What do the poor need to escape poverty? Good advice? Moral support? Neither, according to Nobel laureate Muhammad Yunus, who says the poor really need a little capital to start climbing the economic ladder.
 | Grameen Bank founder and Nobel Laureate Muhammad Yunus (Photo: Reuters) |
For over thirty years, Yunus and his Grameen Bank have shown that small loans can change a whole economy from the bottom up, ensuring that the poor are the first to profit.
But what is wrong with giving big money on a grand scale, such as major development projects or international aid? It seems most funds do not trickle down to the people who need them, but end up in private Swiss bank accounts.
"The international state sector transfers 100 billion US dollars per annum in a top down manner, but has high frictional costs in allocating capital effectively", says Arthur R. Wood, senior vice president of Ashoka Social Financial Services, an international organization giving financial and community support to social entrepreneurs worldwide.
"The worst example is sub-Saharan Africa where an estimated 80 percent of capital allocations have come back as flight capital in one year." In other words, if you want to give something to the poor, give it to them directly.
But it is not only dishonesty that swallows funds; it is also inefficiency. Global management consultants McKinsey & Company Inc. estimate the average cost of fair capital allocation to be between 20 to 50 percent. "The cost of capital allocation in the citizen or philanthropic sector is ten times the rate in the normal capital market," concurs Arthur Wood.
The conclusion: in countries where anything "macro" fails through weak infrastructure, rampant corruption and inefficient administrative practice, you have to build your own system of giving money directly to those who need it (i.e. via microfinance).
Doing good requires expertise
More and more of the world´s benefactors are realizing they have to get better at doing good. That means asking professionals, and in the case of microfinance, this means consulting banks. But banks are generally not charities. They give loans, not handouts. They want an interest and expect to be paid back.
"The poor must pay back every penny they get," says Yunus, who founded Grameen Bank in the aftermath of the devastating famine of 1974 in Bangladesh, which killed 1.5 million people.
Yunus's approach is echoed by other social entrepreneurs. Give somebody a handout, they say, and he will feel and act like a helpless beggar. Give him a loan, and you treat him (or, in most cases her) as a responsible business partner.
"I see people develop a sense of self-respect, hope and confidence in themselves for the first time," says Jimmy Carter, former U.S. president and founder of the Carter Center, a philanthropic society whose mission is to "wage peace, fight disease and build hope," especially for "poor and often forgotten people."
Are poor people a bad risk?
"The poor are neither too stupid nor too passive to earn money," says Yunus. "On the contrary, having to fight continually for survival has honed their innovative skills. All they need is a small capital to get them going."
When Yunus founded the Grameen Bank, almost nobody shared his vision. "Give small loans to poor people? Everybody told me this had to go wrong!" he recalls.
But it is the skeptics who were wrong: 95 percent of Grameen's loans are paid back. Of course, loans should be given on acceptable terms, which is why banks and social entrepreneurs must work together. Banks know how to distribute money effectively - social entrepreneurs know how to distribute it justly.
editor: Karin Lindinger
publishing date: March 21, 2007
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Readers' Comments:
What the poor in the under-developed world need is access for their trade goods. I find it extremely hypocritical for rich western countries to offer cheap palliatives when it would be far more effective to offer access and to stop export incentives and marketing subsidies. The consumers in the western world would also gain access to cheaper and arguably healthier food as a benefit.
Duncan K., New Zealand
I think we can help "jump start" an economy by providing the basics: PV and solar-thermal power,water pumps(with purifying sys),very cheap battery/hand crank radios working up to cheap portable/durable computers. Build everything in Swaziland, offer free education, min. 8th grade(last I checked, they dont have a free "public schol") What ever is done, have the locals build it,also micro loans that target women, but men can get them to.
Anonymous Reader
I'm a student in China where the poor is eager to earn money .If China could have a bank like the Grameen Bank,I think there will be less poor men.
Anonymous Reader
I am a 22 years old student from Ukraine. All above mentioned applies to my country "where anything "macro" fails through weak infrastructure, rampant corruption and inefficient administrative practice etc. Concerning banking, I can admit that at first sight this system tries to work according to the current standards: crediting, mortgage, bank loan etc exist and available to many citizens. But all this is like an iceberg's top, below which is cheating instead of providing reliable service, uncontrollable speculations instead of enhancing ecomonomy, trying to make fast money instead of cooperation and so forth.
I strongly believe, that one of the most influential factor is the dominancy of government over economy. U may say, that its quite natural after decades of communistic preassure. But really I can't see now any change in attitude of my compatriots towards main tendences in Western World, globalization, environmnetal issues, innovations and technologies. Actually I can't see it in my everyday life.
Perhaps some recent visitors would argue that there is a development in Ukraine, but as I said they saw the top of an iceberg, as some quite rich Ukrainians here talking about WHO are Ukrainians and WHAT is Ukraine, sometimes forget that 90% of Ukraininan population live in poverty, in which half may live on less than 5$ a day, i.e. pensioneers with a pension 80$ a month. And the government makes allthis legal.
Sorry to complain and to write things that were already known but still, I do want to say that I hope that Europe and USA do remember the rate of HIV and tubo, and connect Chernobyl with my Motherland. As for me, my concerns are connected more with environmental issues here, since I am from industrial area. And I hope that EU and other international organisation would pay their attention not only on the poverty rate in Ukraine, but also would try to take a control over the pollution and environment in post-soviet contries.
Maria O., Ukraine
Most programmes focus on individual farmers. However there is evidence that the focus should be on families as production units and even on on communities as regards the significance of a supportive environment.
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Microfinance
Mirofinance could be the best tool to contain poverty in Africa,and the program proved efficient in the Gambia.