As the New York Times recently reported, the microfinance business is going through something of an identity crisis.1 Microloans—small amounts of money lent to the world’s poor, including on the Indian subcontinent—have traditionally been conceived of as instruments for social justice campaigns, allowing impoverished individuals to build businesses and bootstrap their way out of poverty. However, social justice workers, having proven that “the poor are bankable,” are now in danger of being run out of business by larger financial institutions that wield the tool as but one more financial service with which to line their pockets—this time with money squeezed from some of the poorest people on the planet.
Of course this is a false dichotomy: there are other actors working in the microfinance space (the government of Indonesia has set up a microloan bank to help fuel economic development), and there is no reason to believe that, if properly directed, large banks couldn’t facilitate the social justice purposes that inspired microfinance in the first place (they just can’t be allowed to charge unconscionable interest rates—whatever that means). But the crisis concerning the industry’s identity—nonprofits leveraging social change or Wall Street fleecing the poor—may be rooted in a crisis of purpose: just what is a small loan good for?
Traditionally, the answer—for social justice workers and Wall Street bankers both—has been entrepreneurship. In most cases, a borrower secures her loan by telling the banker her plan to make money from money. So long as she has a reasonable business model, the loan officer will sign on the dotted line. But there are potentially a lot of things that small loans could help accomplish other than to fuel small business development. Most notably, microloans could be used to deploy life- and environment-saving technologies in some of the world’s poorest communities to help spur responsible, sustainable economic development. On a larger scale, microloans could be used to help India overcome some of the financial and technological barriers that stand in the way of its green development.
Considerable effort has been directed at developing things like clean cookstoves and solar ovens and solar-powered lighting systems to help members of impoverished communities live and work in a way that is more efficient, less damaging to their own health, and more environmentally sustainable. Where these efforts often stall, though, is in deploying the technology and sustaining its use. Much of the problem comes from the fact that the technology is given away or distributed under an aid paradigm, and so recipients have little incentive or opportunity to learn best practices or to engage in meaningful maintenance of their gifts.
However, folks working in the finance industry have long known that when people invest in such a technology, they are motivated to keep it up themselves and to use it more efficiently and effectively. Moreover, such technologies are not just home improvements; they have very real economic benefits as well. They save governments money on health care; they save individuals from illnesses that keep them from their work; they lengthen lifespans and the workday; and they stretch the economic bang had for each environmental buck. In short, there’s money to be gained and saved by deploying these development technologies that could well serve as the basis for securing loans for their acquisition. Add in the fact that some of these technologies might be eligible for carbon credits under various greenhouse gas trading regimes and you’ve got yourself real potential for market development.
By expanding our conception of microfinance and providing loans for a wider range of purposes, the microfinance industry could keep its social justice veneer while also providing important incentives to engineers and innovators to focus their efforts on helping the developing world develop responsibly. That is to say, microlending could support sustainable development rather than just development; it could support a market for entrepreneurs rather than just supporting entrepreneurial endeavors. Indeed, the backers for these loans might very well include the very governments that save money on health-care costs or aid organizations tired of throwing money down an unfillable hole.
Certainly there’s a reason to be cautious in such efforts: it’s all too easy for economic efforts looking to import the tools of the middle and upper classes into the bottom of the economic pyramid to devolve into crony capitalism or to overlook the political systems that perpetuate economic inequality. However, properly directed and carefully implemented, microloans could serve not just to build new businesses but to establish new markets and drive the deployment of new technological innovations that are squarely directed at saving the world.
Thus, while the question of how much money we should charge in interest is an important one, perhaps we should also be asking just what we should be lending the money for.
- MacFarquahar, N. Banks making big profits from tiny loans. New York Times (April 13, 2010).