What's a hundred dollars from the perspective of a low-income, base of the pyramid community? That question should be viewed in a new light in the weeks after Muhammad Yunus was announced as the Nobel Peace Prize winner. A hundred bucks? That's a micro-loan, of course, to be made through Yunus' Grameen Bank or any of the other microfinance institutions around the world. Perhaps the cutting edge answer is to loan the hundred peer-to-peer through Kiva, or invest it in a for-profit microfinance fund, as reported in a lengthy, well-researched New Yorker article. All are worthy responses, but microfinance is not the be-all, end-all answer to the perspective question.
In the new APP (After Peace Prize) world, the barrage of media coverage about microfinance has overshadowed an important fact: some people are too poor for loans, or simply scared of credit. What does this mean for the development, philanthropic, and policymaking communities? Perhaps they should take a closer look at organizations like Trickle Up, a non-profit that provides seed grants (not loans) of $100 and business training to aspiring microentrepreneurs worldwide.
For the past 27 years, Trickle Up (which we've mentioned briefly in the past) has been fighting poverty with small business. Working through local partners - often NGOs and social service agencies - they identify promising businessmen and women who are too poor to qualify for microfinance, or simply scared of the default risk. Prospective grantees work with the partners to develop a basic, 2-page business plan: description of the product/service, how much demand to expect, what will happen in the slow season, etc. Pictures and drawings are often used - many Trickle Up grantees are illiterate. When the plan is complete, the entrepreneur signs on and establishes milestones. Think of it as venture capital for the ultra-poor.
Microfinance is often criticized by people saying that it focuses on rich poor people - those who are connected in their communities or who already have seed capital to hedge the risk and help pay interest. Because they work with grants and target the poorest of the poor, Trickle Up gets bottom of the pyramid entrepreneurs ready for microfinance, filling an important gap in the business-in-development space. So the next time someone asks you what a hundred dollars means from the perspective of a low-income, base of the pyramid community, remember to include both microfinance and Trickle Up in your answer.
Learn more about Trickle Up on their web site or listen to a podcast interview with President Bill Abrams over at BusinessWeek.
BBC Radio 4's In Business also had an interview with this chao last week. The podcast is available on iTunes, at least in the UK.
Since hearing about kiva on worldchanging, I've loaned to four people. It has been a fascinating adventure so far. Finding out that a loan to a Palestinian will be late (or maybe lost) brings home the reality of an embargo.
Ironically, one of the criticisms of much micro-credit is that it doesn't reach out to bigger businesses that can really lift people and communities out of poverty. There are businesses that need several thousand dollars to expand, that are still too small for banks and already too big for most micro-credit lenders.
There is a lot of acrimony in some circles about these issues. I think there's room for different programmes for people and groups with different needs. One of the biggest lessons I hope kiva teaches is that lots of people are willing to lend. There could be enough funds to finance the bottom of the pyramid.
It was good to read the reference to 'Trickle Up' and to see that there are quite a few organisations promoting 'solidarity financing'- through grants / low interest loans etc. In my own work I am increasingly pursuing such options as alternatives to microcredit - especially to the increasingly dominant model of so- called 'best practice'
There is a growing body of concern in the global development community about the limitations of such micro-credit in terms of its ability to empower poor people. One particularly disturbing feature is the high investment made by credit providers / development agencies in positive spin PR materials and the obsession with 'success stories'. If you trawl the web-sites of leading micro-credit providers there are very few examples of 'failure stories'. Yet the imact of failure (and there are many such real life case sudies) may in fact outweigh the positive impacts in some communities. But there is a reluctance on the part of organisations with vested interests in the credit sector to actually allow such stories to emerge. In some contexts, for example in Jordan where I work, the lack of balance and open critical discussion verges on the repressive.
. In the absence of such debate, there is an impression among the less well informed that access to credit is the magic bullet solution to the problems of poverty and social exclusion. If only development were that easy....
In many countries (again I refer to Jordan, but suspect it is true of many other places) there is very limited hard evidence of the 'sustainability' of such credit mechanisms. The use of the term 'sustainability' is generally restricted to the concept of financial sustainability for the credit providers (ie it makes a good return for the bankers). Very few impact studies investigate the broader aspects of sustainability in terms of return to the micro-entrepreneur from their business, the change in access to and control over resources, the impact on the environment and the impact in terms of equity and inclusion for the individual (especially for women who ae the target of such programmes).
Given that this is the gobal year of micro-finance, it seems appropriate to stand back and rethink. In particular, it's important to break down the different forms of credit so that there is far greater awareness that in many cases the real rates of interest / costs are often in excess of 25% pa. Picking up on what daniel notes above, there is a need for different programmes to meet different needs. But this requires that we start to discuss the pros and cons of different approaches openly.
WorldChanging would be a good place to start such a debate.
All - thanks for your good comments and suggestions.
Paul, good to hear that Bill Abrams was on the BBC. I was worried that the microfinance media blitz would overshadow TrickleUp, but evidently not.
Daniel, isn't Kiva great? I would much rather allocate my philanthropic dollars to a peer-to-peer loan or a Global Giving client than a carte-blanche donation through a big charity. You also point out one of the limitations of microfinance - that is, it can be too "micro" and that small, growing businesses often need more than a couple thousand dollars. There's a great paper on this very topic by InfoDev I suggest you check out. It focuses specifically on the ICT sector, but the parts of it on the limitations of venture capital are key. I think you will see public-private consortia move into this "missing middle" quickly over the next few years. Come to think of it, I'll post on that soon...stay tuned.
Winkie, I think the debate you seek is already happening. You need to look to neutral third parties (like Worldchanging) for the true stories and the failure stories, but the mainstream media won't let you down either. Take for example the recent New York Times cover story on a rash of farmer suicides in India, in part due to farmers' inability to pay back microloans. That's just one example - and I challenge WC readers to find and document other failure stories so that the community might learn from them, rather than gloss over them in favor of feel-good successes.