Where a Loan is Better Than a Gift

A mother makes aprons and children’s clothes and sells them in a local market. She needs money to buy materials and thread. A rickshaw driver can increase his earnings with a small motorized rickshaw, but needs the money to buy it. A coffee cooperative wants to sell more coffee to a Fairtrade purchaser at a better price, but needs to cover their costs until they sell their produce.

These people are all economically active. They can work. They have markets and can sell what they produce. They can improve their own lives and the lives of those around them. They need to borrow small amounts of money. They don’t need aid.

But they are poor. Local banks will not help them – there’s no money in it, and they believe such people won’t pay back a loan anyway. They can go to the traditional moneylenders – but they will charge enormous rates of interest and wipe out any profit the borrower might make, keeping them at subsistence.

Or, they might be able to borrow from one of the growing number of microcredit banks and loan funds – new types of lenders working to overcome poverty in the developing world, but doing it through loans with substantial but fair interest rates, not though aid and grants.

For over twenty years now, these micro finance institutions (MFIs) have been building up their activity. Some, like the Grameen Bank in Bangladesh or BancoSol in Bolivia have become famous, with millions of customers. They are full scale banks in their own rights with many lessons for us in the North on how we might solve our own problems of poverty. But there are hundreds of such organisations, themselves developing, who are helping to transform the economic and the cultural environment where they work.

This work challenges many of the assumptions we in the North make about development, the South, and what those in poverty really need. Development is not about huge infrastructure projects which breed corruption and have as much to do with creating employment in the North as helping the poor in the South (the Pergau Dam springs to mind). Nor is it fundamentally about aid, which for the most part addresses the symptoms not the causes of poverty – those who can work need the tools to work, and they will best get these by borrowing, not from gifts.

Most people now know that big development projects serve mainly to make the corrupt wealthy, but can it really be better to lend than to make a gift to a poor woman? This is a hugely complex question and at its heart lie fundamental questions about wealth and poverty. On a recent visit to the UK, Mohammed Yunus founder of the Grameen Bank, described the difference it made to poor women when they were lent small amounts of money. They could work, they could make a profit from their own activity – a loan of the right amount on the right terms was all that was needed. But what a loan did which no gift could do – which a gift would in fact undo – was say that others believed they could do it, that they were not dependent, they were equal. What then is wealth, and what poverty?

Microcredit looks to be a revolution in thinking and action on development which is here to stay. This is not to suggest that it’s easy and free of problems: if nothing else, its very growth in recent years will be a source of these. Nor is it to suggest that there is no need for traditional aid. Microcredit works where basic conditions for lending are fruitful: where they are not, and there are many such situations, it would be harmful. Once again the complexity of money is apparent: how, where and why it is used is as important as that it is available.