Why Microfinance Works and the Faith-based Gap

My previous post argued that microfinance (MF) is an effective development strategy that:

1. provides more permanent solutions to poverty, not temporary hand-outs,
2. empowers individuals within their local contexts instead of creating dependency, and
3. significantly engages the economy.

These are no small assertions, and some explanation is necessary. First, let me give the layman’s view of what MF is. At its core, MF is a development intervention that targets people in poverty who are shut out of traditional banking services. MF is generally conceptualized and described as small business loans to entrepreneurs living in poverty. This is a key component of MF; however, MF has expanded to include several other important services such as savings and insurance.

People in poverty generally have no collateral and oftentimes have debt. This prevents them from accessing traditional bank loans. They also live in areas of high unemployment, where the scarcity of income-generating activities prevents them from acquiring collateral or paying off debt. They’re stuck in a vicious, negative cycle. Since they lack basic necessities, the first aid that compassionate, well-intentioned people often provide is the delivery of material goods such as food, clothing, or shelter. This is admirable and frequently absolutely necessary. However, the provision is temporary. Once they have consumed the goods provided, the beneficiaries of the aid return to the same position. Alternatively, a small business loan enables these entrepreneurs to work their way into financial sustainability and security.

I do not know where I would be today if I had never had access to financial credit or provision that I did not earn. How many of us in the USA take out loans for university studies, a car, or a home? Imagine a world in which you could never take out a loan and there was no benevolent person with sufficient financial resources to help you. This is the world of many of the poor.

The second problem that MF solves is dependency. HOPE International was founded by Jeff Rutt, a God-fearing homebuilder in Lancaster County, Pennsylvania. In the early 1990s he took several trips to Ukraine with containers of goods to distribute to the poor and needy in tow. These gifts were welcome and seemingly justified considering the wealth of the donors in the US and the poverty of the people in Ukraine at that time. However, after one trip, a pastor approached Jeff and said he was doing more harm than good because he was creating dependency in the beneficiaries and robbing them of the joy of personal responsibility. In place of gifts, Jeff started an MF program. Giving loans enables people to work for themselves and not rely on foreigners to meet their needs.

Finally, globalization is bringing the world together with many positive repercussions in the lives of people around the world. But the sad truth is that a significant portion of people have been shut out of recent advances and have actually been hurt by rising fuel and food prices. This drives up demand. Since supply has not been able to keep pace, prices have increased for basic food staples like rice and flour. For people in the lower economic strata, the slightest increase is devastating. Like the victim in the Parable of the Good Samaritan, they are left on the roadside while everyone else trots by. The need for MF is staggering. There are currently 100 million MF clients worldwide. An estimated 450 million other people fit the criteria for it but do not have access to it. Christian MF organizations service 1.5 million clients, or only 1.5% of the current clientele and 0.02% of the overall need. In one sense, this is appalling. However, I’m convinced the reason is that most followers of Christ are not aware of the need or how we can help.

Guest post by Mark Russell, former Director of Spiritual Integration