“Despite the hoopla over microfinance, it doesn't cure poverty”1. The validity of this statement is recognized, and the data; compelling. A simple google search will lead you to a plethora of articles about how microfinance is not as effective as promised by NGOs around the world, and that it is a disappointment in the development field234. However, before you scrap the concept and decide your money is better spent with a foundation, I would like to invite you to consider a different perspective.
When you think of buying a house, how do you begin to budget? Your first thought should be, “okay, I need to put 5%-15% down”5. Stop there. Imagine if that wasn’t an option. That 5% down is actually 100% and the expectation to pay incrementally for 30 years is non-existent6. You have to pay for the land, the materials and labor to build the house, in addition to the furnishings all AT ONCE. A feat impossible to imagine in the US, but expected of from a majority of the world.
Now let’s shift to education.
The average income in the U.S. is $ $56,4307 and tuition to a four year public university costs an average of $9,139 per year8 . But what if you actually live in Sierra Leone, where the average income is $1,5607 and you only have three choices for higher education? There are two public universities (completely dependent on unpredictable government subsidies) which cost an estimate of $750 per year, due before you start the semester. After you pay this fee you receive notification that “there may be departmental charges” that they will let you know about along the way9. The third choice is a private university in Makeni, offering a range of degrees for $1000 to $1700 per year, which they allow to be paid in two installments10.
Try to imagine how difficult it would be to cover medical expenses, start up a business, cope with sudden unemployment without credit cards, insurance or even the layaway programs supported by Target and Walmart during the Christmas season.
If you want to criticize the practice of borrowing credit in the developed world, I commend you; aspects of the system are flawed an often pray upon vulnerable groups. I promote the concept of establishing strict regulations and increasing financial literacy in order to protect the borrower, lender and any collateral institutions. But the perspective that I hope to provide is that access to capital should not be considered just another clever intervention by which the west plans to bring people out of poverty.
In 1545, England was first country to officially set an interest rate by which lending could legally be conducted11. Even before this law, the ethical argument of interest rates, collateral and loan terms were (and should continue to be) debated. But in most of our worlds right now, if a citizen of our country has decided that they need a loan, fit the criteria and can agree to the terms, they are able to participate in credit lending.
Access to capital will open more doors than it closes. And if the intention is to truly flatten the playing field and provide equal opportunity for all, then financial inclusion needs to be encouraged, for better or for worse. In fact, the potential of lending in these emerging and frontier markets is even more promising given that the industry is not yet institutionalized, and instead managed by small enterprises and NGOs. There may still be time to keep the focus on social impact, rather than purely profit if resources are allocated properly. Please, if you have ever personally benefited from a credit program, I encourage you to go fund a business, an education, a home or maybe even Christmas presents. Better you than Wells Fargo, am I right?