Today is blog action day. All around the world, thousands of blogs will be writing about the same issue – poverty. There are many ways to combat poverty. One of the methods that is increasing in importance is microcredit. Microcredit has come under the world spotlight over the past several years. The United Nations declared 2005 the Year of Microcredit and in 2006, Dr. Muhammad Yunus, considered to be the founder of microcredit, won the Nobel Peace Prize.
What is Microcredit?
Microcredit is the use of small loans to people who are too poor to qualify for standard bank loans. The goal of the loan is to help them move out of poverty by helping them start or expand some form of business known as an income generating activity. The loan is then paid back quickly, generally in one year or less. Payments are made weekly with interest paid as part of those weekly payments. Microcredit caries a natural appeal to people who might be skeptical of traditional methods of international aid because it promotes the idea of a “hand up not a hand out”.
In March of this year I was privileged to take a brief trip to Bangladesh to witness the work of the microcredit division of an organization called Child Development Network. This was a profound trip that opened my eyes to the issues of global poverty and how microcredit can be used in the fight.
Income Generating Activities – Entrepreneurship
Rickshaw Driver in Dhaka, Bangladesh
Microcredit is all about supporting and developing entrepreneurs. Loans are made for income generating activities – in other words for small (sometimes very small) businesses. Some examples from Bangladesh include:
* Rickshaw drivers – one common purchase with a microcredit loan is a rickshaw. Rickshaws are often used instead of taxis in Bangladesh. A loan for one rickshaw generally creates two jobs, as the owner will use it for 10-12 hours a day, and then hire an employee to drive it for the remainder of the day. Enterprising people will turn their profits from their first rickshaw into a second rickshaw that they hire employees for.
Farmer in the slums of Dhaka
* Farmers – in rural areas the farmers are the primary entrepreneurs to benefit from microcredit. Money is often used for a cow or a bull. The farmer is able to sell the milk and the calves to create an income, and slowly over time increase their herd. Even in the slums of
the city entrepreneurs will set up small farms (see photo).
* Small Shops – some entrepreneurs set up small stores with their loans. These are generally small tin shacks with an open front for customers to come to. They sell everyday use items such as soap and toothpaste, as well as some basic foodstuffs.
* Fruit and Vegetable stands – similar to the shop owners, some people develop fruit and vegetable stands where they are able to sell fresh produce that has come in to the city from the countryside.
* Sewing shop – another popular use of microcredit is to purchase a sewing machine and do sewing services for people. Again, this has the potential to create many jobs as people often will pay off their first sewing machine and use future income to purchase a second machine and start hiring people.
Benefits of using Microcredit
1. Freedom from moneylenders
Microcredit moves the debt out of the hands of moneylenders who charge extremely high rates of interest. These borrowers are not eligible for loans from traditional banks for many reasons. In general, they are not considered to be viable borrowers. Usually, they do not have a suitable form of collateral, many are illiterate, and often the loans are so small that the bank would not make enough profit to cover the costs of completing the paperwork. Because of this, people who are already struggling with severe poverty are forced to go to the money lenders. Much to the surprise of the traditional banks, microcredit organizations tend to have repayment rates around 98%.
2. Creating savings
Many microcredit organizations require beneficiaries to save for the future. Dr. Yunus’ Grameen bank requires that 5% of each loan is saved on a weekly basis in a group fund. Other organizations save the funds on behalf of the borrowers allowing for the funds to be used only in cases of emergency. Beyond required savings, many microcredit organizations allow borrowers to save at their own initiative. By encouraging people to save for their future they are able to help people prepare for the possibilities of floods, famines or other disasters, as well as saving for future purchases.
3. Empowerment of Women
Another advantage of microcredit is that most loans are made primarily to women. This results in significant empowerment for women in cultures that often have very few rights for women. Empowerment also comes through the relationships that women develop. As women meet weekly with other borrowers they develop relationships that help them both with business growth and other life goals.
4. Providing Other Services
The framework of microcredit provides for the possibility for organizations to provide borrowers with many other services. The variety of extra services is vast and may include provision of health care and disease prevention, literacy programs, as well as savings and insurance programs. One of the most important services that many microcredit organizations focus on is training. The group approach especially provides opportunity for easy and efficient training whether on business skills, character development.
5. Multiplication of Donations
The donations that are made also have a multiplier effect as the money is often loaned out several times. Each time it is repaid it is loaned out to another beneficiary. This is a big part of what makes it so appealing to donors. The multiplication effect can be even greater when you consider that more than one job is often started from each loan. As the borrower grows her business, she is able to hire other people increasing the level of employment in the region.
Further, the lending agency should eventually be able to become a self-sustaining enterprise. After an initial period of funding from outside organizations, the lending agency will be able to continue to expand their services to more and more beneficiaries by simply using existing revenues.
6. Poverty Alleviation
Naturally the big benefit of microcredit is that it helps people move out of poverty. This is a slow and steady process that occurs as borrowers grow their business. As their standard of living increases through their business or other income generating activity the borrowers move past the point of fighting for survival and are able to start dreaming about the future.
It may take a year or two for a borrower to move from $1 a day in income to $2 a day in income. By progressing even in this small way, the borrower is able to substantially improve their life. The goal for borrowers with their extra income is to move to a point where they are not worried on a daily basis about what they will eat. This moves people from a point where they are barely surviving to a point where they are able to start to focus on other goals. Normally the next goal becomes providing education for their children.
Banker for the Poor – Muhammad Yunus – The original book on microcredit, written by the man many consider to be the founder.
A Billion Bootstraps – Thurman and Smith – A thorough book looking at the use of microcredit and related services for poverty alleviation
End of Poverty – Jeffery Sachs – The most important book written in recent years on the topic of poverty
Before blog action day ends today you need to take action. Here are a few concrete options:
1. Phone your favorite international aid agency and ask them how you can support microcredit through them.
2. Visit http://www.kiva.org/ to personally loan to an entrepreneur.
3. Sponsor a child through Compassion or World Vision.
Poverty needs to be all of our concerns. Too often we neglect to care for world wide poverty because it doesn’t hit close to home. As a Christ-follower, it frustrates me that the Christian church often focuses on secondary (even petty) issues rather than the important work of fighting poverty. After all Jesus started his ministry with poverty on his heart:
“He went to Nazareth, where he had been brought up, and on the Sabbath day he went into the synagogue, as was his custom. And he stood up to read. The scroll of the prophet Isaiah was handed to him. Unrolling it, he found the place where it is written:
“The Spirit of the Lord is on me,
because he has anointed me
to preach good news to the poor.
He has sent me to proclaim freedom for the prisoners
and recovery of sight for the blind,
to release the oppressed,
to proclaim the year of the Lord’s favor. ”
Then he rolled up the scroll, gave it back to the attendant and sat down. The eyes of everyone in the synagogue were fastened on him, and he began by saying to them, “Today this scripture is fulfilled in your hearing.” (Luke 4:16-20).
The Success Professor – Danny Gamache
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