Weaving a Microfinance Success Story…Without the Microfinance?

By Leigh Madeira, KF10 Ecuador

Anyone who visits Ecuador, Quito in particular, will likely hear that Otavalo, a town with 40,000 indigenous people about 1.5 hours from the capital city, is a must-see. Is it for the beautiful beaches? Definitely not. The rainforest, cloud forest, or lush mountainous landscape? Not that either. The wildlife? Nope! Although Otavalo is a quaint town with great views of the surrounding volcanoes, it is a popular tourist destination solely because it has one of the most famous indigenous markets in all of South America. In fact, Lonely Planet calls the Otavaleños (people from Otavalo) “the wealthiest and most commercially successful indígenas (indigenous groups) in Ecuador”.

Perhaps the most interesting part of Otavalo’s success, for me at least, is that the Otavaleños have in large part preserved their indigenous culture. They didn´t have to choose between maintaining their lives and customs as an indigenous population and being successful entrepreneurs. They still dress the same, they still maintain the same customs, and to this day, the Otavaleños still gather every Saturday morning to trade livestock and other goods in the same bustling, chaotic (and most definitely not FDA approved!) manner they did a century ago.

I was able to visit the town twice and, once I got over the initial shopper’s rush, started to wonder just what made these people so successful. As a Kiva fellow I immerse myself in Ecuadorian microfinance and meet entrepreneurs day after day who would love to be half as successful as the average Otavaleño. I couldn´t help but wonder, why are the Otavaleños so successful and did microfinance play a role?

Otavaleños have been known for their weaving for centuries now, but as recently as the 1940s the Otavaleños were nothing more than peasants…a far cry from the successful entrepreneurs you see throughout the city nowadays. There are several factors that contributed to this development:

• Market expansion and export boom

According to Otavalo researcher Tanya Korovkin*, “in the 1960s and 1970s, national manufacturing grew at annual rates close to 10%, with the textile industry being one of the most dynamic branches.”

• Import-substitution industrialization

Wikipedia describes it better than I can! Import-substitution industrialization is “a trade and economic policy based on the premise that a country should attempt to reduce its foreign dependency through the local production of industrialized products.”

• Rural-urban migration

Due to pressure on land starting in the 1950s, many Otavaleños migrated to larger cities to work in textile factories. When they returned home they introduced many of the factory techniques they had learned, such as synthetic yarn and the electric loom.

• Government support for indigenous craftsmen

The Ecuadorian government created numerous organizations to train and promote indigenous craftsmen dating back to the 1950s. The organizations offered training courses and technical assistance and established artisan markets for indigenous entrepreneurs.

Where is the power of microfinance in this story? As much as I would like to tell you that it was the main reason behind the success of the Otavaleños, the truth is that microfinance played a very minimal role in the development of this indigenous group, although not for lack of trying.

In addition to the organizations mentioned above, the government also offered financial assistance for small entrepreneurs through the National Development Bank and the Ministry of Labor. Sounds promising, but in reality, “the amount of public credit that indigenous artisans received was modest*” for a few reasons:

• Difficult bureaucratic procedures to obtain loans (anyone who has been to a DMV can probably imagine)
• Threat of foreclosure
• Unrealistic legal and financial prerequisites
• Cultural and language barriers between Spanish-speaking bank employees and the Quichuan-speaking indigenous clients

Korovkin* explains, “As a result, only the largest among Otavalo´s indigenous craftsmen and traders were actually willing and able to get access to bank credit. Most others either relied on their own capital or operated outside the formal banking system, using consignment arrangements with local traders or borrowing money from informal money lenders, whose interest rates were much higher than the banks’*”

In typical Otavaleño fashion, some entrepreneurs started local credit cooperatives to provide affordable access to credit, a few of which were very successful. However, the fact remains that most Otavaleños did not have access to microfinance, which likely would have been wildly successful.

As a result of their entrepreneurial spirit and some good old-fashioned luck, the Otavaleños are not only a model for modern success, but also an example of how cultural preservation does not have to clash with technology and financial success. Although I firmly believe in the power of microfinance, access to affordable credit does not guarantee success and, in Otavalo’s case, the lack of access to affordable credit does not automatically determine failure. If microfinance would have been available in the developmental stage for Otavalo, who knows what the market would be like today? While no one can be sure, there is one thing I know…my wallet wouldn´t have been able to handle it!

*Source: Commodity Production and Ethnic Culture: Otavalo, Northern Ecuador by Tanya Korovkin

Leigh Madeira is serving in Guayaquil, Ecuador with Kiva Field Partner Fundación D-MIRO as a member of the Kiva Fellows 10th class. Please join D-MIRO’s lending team, make a loan to a D-MIRO entrepreneur or donate to Kiva today!