Microloans: A little capital goes a long way




The Association of German Development NGO’s (Verband Entwicklungspolitik deutscher Nichtregierungsorganisationen – VENRO) has published a book in conjunction with the Berlin Institute for Population and Development on the effectiveness of microloans. My Word Counts draws on examples and background information to explain why "small capital" is an effective technique for fighting poverty. 


Today the importance of microloan systems in combating poverty in developing countries is generally known, not least since Muhammad Yunus and the Grameen Bank he established were awarded the Nobel Peace Prize. Yunus – an economics professor during the early 1970s at the University of Chittagong in the newly-independent Bangladesh – was not pursuing a radically new idea. Rather, his concept of savings and microloans based on mutual aid fostered a tradition that was centuries old. Confronted by the destitution of his fellow Bangladeshis, he recognised that even the smallest contributions could help them achieve financial independence. In Bangladesh alone, this dramatically changed the lives of 7.2 million borrowers, 64 percent of whom successfully escaped the poverty trap. 


Researched and written by the Berlin Institute, the book My Word Counts begins with a woman from southern India narrating her life story. From her childhood onwards, she had been obliged to support her family by working as an unskilled labourer. She recounts how she and other women in her village formed a self-help group – which now successfully operates a flower shop and boat rental business. In this way, she and the other members of the group became small business owners. 


The NGO-IDEAs Project – which includes 32 southern Indian and 14 German non-governmental organisations – provides outside assistance to people in need of help. Its objective is to enable the beneficiaries to take independent action for which they are solely responsible, allowing them to learn how to master situations on their own. However, these efforts are only successful if the funded projects become efficient, i.e. they achieve the goals set for them: to fight poverty, strengthen the role of women and promote self-reliance. But how can efficiency be assessed and quantified? By continuously monitoring each project’s impact, and by ensuring that the individuals involved take an active role in the subsequent analysis. Only then can the project contain a learning component: the review of a project's impact becomes a development process with benefits of its own. Promoting these educational processes is a core aspect of the NGO-IDEAs’ strategy.


NGO-IDEA is based in India, where the gap between rich and poor is widening visibly: while India's economy is booming, its rural regions are still afflicted by illiteracy and abject poverty. Of the subcontinent’s one million inhabitants, one-third has to survive on less than one US dollar per day. But poverty in India extends beyond financial hardship. As is generally the case around the world, it manifests itself in a variety of problems and complications: disease, a shortage of infrastructure and education, and a paucity of resources such as water, firewood and arable land. And poverty in rural India also entails other factors, such as natural disasters, power imbalances, and discrimination based on caste, class or gender. 


As experience has shown, tackling these problems individually is of little help. However, by locating the few intersections at which these problems overlap it is possible to identify three core measures that are central to all development work. Firstly, giving people capital to invest; secondly, encouraging them to be proactive, especially through education; and thirdly, strengthening the role of women. These measures may not guarantee successful development in the long term, but they are key requirements to any success. In a best-case scenario, a momentum can develop in which successes in specific areas reinforce each other and have positive effects on other areas. In practice, this occurs when a development organisation fosters the formation of self-help groups – above all for women – and these groups go on to create opportunities to earn money as part of a savings and loan program.


The greatest achievement of Muhammad Yunus and the Grameen Bank may be the transformation of the microloan system – and other bank services for those who were previously perceived as "uncreditworthy" – into a successful model that has been copied many times over in cooperative development efforts.

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