by Abraham George and Shyama Venkateswar
Originally published in The Chicago Sun-Times, December 2, 2006
Business Week dubbed 2006 ''the year of micro-finance,'' when the idea of extending small loans to the world's poorest people to start their own businesses caught on in the developed world. Governments, financial institutions and private donors including the foundations of Bill and Melinda Gates, Dell and others committed hundreds of millions of dollars to micro-finance this year. To cap it all, Muhammad Yunus, founder of Bangladesh's Grameen Bank and progenitor of the global micro-lending industry, won the Nobel Peace Prize.
Yet 2006 might also be called ''the year of global poverty,'' because 3 billion people--about half of the world's population--now live on less than $2 a day, a billion of them subsisting on less than $1 a day. Each day, 35,000 children under 5 die of starvation or preventable diseases. In terms of sheer numbers, it's the largest poverty epidemic in our history. How did we get here?
For decades fighting poverty has been the responsibility of national governments, but they have been generally ineffective. Nongovernmental organizations, on the other hand, are strong advocates for change, creatively complementing government poverty programs, but lacking the capacity to transform the lives of the 3 billion poor.
Economic progress in countries such as India and China has the potential to lift millions out of poverty. But much of the gain is confined to urban areas, and the trickle-down effects haven't yet extended outside. Of India's billion-plus people, 650 million rural poor remain untouched.
That leaves the question of how to connect the economic engines of the private sector to the rural poor. Micro-loans, typically about $100, make a small-scale contribution by providing them access to cash for personal needs such as payment of dowry, medical emergency or repayment of prior loans. But as economic engines, the loans have severe limitations.
Banks and micro-finance intermediaries making the loans say they are intended to empower the poor to start and run their own businesses. Yet, the interest rates charged are often 18 percent to 24 percent for the poorest, sometimes as high as 36 percent. Repayment rates are high -- some banks claim 99 percent. That's good for the banks' bottom line, but it hardly proves that the loan recipients have become successful business owners. A recent study of 50 micro-credit programs in 17 villages in South India showed that less than 5 percent of recipients used the money to start businesses.
The current debate on the future of micro-finance is about how to cope with its growing pains, as it seeks to roughly double the number of loan recipients to 175 million by 2015. This discussion misses a vital point: If poverty alleviation were simply a matter of lending $100 to all the world's poor, poverty could be eradicated easily; it would cost about $300 billion (compared to trillions spent on assistance over the last half century), and we'd be done. But it's not that simple. In its current form, micro-credit can't build equity or jobs on the required scale.
What micro-financiers ought to be debating -- and some are -- is how to ensure that the loans create jobs, and how to leverage their activity to employ billions. From farming to alternate fuels, rural areas have great potential for developing sustainable industries, and yet there is almost no serious effort to realize that potential. We must build on the goodwill micro-finance has created to attract more private investment and commercial activity in deprived communities.
Micro-finance brought private investment capital to millions of poor people on a small scale and even proved it could be profitable. The challenge now is to bring investment capital on a larger scale to start businesses in rural areas and employ billions of people. Not government, not NGOs, but business, with its scalability, risk-taking and accountability for results, is in a position to do this.
Might some profit-driven businesses try to exploit the poor? Yes, which is why governments and NGOs must provide effective checks and balances. But ultimately it is not benevolence the poor seek; it is opportunity, and specifically jobs. Without vibrant economic activity where the poorest live, the global fight against poverty will be swamped by the nearly 100 million population increase in developing countries each year.
Abraham George is the founder of The George Foundation, which conducts humanitarian work in India, and the author of India Untouched: The Forgotten Face of Rural Poverty. Shyama Venkateswar is director of the Asian Social Issues Program at the Asia Society in New York, hosting a public conference November 30 with Mr. George and other experts on rural poverty and social entrepreneurship in India.