In many impoverished and economically undeveloped parts of the world, jobs are scarce and people without one must earn their living through some sort of self-employment. Unfortunately these “microbusinesses” often provide barely enough income for a family to survive, without paying for education, healthcare or a higher standard of living, leaving the poverty cycle unbroken.
But a small infusion of capital, sometimes less than US$200, can offer these entrepreneurs a chance to expand their businesses, bring in more money and even hire employees, thus helping other families in the process. Such microloans foster grassroots economic growth and, proponents say, can change the world, one poverty-stricken community at a time.
Microlending is being touted as the next and best wave in foreign aid. With around US$4 billion invested annually around the world, the strategy offers alternatives to those with none, while leaving out such middlemen as usurious moneylenders, despots and their bureaucracies. Produce sellers in Tanzania, grocery store owners in Mexico and dairy farmers in Azerbaijan have all benefited from this concept, and, perhaps most amazing of all, it boasts a repayment rate of 95% or better.
Criticisms
The strategy is not without its critics. Microlending, they say, does not truly help the poorest of the world’s poor. After all, people without food or shelter must manage their survival, their families and their health before they can manage a business or contribute to their community, and in such cases perhaps profits would be more appropriately used to upgrade living standards than repay a loan, no matter how micro. For this reason, Trickle Up, an agency working with the most poverty-stricken people in the world, issues microgrants rather than microloans.
In areas of extreme poverty, such as rural agricultural areas, local businesses have a limited clientele with money to spend, even for the necessities of life. This puts a low cap on earning potential before the business even opens its doors, the so-called “thatched ceiling,” and while a microloan may make all the difference in reducing one family’s poverty, it may not bring about a significant change in the regional economic malaise.
Additionally, microlending can carry high overhead. Some agencies, in addition to small loans, also offer business education, insurance, depository facilities, payment transfers and other financial services, all of which require staff, office space and equipment. For these agencies, according to the International Labour Organization, efficiency becomes extremely important as an overhead-cutting strategy. While it’s true that microlending is generally perceived as more of a poverty-fighting tool than an investment, nevertheless if the cost far exceeds the return then it becomes difficult to maintain the microlending institution as a going concern, never mind a profitable one.
Because of this dual bottom line, many microloans are made to women, and some organizations intentionally target them as clients. The data suggest that men tend to invest their profits in their businesses, but women fund their families—educating, feeding and providing healthcare for their children, thus reducing the effects of poverty and giving the next generation a chance for a better future. Interestingly, women are also seen as more likely to repay their loans than men, another reason they are often preferred as clients.
“Village Banking”
To be truly effective, microfinance must be local. An understanding of an area’s culture, needs and infrastructure (or lack thereof) is required before the lender can make knowledgeable decisions regarding the best use of the funds available. One solution to this problem, used with success by FINCA and other international microfinance organizations, is the concept of “village banking,” where loans are made not to individuals but to communities, who decide amongst themselves how best to use the funds and who support each other should one member prove unable to make a scheduled payment for any reason.
With these issues, microfinance is unlikely to completely replace traditional foreign aid anytime soon, and perhaps the absolute best alleviation for world poverty lies in some combination of these strategies. However, microlending’s potential for helping the world’s poor to help themselves is vast and undeniable. Unlike handouts, there’s at least the possibility of a partial return on the investment—sustainability figures for non-profit microfinance institutions currently run around 70%—which can then be used to foster economic growth in other regions. And even after the loan is paid off, what remains is an entrepreneurial spirit, healthy and educated children and a positive sense of accomplishment.
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