Microloans: Small Capital – Large Effects

The Association of German Development Non-Governmental Organisations (Verband Entwicklungspolitik deutscher Nichtregierungsorganisationen – VENRO) published a book together with the Berlin Institute for Population and Development about the effectiveness of microloans. My Word Counts uses examples and background information to explain why “small capital” is an effective means to fight poverty.

The importance of microloan systems in the fight against poverty in developing countries has become clear to the greater public, at the latest since Muhammad Yunus and the Grameen Bank which he founded were awarded the Nobel Peace Prize. Yunus, who was teaching in the early 1970s at the University of Chittagong as an economics professor in the newly independent Bangladesh, only took up a tradition that was hundreds of years old with his concept of saving and microloans based on mutual aid: In light of the bitter poverty of his fellow Bangladeshis, he recognised that the smallest contributions were enough to help them achieve economic independence. In Bangladesh alone, this drastically changed the lives of 7.2 million borrowers, 64 percent of which successfully escaped the trap of poverty.

Right at the beginning of the book My Word Counts, written and researched by the Berlin Institute, a woman from South India tells her story. From her childhood onwards, she had to support her family as an unskilled labourer. She tells of how she formed a self-help group together with other women in her village whose members successfully operate a boat rental business and a flower shop. In this way, she became a small business owner.

The NGO-IDEAs Project, a cooperation of 32 South Indian and 14 German non-governmental organisations, attempts to use outside assistance to enable those supported to independently take actions for which they are solely responsible, as well as to master situations on their own, as does every other cooperative effort for development. However, these attempts are only successful if the projects that embody them are efficient, meaning that they achieve the goals they set out for themselves: to fight poverty, strengthen the role of women and promote self-reliance. But how can efficiency be assessed? By continuously observing the effects of projects, and by the participation of the persons concerned in the analysis of those effects. Only then does the assessment become a learning process; only then does the contemplation of the effects become a development step in itself. The development of these self-learning processes is a part of NGO-IDEAs’ project.

The project is based in India, where the gap between rich and poor is widening visibly: While the Indian economy is booming, India’s rural regions are still characterised by bitter poverty and illiteracy. Of the subcontinent’s one million inhabitants, one-third must make do with less than one US dollar per day. Yet to be poor does not only mean having no money. Poverty in India is also visible through many different aspects, just like anywhere else in the world: a lack of infrastructure and education, diseases, as well as scarcity of resources such as water, firewood or arable land. Poverty there also includes external factors such as natural disasters, unfair power relationships and discrimination based on caste, class or gender.

Experience has shown that approaching these problems individually helps very little. Searching instead for the few intersections at which these problems overlap results in three central measures that development must apply: firstly giving people capital to invest; secondly encouraging people to be proactive, especially through education; and thirdly strengthening the role of women. These measures do not guarantee development in the long-term, yet they are certainly necessary prerequisites. In a best-case scenario, a momentum develops in which successes in particular areas strengthen each other and have positive effects on other areas. In practice, this occurs when the development organisation initiates the formation of self-help groups, especially for women, and these groups go on to create opportunities to earn money as part of a savings and loan program.

The greatest success of Muhammad Yunus and the Grameen Bank is possibly their transformation of the system of microloans and other bank services for people who were seen before as “not creditworthy” into a successful model that has been copied many times in cooperative development efforts.