestions for research The formulation of a strategy for improving access to financial services depends first and foremost upon understanding the realities, needs and environmental impact of small-scale entrepreneurship. In order to do this, we must first conduct a survey of the principal economic activities being developed by small-scale entrepreneurs in the rural and urban areas of the coastal region. We must make specific diagnoses regarding the environmental impact of these activities and what financial services would best serve to increase their sustainability. These studies must be conducted by territory and activity sector. The diffusion of the information contained in the next ECINF (2004) can aid in this task, but it cannot substitute specific fieldwork directed towards areas of the greatest environmental impact along Brazil’s coastal regions.

5.2. Definition of the criterion to be used in project evaluation The environmental criterion used in offering financial services should be objective, measurable and widely recognized so that these can be applied in the projects elaborated by the entrepreneurs and clearly evaluated by the financial organizations. In order to achieve this, we must construct a system of environmental impact indicators for small-scale enterprises. This construction process must be participatory and involve the principal organizations linked to the sectors which produce the greatest environmental impacts in the coastal region.

5.3. Formation of new institutional arrangements In order to reduce monitoring costs, it is necessary to stimulate the formation of partnerships between financial organizations, technical assistance organizations, NGOs and the entrepreneurs and their associations. The fragility most sectors contemplated here, especially those involved in the informal urban economy, demands that great efforts must be directed towards this goal. A short term solution might be the implementation of pilot programs in those sectors which are more densely organized – such as recycling, agriculture, fishing, or some of the segments which compose the social economy of solidarity. Financial stimulation by public policies through the lowering of interest rates for sustainable projects and the financing of technical assistance and training programs may also create important effects in the formation of organizational networks.

5.4. A program to strengthen the financial administration of environmental projects The existence of few experiments in financing policies for environmental projects means that a training program for financial organizations and entrepreneurs must be developed. Microfinance institutions must become capable of implementing environmental administration mechanisms in their credit lines. They must also strengthen the economic administrative capacity of environmental projects. To do this, it will be necessary to create a training and technical assistance program for the financial and environmental administration of small-scale productive activities in Brazil’s coastal region.

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