25 November, 2008
Is Micro-finance Development Aid?
by Tamsin Harriman
Micro-finance consists of making small loans to very poor people, who would not normally have access to financial services, so that they can grow their small businesses (known as micro-businesses). The goal is that the loan will enable the person to make more money from his or her micro-business, and keep expanding it to the point where the person no longer needs to take out loans, and has risen out of poverty.
There is some debate over whether micro-finance constitutes development aid or not. Typically, development aid is thought of as an organization (usually a charity, or a governmental program) either building or donating money for infrastructure, such as a school or better houses, in poor countries. However, according to Wikipedia, the definition is broader: "Development aid or development cooperation [...] is aid given by governmental and economic agencies to support the economic, social and political development of developing countries." Under that definition, micro-finance is quite clearly development aid, although it works with individuals rather than countries. Micro-finance allows poor people to make development improvements themselves, and encourages them to do so.
Famously, Grameen Bank in Bangladesh, which has successfully lifted 65% of its members out of poverty, created the "16 Decisions" as part of its loan program. Among other things, borrowers from Grameen have to swear: "We shall not live in dilapidated houses. We shall repair our houses and work towards constructing new houses at the earliest." Also, they must promise: "We shall educate our children and ensure that they can earn to pay for their education," and "We shall build and use pit-latrines." Thus, development is built into the Grameen model.
Many micro-finance initiatives (MFIs) do not have a requirement like the 16 Decisions, but it is logical that once a poor person begins making more money, that person will want to improve his or her living situation. While MFIs do not give poor people money, but rather allow them to borrow it, they still provide those people with development aid. They give people the ability to improve their own lives. This is far more sustainable than traditional development aid. If an external organization builds new houses for a village, that may help temporarily, but if the villagers do not have the money to maintain those houses, then eventually their houses will fall into disrepair again. On the other hand, if the villagers have the money to build new houses for themselves, and are able to earn enough to keep those houses in good condition, then their lives will have been permanently improved.
If an MFI (or several MFIs) are able to make that happen throughout an entire country, then they create the same outcome as that of development aid, only in a more sustainable way. Therefore, I believe that while micro-finance is not necessarily traditional development aid, it is certainly development aid, and has a much more permanent effect.
Micro-finance consists of making small loans to very poor people, who would not normally have access to financial services, so that they can grow their small businesses (known as micro-businesses). The goal is that the loan will enable the person to make more money from his or her micro-business, and keep expanding it to the point where the person no longer needs to take out loans, and has risen out of poverty.
There is some debate over whether micro-finance constitutes development aid or not. Typically, development aid is thought of as an organization (usually a charity, or a governmental program) either building or donating money for infrastructure, such as a school or better houses, in poor countries. However, according to Wikipedia, the definition is broader: "Development aid or development cooperation [...] is aid given by governmental and economic agencies to support the economic, social and political development of developing countries." Under that definition, micro-finance is quite clearly development aid, although it works with individuals rather than countries. Micro-finance allows poor people to make development improvements themselves, and encourages them to do so.
Famously, Grameen Bank in Bangladesh, which has successfully lifted 65% of its members out of poverty, created the "16 Decisions" as part of its loan program. Among other things, borrowers from Grameen have to swear: "We shall not live in dilapidated houses. We shall repair our houses and work towards constructing new houses at the earliest." Also, they must promise: "We shall educate our children and ensure that they can earn to pay for their education," and "We shall build and use pit-latrines." Thus, development is built into the Grameen model.
Many micro-finance initiatives (MFIs) do not have a requirement like the 16 Decisions, but it is logical that once a poor person begins making more money, that person will want to improve his or her living situation. While MFIs do not give poor people money, but rather allow them to borrow it, they still provide those people with development aid. They give people the ability to improve their own lives. This is far more sustainable than traditional development aid. If an external organization builds new houses for a village, that may help temporarily, but if the villagers do not have the money to maintain those houses, then eventually their houses will fall into disrepair again. On the other hand, if the villagers have the money to build new houses for themselves, and are able to earn enough to keep those houses in good condition, then their lives will have been permanently improved.
If an MFI (or several MFIs) are able to make that happen throughout an entire country, then they create the same outcome as that of development aid, only in a more sustainable way. Therefore, I believe that while micro-finance is not necessarily traditional development aid, it is certainly development aid, and has a much more permanent effect.
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