Breaking the Poverty Trap
Likewise, many poor are unable to borrow. Most don’t have guaranteed regular income. The poor are often denied property rights, so have no security to offer. Many poor people have great entrepreneurial ideas about ways to make money, or businesses they could start or expand – if only they had access to the resources to get set up. Micro Enterprise Development and Micro-finance seek to break that poverty trap and release poor entrepreneurs. Women are the most excluded group, and most MED or microfinance programs target women more than men.
Micro Enterprise Development (MED) programs typically aim to provide both micro-loans and business coaching. MED programs are often run by development organisations in communities where they are also addressing essential needs, such as access to clean water, health care, nutritious food, basic education, and vocational training. Providing business coaching, then loans to those with sound business plans and support networks, MED is a catalyst to entrepreneurial activity allowing people to take charge of their finances and create a new future for themselves, their families and their communities. Typically, micro-loans are often less than $100, are expected to be repaid within a year, and interest is charged on the loan.
Micro-finance is a related idea. It is a broad term. It covers the micro-loans of a MED program, but can also mean all manner of credit co-ops within poor communities. For example, a ROSCA (Rotating Savings and Credit Association) is a small group of individuals who agree to meet for a defi ned period of time in order to pool their savings, so each can borrow off each other. ROSCAs are the poor man’s bank, similar to small credit unions. Many development organisations help communities start ROSCAs.
A Growing For-Profit Industry
Micro-finance today is also a growing for-profit industry, attempting to provide full financial services to the poor traditionally excluded from banking. Muhammed Yunus began in 1974 by providing small loans to impoverished people, as capital to start or expand businesses in Bangladesh. Today the Grameen bank is the largest of hundreds of micro-fi nance institutions, with over US$ 6 billion – globally micro-finance institutions have over US$ 23 billion in outstanding loans. Micro-finance institutions also provide insurance, credit transfers, and other financial services to the poor. Instead of security, they will accept group guarantees, a savings history, or repayment history on a previous loan.
Initially it was assumed that the poor required cheap, subsidised credit. However, the argument is that subsidised services are long-term unsustainable and that a market-based solution is necessary. Unfortunately, that means many microfinance institutions charge high interest. Because they typically provide less business plan development and coaching than MED programs, they are regularly accused of landing communities in spiralling debt levels – making poverty worse rather than breaking poverty.
Development agencies generally prefer the more holistic approach of a MED program.