World poverty is a systemic issue, and it will take an intentional, systemic approach to end it. Throwing money at the problem won’t cut it. Unfortunately, that has been the primary tactic for decades upon decades. In the past, foreign aid and donations given to the developing world have not made a sustainable impact. That’s because the recipients have not been taught to steward their finances. This article will offer a better approach regarding how to break the poverty cycle: Microfinance. After reading, you will be able to answer the question ‘what is Microfinance’ and know what steps you can take.
What is Microfinance?
Microfinance, or microcredit, is defined as the lending of small amounts of money at low-interest rates to new businesses in the developing world. Microfinance’s target audiences are typically people who do not have enough income to work with traditional financial institutions.
Unfortunately, the financial systems in much of the developing world are not robust (and are often corrupted.) In places like Uganda, it is extremely difficult to obtain capital and build a credit history. The best interest rates the wealthiest citizens can obtain are around 30% APR. So, many poor people look to family, friends, and unethical loan sharks for money. If they do get a loan, they often don’t know how to make the money needed to pay their creditors back.
How Does Microfinance Work?
Microfinance provides a solution by allowing people to take on reasonably small business loans safely and ethically. The distribution of the loans is often contingent on the potential client taking some sort of business or financial education class.
Many times, the loan clients can’t offer any collateral. So, microlenders will do group loans as a buffer. Loan recipients pay their loans together. Since their success depends on everyone’s contributions, a positive peer pressure is created and repayment rates increase.
Microcredit loans are sometimes as small as $50. That may not seem like much in the developed world, but for people in developing countries, it can be enough to break the poverty cycle for their family and generations to come (when stewarded properly!)
So, as the debtor pays their first loan back, they develop a credit history. After that, they qualify for larger loans. Then the loan client can receive another loan, they often build their business, pay their debt, and repeat the cycle. What is Microfinance you ask? Here it is at work: I knew someone named Ephraim who used their first microcredit loan to open a bicycle repair shop. The business was so successful that he paid the loan off and used the remaining profits to open a furniture and appliance store. Then he repeated the cycle and opened a gas station, supermarket, and a store akin to Costco as well!
Why is Microfinance Is Better Than Charity
Giving money without teaching business or financial skills is like putting a Band-Aid on the problem of poverty. It doesn’t actually solve anything; it simply covers it up.
In her book, Dead Aid, Dambisa Moyo, Ph.D., reveals that over US$1 trillion in developmental-related aid has been transferred from rich countries to Africa. She writes, “In fact, the recipients of this aid are worse off; much worse off. Aid has helped make the poor poorer, and growth slower. Yet aid remains a centerpiece of today’s development policy and one of the biggest ideas of our time.”
In addition, Kathryn Feliciano from the Institute for Faith, Work, and Economics puts it like this: “Charity gives a person a plate of food; it does not equip them to get their own food in the future. Charity is done outside of relationship.”
If you give a dollar to somebody oversees, you have to come back to America and raise another dollar. However, if you invest the dollar, then you can obtain a return and invest it over and over again.
The Importance of ‘How-To’
This problem became evident to me on a trip to India. A missionary was showing me around their concrete facility, and I noticed random machinery strewn all over the place. I asked the missionary, “what am I looking at?” He said, “Sewing machine parts. We gave them to the ladies so they could start a sewing business.” It was a good thought, but there was no follow through. Because nobody taught the ladies how to do business, they ended up dissecting the sewing machines and selling them for parts.
One of my biggest pet peeves is seeing ‘business as mission’ money deployed without showing the recipients how to do business. It’s a waste. Christians will explain the transformational impact they hope to have, but when you examine the transactional impact, there often isn’t any result. We must combine the transformational and the transactional in our approach to ministry.
Western mission money has created a welfare mentality. I’m not criticizing—people’s intentions behind giving are usually good. However, those good intentions can be channeled into a smarter system. Microfinance is an excellent tool that can be used to attack the problem of global poverty from the roots.
One of the ways we aim to break the poverty cycle is through our nonprofit, Tricord Global. We raise investor capital in the United States and deploy it in Uganda in the form of Microfinance loans. Then our investors receive a 4-8% return on their investment, and the loan clients receive a loan and the business education to put it to good use.
Our goal is to move people from being economically inactive to economically empowered. Someone who is economically inactive is not participating in the marketplace, so they have no foreseeable way out of poverty. However, someone who is economically empowered is able to improve their local economy, even employing and teaching others in the community.
He who was seated on the throne said, “I am making everything new!” Then he said, “Write this down, for these words are trustworthy and true.”
(Revelation 21:5, NIV)
God is restoring all things. Transformational ministry will restore your soul, and the transactional will restore cities and nations. It’s not an either or—it’s a both and. Furthermore, God “secures justice for the poor and upholds the cause of the needy.” (Psalm 140:12) Microfinance is an avenue to live like Christ, help the poor, and restore the economic dignity of others.
We hope this article helped you answer the question, “what is Microfinance?” and inspired you with the fact that we can break the poverty cycle. If you want to get involved and become a Tricord Global investor, click here. And check out the infographic below for more on how we aim to promote the Biblical values of abundance, transformation, sustainability, and inclusivity in our Microfinance organization.