- Last Updated on Wednesday, 03 April 2013 10:59
- Published on Wednesday, 03 April 2013 10:59
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The developing world has a long list of burdens. There is poverty, poor health care, lack of schools, very little money, and often corrupt governments. Building an economy and developing business in this environment often seems impossible.
There are aid programs, and they do a lot of good, but often, in terms of helping individuals move out of poverty, they aren’t that effective. Larger programs help build needed infrastructure. But in terms of providing that much-needed individual leg up, and fostering the growth of a strong economic base, they haven’t been able to provide the kind of help
|Microlending, a free enterprise approach to foreign aid, has the potential to change not only the lives of individuals, but also, through their success, the economic base of their communities and even their countries.|
That’s where microfinance comes in.
The amount of money needed to launch a small enterprise in a developing nation, by American standards, is surprisingly small. It can be as little as $200 for a rototiller, $50 a for fishing net, or an equally small amount to open a stand in town or city market place.
Not surprisingly finding a bank that will make a loan this small to a person with no credit history and with no assets is almost impossible. No one wants to lend to the poorest of the poor. Unfortunately, the result is that a lot of prospective entrepreneurs, generating the kind of business activity that can grow a developing nation’s economy, just languish. Microfinance has the potential to change that.
There is a lot of debate about whether this can ever be a profitable lending enterprise or not, but that part of the debate, in a way, misses the point.
Its real value may be in providing a form of foreign aid that directly and materially improves the economic wellbeing of individuals. There are a host of examples of how well it works. In Rwanda, a small church-based microlending institution, based in Britain, provides micro loans to farmers to buy livestock for breeding. The repayment terms are similar to those of a regular bank, but there are no collateral requirements, and the interest rate is reasonable. The group works through local churches and villages and administers the program directly.
Another example is in Bangladesh, one of the world’s poorest nations, where small loans have helped thousands. An example was a loan for $65 that helped a widow purchase a sewing machine. She made enough money to buy another machine and now has two employees. Not all of these loans are successful, but the track record, in terms of business success and repayment is impressive.
Microlending has a lot of supporters.
There are all sorts of lenders, from church groups to the International Monetary Fund, but not all have been successful. In India, one large scale microlending program was so badly managed, with thousands of bad loans, that it all but collapsed. However, microlending accompanied by some sort of business counseling to include some understanding of the borrower and a business plan, is a good formula for success.
Most foreign aid is conceived and managed on a large scale. Microlending, by contrast, is aimed at individuals and is carried on a small scale administered on a local level.
It’s by no means a complete solution. The larger problems remain. But this is a free enterprise approach to foreign aid that has the potential to change not only the lives of individuals, but also, through their success, the economic base of their communities and even their countries.