microloans: end poverty, microsave the world

I got a letter from a woman in India the other day. An email, actually. Her written English was halting and grammatically atrocious, but her sincerity and gratitude were unmistakable. I had recently loaned her $50, and she had written to thank me.
No, I have not been caught up in a Nigerian-prince-style marketing scheme (I hope). I have just been introduced to the only-in-the-21st-century-would-this-be-possible idea of microloans.

Actually, I was introduced to the idea a few months ago while scholarship-hunting on the internet and it has been a bug in my ear since, so I finally decided to try it out. Part of the double-edged sword that is globalization is that we now know about problems such as the horrors in Darfur, or the poverty in India and Africa and much of southeast Asia, and we feel the need to do something about it.

I think it speaks volumes about the nature of our society that we do feel such responsibility, and that there are many, many people working hard to save the lives and dignity of people they will never meet. Americans contributed $303.75 billion to charity in 2009, a full 2.1% of our GDP. However, when our international aid is assessed in real, ‘how much does it actually help’ terms, we rank 18th out of the world’s top 23 economies in effectiveness. There is no doubt that, as a nation, we want to help and we are willing to work to help. So the question becomes: what is the most effective way to help?

And that is where the other edge of the sword comes into play. Due to expanding global markets, instantaneous communications, and worldwide economic and social networks, we are able to find innovative ways to help others. Until recently, when you sent a check to UNICEF, or the Red Cross, or any international charity organization, you got no further information about how and where your donation was being used. You never saw the people you helped. You just hoped you helped someone, somewhere.

Large international aid organizations have other detriments as well: large operating budgets (decreasing the percentage of aid donated that actually assists those it is meant to assist), political and bureaucratic inertia that must be overcome in countries before the aid can be distributed, worries about damage to local economies and aid dependency; the list goes on and on.

Recently, a new paradigm of assisting the world’s poorest populations has begun to take root: microloans. The idea behind a microloan is beautiful in its simplicity, and staggering in its implications. You provide a loan of as little as $25, and that money goes to an entrepreneur in an impoverished region to start, maintain, or expand a business (a quick side note: the Small Business Association has been lobbying congress and banks to free up money for what they are terming ‘microloans’ here in the U.S. These are generally ‘tide you over’ loans of up to $10,000. These are much different in both scope and goal from the microloans discussed here. Just wanted to give the heads up in case anyone decided to google ‘microloans’ after reading this).

My loan went to a woman in India to buy fabric for her ‘shop’—a photo showed it as a lean-to next to a tree—where she makes petticoats to be worn under saris. My $50 (plus the lunch money of a few other donors) will allow her to stay open for the rest of the year. I think of it as a self-regenerating charitable donation. I get to help someone in need, and in a few months, that money will be back in my PayPal account to help someone else in need. Such is the beauty of the microloan.

The microloan boom began as an idea in the mind of Mohammed Yunus, an economics professor. Frustrated by what he saw as a cycle of poverty and exploitation in his native India, in 1976 he founded the Grameen Bank Project (‘Grameen’ is Farsi for ‘rural village’) to give loans to people who were traditionally outside the purview of banks. Most of his early clients were women whose only other option in securing loans for businesses or entrepreneurship were local loan sharks, and who often ended up in something akin to indentured servitude to pay back their loans.

Yunus offered them a safe, reliable alternative and the women of Bangladesh came in droves. What’s more, they repaid the loans on time, almost all of the time, showing that even those without traditional ‘credit’ could be helped by the right money in the right spot. The success of Grameen has caused an interest in expanding the model worldwide. The microloan model has sprung up banks throughout Africa, Asia, the Caribbean, and South America, where people can go to get reliable, reasonably rated loans for small amounts.

One of the reasons these loans have the potential to be a vehicle for change in these societies is the often high rates of entrepreneurship poorer societies allow. Where you cannot go to Walmart to get everything you want, you must go from local vendor to local vendor, allowing people to produce and sell their own wares and be self-employed at a much higher rate than in industrialized nations. Peru, for example, has an entrepreneurship rate of almost 40% of the employed population, compared to just over 14% percent for the U.S.

A reason to hope for significant change from these loans is the growing recognition that economic freedom is freedom in many ways. U.N. studies have found direct correlations between economic freedoms and human rights throughout the world, and the Nobel Peace Prize committee has recognized the importance of economics in promoting a just and peaceful world, awarding the 2006 prize to Mohammed Yunus and Grameen Bank.

Microloans are certainly not a panacea—they have their faults as well as their promises. Studies attempting to confirm their societal level effectiveness have been inconclusive and contradictory (though most experts are waiting until enough data becomes available for true controlled random sampling to clarify effects). And there are those who would take advantage of microloans for profit and disappear. The very nature of the loans means those who get them would find it easier to disappear than those applying for larger loans. But with loan sites like Kiva.org and MicroPlace.com as well as Grameen Bank reporting repayment rates around 98%, even after the recent worldwide economic downturn, one must at least be comforted to know that almost all of the people who come to these places for help are willing to work for their economic freedom, and that these loans are indeed helping them do just that.

Now, if you’ll excuse me, I’m off to help corner the petticoat market in Bangladesh.

The links for the U.S. Charity Numbers:
http://www.pursuantmedia.com/givingusa/0510/

And the ‘effectiveness’ numbers:
http://www.cgdev.org/section/topics/aid_effectiveness/quoda

Photo by Emre Ayaroglu.

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microloans: end poverty, microsave the world

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