Microlending is well-aimed aid

Paul Letters urges a rethink of how best to assist poor communities

PUBLISHED : Wednesday, 02 January, 2013, 12:00am
UPDATED : Wednesday, 02 January, 2013, 2:52am

The international community has failed to help many of the world's poor. Could you or I do better without even spending a dollar? Around this time of year, many of us think about how we can make a tiny slice of the world a better place through giving to those in need. Too often, a disaster is required to persuade us our money won't be wasted.

While short-term humanitarian aid is lauded, financing long-term development for poor communities is a contentious area. Critics enjoy nothing more than exposing cases of misused funds and, in the current economic climate, many governments feel pressure to cut overseas development assistance at a time when it's most needed. Microfinance, too, is currently under scrutiny.

Development aid has been disparaged for not reaching those who need it and, paradoxically, for creating a dependency culture among those who receive it. But aid does not always mean giving money away. For instance, aid agencies trying to prevent malaria found that when they gave out mosquito nets for free, fewer were taken than if they sold them for a few cents.

Give people a good deal, give them a stake in it and, through regulated microfinance, give them the opportunity to create their own sustainable income. Where microcredit is successful, independence transcends dependency and the money lent is repaid with no profiteering. It's less about the World Bank or national governments and more about you or me lending someone in poverty US$50 to help them start a community shop or upgrade from needle and thread to a sewing machine.

Microfinance has the ability to promote employment, boost people's self-esteem and provide financial services, education and development for the community. It's generally most effective where regular income leads not only to greater consumption but to sustainable savings, too.

Regulated, local microfinance institutions can arrange both low-interest loans for appropriate business plans and micro-insurance for protection against income volatility. They also host savings accounts and smooth the safe passage of remittances back to an individual's home country.

During 2012, some leading government players questioned the place of microfinance within their aid budgets. And rightly so - if politicians view microlending as donated aid, they miss the point entirely. The reality is that microfinance is burgeoning, especially in South and East Asia. Commercial capital is bringing its own clout - and dangers - to the sector.

In China, person-to-person lending has grown exponentially since it officially began in 2006, although institutions often charge subversively high interest rates.

South Asia, where microfinance was born, has many established microfinance institutions that are economically self-sufficient.

Furthermore, non-profit organisations, such as Britain's Microloan Foundation or US-based Kiva Microfunds, attract money from increasing numbers of individuals like you or I.

The long-term impact of microfinance on poor communities is contested. Verification procedures vary in their efficacy and external factors are difficult to account for. For success, we must be able to follow the money through strong and transparent local financial institutions and expose profiteering individuals and institutions.

Critics suggest microcredit is a euphemism for "microdebt" - and debt is the last thing those in extreme poverty need. In addition, not everybody has a suitable, sustainable business idea. So we should lend to the best entrepreneurs in impoverished communities, not necessarily to the poorest within them.

Impoverished individuals and communities may need a little help to forge their own path of sustainable development. You may not receive any monetary interest but you could give yourself a cathartic start to the New Year.

Paul Letters is a political commentator. See www.paullletters.com