The poor of the world are numerous and have many needs; no single solution will meet them all. However, as David R Befus wrote, “governments of most countries support micro credit as a development strategy. It is one policy that generally has support from politicians on opposite sides of the ideological spectrum.”1 Microfinance has proven to be an effective way to lift individuals out of poverty in a way that is realistic, sustainable, and respectful of personal dignity. The foundational belief of the industry is that the poor deserve the same access to financial services that the wealthy enjoy.
What is it?
Simply put, microcredit is the issuing of small loans to the working poor. It is part of a larger industry called “microfinance,” which simply includes additional financial services (loans, savings, insurances, etc.) designed specifically for the poor. These services are called “micro” because the amount of money involved in individual transactions is extremely small. Loans can even be as small as $20. Programs that provide savings accounts may take deposits of several cents at a time.
Microloans generally require no collateral. Instead, most programs use some form of group guarantee, requiring borrowers to meet regularly with a group of their peers to encourage loan repayment. Most microcredit programs have repayment rates that are much higher than those of traditional loans. That is to say, the poor have proven to be more consistent at repaying their debt than the wealthy.
Microcredit is an important poverty alleviation tool for several reasons. First, it gives the poor a reliable way to access lump sums of money for investment purposes. The poor earn small amounts of money, but most income is quickly spent on daily needs. It is difficult to find extra to save, and even then there are few safe places to keep it. Larger sums of money, like the kind provided by microloans, are necessary to expand or to start any kind of small business. They provide the first steps toward greater business profitability and higher income.
Even where it does not immediately boost income, access to credit provides a measure of security to the vulnerable poor. They know that they can get a loan at a fair rate from a reliable source. This makes them less vulnerable to disasters or emergencies.
Finally, microcredit is a poverty solution that gives people their dignity. Providing them with loans shows them respect as wage-earners and small business owners. As they build up their businesses, they learn about credit and money management, and are better able to participate in the broader business community. Many micro-entrepreneurs grow their simple endeavors into profitable, thriving small businesses.
1David R. Befus, “Discovering a Role in God’s Provision: Sustainable Economic Development for the church and the Poor,” Working with the Poor: New Insights and Learnings from Development Practitioners, ed. Bryant L. Myers (Monrovia, CA: World Vision,.1999) 81-93.