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11 12 2015 | by Victor Xing | Economics

How does microlending reduce poverty?

I was briefly involved with the Grameen Foundation, and there are a number of examples on how its microlending operations reduced poverty.

Example of how microlending works

Micro-lenders would lend out small amount of money to (mostly) rural borrowers.  These are truly small amount of money – $50, $100, $250.  In the case of Grameen, these borrowers (predominantly female – more on this later) would use the small amount of cash to buy a sewing machine or some chicken (or a goat), and that would be the foundation of a cash flow generating business.  Borrowers will get a shot at acquiring a cash flow that may pay back the loan and grow into larger and more sustaining operations in the future.

The group in #1 is important – it is a way to add “social collateral” to the process.  It is easier for one person to default (or run away from the village), but it will be hard for a group of people’s social standing if they let one of their members default.

microlending - focusing on women and family
Microlending – focusing on women and family

From a higher level, micro-lending is nothing more than introducing financial services to an area with little or no prior banking presence.  Its effect on growth would be similar to banking’s role in developed economies (business owner takes out a loan to buy a fleet of cargo vans for a logistic business).

More about the Grameen model

Back to why Grameen mostly lend to female borrowers in rural areas.  This has been a controversial subject, but it was rooted in practicality.  Alcoholism and compulsive gambling is common in some rural areas, and participants of such activities have been largely male.  Grameen and other micro-lenders argued that direct lending to women can be a form of social empowerment, and they would likely re-distribute their future income in their children and their community (less risk of loans being spent on consumables or at a gambling operation).  In turn, Grameen argued that this will be a positive force on reducing overall poverty in an area.

 

Next article11 11 2015 | by Victor Xing | Economics

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