Micro-Financing: Scrapping Old Notions of Development

With the advent of a new year, people reflect on the events or behaviours which define their lives, and try to improve upon the previous year’s setbacks by creating New Year’s resolutions. Yet, as a society, we should also consider the past year in the global context, and consider resolutions to improve conditions for others as well. Decreasing and ultimately eradicating the problem of poverty in Africa has been a goal that the global community has pursued for many decades. Up to now, developed countries around the world have all contributed significant amounts of aid to Africa, yet poverty is still prevalent. Third world dependency on foreign aid has quickly become a dangerous downward spiral, with limited opportunities for improved living conditions or sustained upward mobility in sight.

For years, the field of development was dominated by government donor agencies like USAID, CIDA, and UNDP, as well as a cluster of big non-governmental organizations (NGOs) like UNICEF, CARE, and World Vision. For the United Nations the formula for economic stability involved large injections of capital to the poorest regions of the world. In line with this belief, African countries have received US$568 billion in foreign aid over the past four decades, $12.4 billion of which was contributed by Canada.

One would think that being provided with such substantial financing, African countries would have all the resources needed to resolve their poverty-related issues, but this has not been the case. Rampant corruption amongst the elites that represent the poor countries has resulted in aid rarely getting to the people who needed it the most. In circumstances where aid did filter down to the poor, the money did not ease the effects of poverty in these regions, as this money was not re-invested into the community. Market-oriented reforms were not created to encourage re-investment, and so repeated behavioural patterns of stingily retaining money were adopted by the poor. All of these challenges placed the foreign aid programs administered by industrialised countries and NGOs into question, as they did not do enough to eradicate poverty.

It wasn’t until the late 1970s that private actors become more involved in development. In 1976, Mohammed Yunus, a university professor of economics, established the Grameen Bank in Bangladesh, and later became known as the godfather of microcredit. Microcredit schemes involve giving the world’s poor small loans, usually less than $US100, to start their own businesses and thus gain a means to support their families. Microfinancing has a higher likelihood of reducing the rate of poverty than continued foreign aid because it works directly with individuals in need of help, rather than through a corrupt governing system.

Some economists question the necessity of microcredits, stating that an average bank loan would provide the same benefits, but the reality is that many of the people who suffer from poverty would not be approved for a loan since they have no capital or collateral to offer. Moreover, regular bank loans are inaccessible to the poor because they tend to live in rural areas, not in proximity to commercial banks.

Today, the Grameen Bank alone has distributed more than $5.3 billion to almost seven million borrowers - 96% of them women. And though interest rates can be as high as 20%, Grameen claims to recover 98% of its loans, while any profits made are reinvested in the community. Given the proven success of the Grameen Bank, which shared the 2006 Nobel Peace Prize with its founder, Mr. Yunus, many NGOs are now carrying out the same task, throughout Latin America, Africa and Asia.

Currently, Grameen, which means village in Bengali, is an idea that has spread to more than 40 countries. Its grassroots approach has proved to be sustainable and has given millions of female borrowers an opportunity to provide for their families and find a new lease on life. So this year, perhaps micro-financing should be expanded to more regions since traditional practices of providing financial aid may not work in all parts of the world.

As culture, religion, and politics continue to shape the distribution of wealth in developing countries, the strategies implemented to assist the world’s poor must also adapt to these changing social environments. Instead of relying on traditional methods of foreign aid, micro-financing could provide a significant financial boost to a community’s economy by increasing self-employment opportunities and financial independence. Additionally, micro-financing promotes economic equity, and decreases the strain placed on developed countries to provide aid to developing countries. Micro-financing has the potential to provide multiple dividends at a lower cost, and has a higher probability of success. All that is needed now is the motivation to act.

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