The Pros and Cons of Microfinance to Beat Poverty


Microfinance can make and has made an impact on global poverty for certain people (those with an entrepreneurial spirit) in certain places (those where entrepreneurs are free to grow and sustain a business), Dawes writes.
"The poor will always be with you."

This somewhat dismal proclamation first appears in Deuteronomy 15 and is repeated in Matthew 26.

These are weighty sources, so is it true that poverty must always exist?

Muhammad Yunus, founder of Grameen Bank and winner of the 2006 Nobel Peace Prize, does not think so.

Yunus' vision originated in a 1976 research project in Bangladesh, in which he considered "the possibility of designing a credit delivery system to provide banking services targeted at the rural poor."

This credit delivery system is now known as microfinance, which the Grameen Foundation describes as: "Very small loans, or micro-loans, to poor people, mostly women, to start or expand very small, self-sufficient businesses. Through their own ingenuity and drive, and the support of the lending microfinance institution (MFI), poor women are able start their journey out of poverty."

The foundation adds: "Unlike commercial loans, no collateral is required for a micro-loan and it is usually repaid within six months to a year. Those funds are then recycled as other loans, keeping money working and in the hands of borrowers."

This approach has proven extremely successful, providing 9.4 million impoverished persons with microloans and creating numerous success stories.

Despite these advances, microfinance is not without its problems, detractors and exploiters.

Beginning in late 2010, Yunus, the Grameen Foundation and the microfinance concept have come under increasing scrutiny.

Some detractors seem to be politically motivated, as certain members of the Bengalese government might have a personal vendetta against Yunus.

Other detractors cite exploitation of the system by "loan sharks" – an occurrence Yunus recently decried – and lack of accountability.

In a January 2012 column on EthicsDaily.com, Vinoth Ramachandra discussed "cracks" in the microfinance industry, citing excessive interest rates that often result in inescapable debt cycles as new loans are taken to pay interest on old loans.

MFI interest rates are a complex problem, as David Roodman of the Center for Global Development reveals, making it difficult to distinguish between interest payments and required savings plans.

With an abundance of MFI organizations, accountability is also a problem. In some regions, individuals have accumulated unhealthy debt by irresponsibly accepting multiple loans from different organizations.

Thus, for all its benefits, MFI faces at least two significant issues:

●     Predatory lending: the poor are exploited under the garb of helping.

●     Unsustainable debt accumulation: poverty due to deprivation is replaced with poverty due to debt.

Nevertheless, a detailed research thesis and a recent report by the Microcredit Summit Campaign – available here and summarized here – suggest that MFI can be an effective tool in addressing poverty when handled ethically and responsibly by both the lending organization and the client.

This is where Christians can play an important role.

Our sacred texts continually stress concern for the poor, wise financial management and sharing our abundance with others.

They also critique unjust gain, exploitation of others and forbid "usury" (that is, charging excessive loan interest).

Thus, churches and their judicatories have strong motivation for establishing or supporting MFIs or both, while avoiding the key problems of predatory lending and unwise debt accumulation.

Recognizing this, many Baptist groups already have microfinance initiatives.

The International Ministries arm of American Baptist Churches USA has a microcredit program and recently launched a program in northern Thailand that will support several villages through various economic development initiatives, including a micro-finance component.

The Baptist World Alliance is using variations of the microfinance concept to address needs in the following countries: Zimbabwe, Bangladesh, Sierra Leone, Zambia, Mozambique, Cameroon, Jamaica and the Democratic Republic of Congo.

Tearfund, a Christian social justice organization in the United Kingdom, has a microfinance initiative called Inspired Individuals, which provides small, financial stipends and support/training to individuals that are seeking to address poverty.

The Cooperative Baptist Fellowship Foundation also has a microfinance program, which has been implemented in the following countries: Bolivia, Bosnia, Cambodia, Colombia, Kyrgyzstan and Peru.

The long-term impact of microfinance remains to be seen due to unfortunate (but, perhaps, unavoidable) abuses.

Yet, it seems that microfinance can make and has made an impact on global poverty for certain people (those with an entrepreneurial spirit) in certain places (those where entrepreneurs are free to grow and sustain a business).

It is certainly not the panacea for all manifestations of poverty, but it can and should be part of the solution.

The statement with which we began, "the poor will always be with you," arises in a passage calling for perpetual acts of generosity toward those in poverty.

"If there is among you anyone in need … do not be hard-hearted or tight-fisted towards your needy neighbor. You should rather open your hand, willingly lending enough to meet the need, whatever it may be" (Deuteronomy 15.7-8).

The notion of helping the neediest among us – through generosity, lending without usury, and even forgiving the debts of the impoverished at certain times and in certain circumstances – is rooted deeply in our faith tradition.

One way churches can enact this calling is by using microfinance responsibly and ethically to address poverty through compassionate, constructive lending.

Zach Dawes is the managing editor for EthicsDaily.com.

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Tags: Microcredit, Microfinance, Poverty, Zach Dawes


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