Solution to Poverty Part III: Micro-Loans vs Grants

I received a very interesting comment from bambit of Bambit Online (http://bambit.blogspot.com). Bambit said the following:

“What is your opinion on microlending vs. grants? A friend from an INGO once told me that microlending makes money from the beneficiaries instead of really giving them the means to start and maintain a business, as what grants do. But I am really interested in what you have to say.”

Here is my response to her.

Grants and micro-loans are the same; both are resources to be used for making a living. The primary difference of the two is obvious, micro-lending institutions charge interest for the loans they provide and the other is free. Some might feel that charging interest to the poor is exploitation, but I think its just fair as long as the interest rate is reasonable.

However, a micro-enterprise by its nature does not generate much value due to its small size, which means one might be able to earn a decent living from micro-loans but it won’t make you rich. As I said in my previous article, “I must admit that the impact of micro-lending is somewhat limited…”; as such your observation is accurate as far as the limited benefits of micro-credit.

The second half of the story is this, “but it is effective in keeping the very poor "productive" and "participating" instead of being unemployed and a burden to society” , which I stated in my previous article. There is a price to be paid for being “productive” and “participating”. The stark reality is that opportunities for the poor in our country are very few; one should not fault the micro-lender for charging the micropreneur for that opportunity, given that the interest rate is reasonable. Because of this, I proposed in my previous article to combine micro-institutions with cooperatives to pool together the resources of micropreneurs, resulting in enhanced efficiencies and competitiveness.

Micro-lending institutions having a profit motive is a good thing; this should motivate the management of these institutions to operate efficiently and expand operations and in the process provide capital to more poor folks. Grants are great, but funds given away cannot be replenished, unless new donations are received; thus limiting the number of beneficiaries.

Providing capital is easy. What is tough is to get the poor to utilize the money effectively; this is the reason why I believe that lending programs should be accompanied with business training and mechanism that would encourage productive behavior and discourage the opposite. I believe this is the true issue we are facing in the Philippines.