Making Microcredit Thrive
Global, June, 03 2014 -
Lack of education accounts for a great deal of abject poverty in the world. Basic needs such as food, clothing and shelter dominate the daily thoughts of those caught in destitute circumstances. The short-term goal of survival takes precedence over the long-term goal of starting a business.
In that vein, providing microcredit loans proves disastrous when unaccompanied by guidance on creating sustainable value. Two examples where such systems failed include South Africa, where self-employment income fell more than 11 percent annually over a period of six years, and Bangladesh, where some indebted resorted to selling their bodily organs.
However, incorporating an educational component into the lending system makes a marked difference. Nobel Prize winner and microcredit founder Muhammad Yunus taught millions of Bengali people how to leverage their potential to become successful entrepreneurs. He established Grameen Bank to provide loans totaling more than $15 billion, of which $14 billion has been paid back, according to its May 2014 statement.
Yunus' program thrives on:
- Committing attention to organization, outreach, advocacy and activism
- Assisting in rebuilding communities and providing critical services
- Solving a collective action problem by motivating women to get loans, despite cultural and religious pressures
His microcredit system pushed beyond simple financing to address how a community’s culture and values can be reshaped through education and guidance.
In order to secure a loan through Grameen Bank, candidates were required to apply in a team of five. If eligible, the team would be educated for a week about the financing system before being tested on the material. If even one participant failed to pass the test, the group would be rejected for the loan. This kind of an application and education system ensured a more reliable and continuous lending system. It further established stronger bonds, encouragement and higher accountability for hard work within the teams.
Thus, we see that microcredit can be an extremely effective engine for social change. Because Yunus' program strengthened and heightened the value of women, their community started to recognize women's rights. Despite a deeply rooted Islamic and male-dominated culture, Yunus' work enabled activism and advocacy among women. Female empowerment rose in Bangladesh as women increased their participation and work to create value in their homes and businesses.
Yunus' success abroad is a good argument for further expansion of such systems in the United States since microcredit can foster entrepreneurship in poverty-stricken populations. "Microlending in general has boomed, more than tripling the number of borrowers from 2008 to 2011,” according to a NY Times article. As of last year, microcredit banks have lent out more than $100 million.
The ultimate goal of microcredit financing is to rejuvenate communities by providing capital to those who have a potential to create their own employment. This can be achieved through:
- Education: Teach budding entrepreneurs to discover and maximize their abilities with the goal of starting their own business.
- Varying credit size: Offer different sized plans depending on eligibility. For instance, promising business plans may be granted mezzo credit, allowing for the potential to create higher value.
- Micro-savings accounts: Emphasize sustainability by offering banking structures designed for this group.
Social impact entrepreneurs are critical agents in improving the lives of those less fortunate. The impoverished have been long neglected as a source of meaningful value and ideas. However, given the proper guidance and resources, they hold the key to improving a country’s economy and culture on a macro scale.