Muhammad Yunus and the Grameen Bank, as reported by the BBC here, have won the Nobel Peace Prize. They won it for their pioneering work in making micro-finance (small loans) available to poor people. I'm delighted. I researched this and wrote it up last year for World Vision's 2005 Harvest Pack. Since it is no longer on their archive, here is what I wrote:
World Vision's Harvest Pack this year seeks to assist Angolan farmers re-establish their livelihoods following the long civil war that engulfed them and their land. Many factors will impact their success. Steve Tilley explains what micro-finance development is and how it will help these farmers.
Prior to the war Angola was self-sufficient in agriculture. It retains the natural resources to be so again. Its varied climate zones make the production of many crops possible including cassava, yams, maize, bananas, beans, cotton, manioc, palm oil, potatoes, sunflowers, citrus and numerous vegetables. There is grazing land and Angola is also a large coffee producer – the world’s fourth largest exporter before the hostilities.
Here’s the problem. You have recently resettled in your homeland. You have experience in agriculture but during the war all your, admittedly basic but necessary, farming equipment has been wrecked. The war has been over for three years but your land may be littered with landmines and other ordnance. Clearing it is dangerous, time-consuming and costly.
So you are limited to working less than two hectares of cultivatable land. This level of production doesn't provide enough food to feed your family each year, let alone allow you to sell produce and generate money in the local markets.
You have no access to new seed varieties, fertiliser or animals. You haven’t worked for a while so you have no savings. Your family have no reserves so they can’t lend you money. Despite the small amount of start-up loan you’d need to start earning, the bank won’t lend you money as you have no income or collateral. You can’t even pawn something if you own nothing. What do you do?
Either of the words ‘micro’ or ‘finance’ tend to make our eyes glaze over before we even dare attempt using them in a row but to our poverty-trapped Angolan farmer they represent hope.
Agencies such as World Vision have been paving the way to make credit accessible to individuals who would otherwise be unable to break free from poverty.
Before we think about what micro-finance is lets eliminate something that it isn’t. Small loans at higher-than-average rates of interest are often part of a dangerous black-market. People in too much debt borrow more money at ridiculous rates of interest which they usually can’t repay. They incur further debt (and often threats of harm) in the process.
Micro-finance, on the contrary, is usually a one-off investment in individual creativity, provided specifically to kick-start people out of poverty. The interest rates are higher than conventional loans because small loans take as much administration as large loans, but they are kept to a manageable level. Often the loans only need to be for a short period as they enable income-generating work to start immediately.
World Vision Angola have brokered a new deal for rural micro-financing with Angola's largest bank. This represents a commitment by the Government to supporting sustainable rural development.
The agreement means smallholder farmers now have access to credit, allowing them to get what they need to improve their production. The funds will assist around 1,900 families and 75 farmers groups and associations initially, before growing into a large-scale initiative. World Vision will provide technical and business support services to the beneficiaries.
By providing credit, World Vision hopes to allow farmers to get the necessary resources to break out of the cycle of poverty and subsistence agriculture, and re-ignite the region's economy.
The idea of micro-finance as a survival strategy for the poor is relatively recent. Ela Bhatt established the Self-Employed Women's Association (SEWA) in India in 1974, while in 1976 Mohammed Yunus founded the Grameen Bank project in Bangladash. Ela Bhatt's first loan was $1.50 to a woman who sold herbs, while Mohammed Yunus lent a total of $27 to forty-two poor people.
Studies of the impact of micro-finance in more than 24 countries have found dramatic improvements in household incomes. These improvements take place mainly through growth in the borrower's business. Access to micro-finance allows the recipient to reduce costs with lower interest rates and bulk purchasing of raw materials. Micro-financiers have found that women are a particularly good credit risk, invariably investing their money in the well-being of their family and generating wealth.
Micro-finance doesn’t, in itself, guarantee prosperity. Whilst cheaper than the black-market the interest rates do cause some difficulties. The global market is tough and there will always be a need for other social services and infrastructures. Micro-finance can help poor households reduce their vulnerability to economic shocks, but it does not eliminate them. It helps the poor to take advantage of economic opportunities, but it does not create them.
Some of us might, in the past, have tried to avoid borrowing money at all costs. This sort of borrowing saves lives. Time for a rethink?
2005 is the United Nations International Year of Microcredit.