Micro-Loans: The New Philanthropy?

The concept of giving to the poor, or alms giving, is an idea that is as old as the creation of money.

Giving to the poor has traditionally meant giving to charities or non-governmental organisations (NGOs). You give money to these charities and NGOs, in the hopes that they will either pass on that money to targeted beneficiaries, or buy in-kind products (such as food or shelter) to give to the poor, or even to implement social programs (such as participatory initiatives or vocational training or education). These ideas are now incorporated in good business ideas.

This sort of giving has been the conventional form of giving for centuries.

Philanthropy Needs to Change for the 21st Century

However, as times have changed, technologies and ideas have grown. We now live in the 21st century. As a result, the concept of giving must adapt to the ever-growing and ever-changing dynamic of our world. Giving to the poor must keep up.

At times, the problem with giving money, or throwing money at poor people, is that it can often breed a habit of dependency on aid. Having worked with NGOs and beneficiaries of long-term aid, I have seen first-hand the problems of having people depend solely on handouts by governments, NGOs or international organisations. It kills initiative in people and self-reliance. I understand that there are instances where humanitarian assistance is necessary, but prolonged aid can be more problematic. And giving aid without thinking about the consequences of the self-reliance of the people, in my view, is a major problem.

Fortunately, thinkers and development economists and people in the field have come up with new forms of giving. Herein lies the new form of philanthropy that I am personally excited about: micro-loans (also known as microcredit or microfinance).

What are Micro-Loans?

Currently, I live and work in Bangladesh for humanitarian and development programs. Funny enough, the idea of micro-loans originated from Bangladesh, by the renowned Bangladeshi economist and Nobel Peace Prize laureate, Muhammad Yunus.

He noticed that the poorest people in Bangladesh were more than capable to lift themselves out of poverty. That they had the skills and the drive to lift themselves out. They have the initiative to do it, because they are the ones who directly benefit when they take initiative for themselves.

Yunus noticed that women, in particular, had a great capacity to save for their families and even had the willingness to use their savings to buy income-generating assets (IGAs).

The major thing preventing these extremely poor women from saving and then investing in IGAs is the lack of capital, a lack of finance to start up small businesses. Yunus discovered this as he observed and interviewed poor households in Chittagong, Bangladesh.

Yunus then realised that many of the larger banks would refuse giving loans to potential entrepreneurs from poorer backgrounds because the loans requested by micro-entrepreneurs were too small, and plus the poor often lack sufficient lack of collateral.

Micro-Loans Have Changed People’s Lives

When the big banks refused to given loans to the poor, Yunus stepped in and believed that it was possible. From there, the idea of micro-loans emerged. Yunus did some experiments with micro-loans, financing small entrepreneurs from poor backgrounds. For his first trials, he actually used his own pocket money to loan to some women. These women would then go out and buy simple IGAs such as chickens or cows or small goods to sell and make profit. Interestingly, Yunus discovered that when micro-loans were given to women, the repayment rate of the loans was over 90%. Perhaps it was the family-orientated characteristic of the poor women, which encouraged them to consistently save and repay.

Yunus then established the Grameen Bank in Bangladesh, in order to institutionalise microfinance. Now, his model of micro-loans spread across other developing countries. His pioneering of micro-loans and his exemplary work on social entrepreneurship, has given him and the Grameen Bank the Nobel Peace Prize in 2006. They were awarded it “for advancing economic and social opportunities for the poor, especially women, through their pioneering microcredit work.”

Yunus has often been called the Banker of the Poor.

My Opinion: Micro-Loans are Changing the World

In my opinion, there is alot of potential for micro-loans as good business ideas in helping people from developing countries. It gives them access to capital that would never have traditionally been given to them. It encourages people to take initiative, and has been especially beneficial for poorer women – who are often the most vulnerable (and I have seen this myself as I have lived and worked in Bangladesh).

What’s your opinion? Do you believe that microloans may be the new form of philanthropy to help impoverished people in developing countries?