Microfinance: A Revolution in Foreign Aid?

It has become clear that the prevailing model of foreign aid is not nearly as effective in alleviating global poverty as is desireable. Pushed by celebrities like U2's Bono and high-profile activists like Jeffrey Sachs, the prevailing model often amounts to simply dumping massive amounts of Western money in poverty-stricken countries, and dispatching teams of Western experts to undertake development projects. Despite huge expenditures and decades of work, poverty rates in most of the Third World have barely budged, and some areas have actually gone backwards.


The hearts of those who pursue these policies are certainly in the right place and I have nothing but the highest respect for the hard work these aid workers put in. But facts are facts. Most efforts to alleviate global poverty using the prevailing model are not particularly effective. Many of the proponents declare that the failure has resulted from insufficient funds, and politicians are always calling for doubling foreign aid every time a new budget comes up. But the problem is not so much a lack of resources as a largely flawed approach.


The reasons for the failure of the prevailing foreign aid model are easy enough to see. By making the people of Third World nations dependent on Western money, no matter how well-intentioned its givers may be, a cycle of dependence is created from which it is usually impossible to break out. Individual self-sufficiency is the key to a prosperous society, and this is precisely the aspect most lacking in the prevailing model of foreign aid.


For Global Citizens, tackling the problem of global poverty is clearly a high priority. Not only does our basic humanity demand it, but it also serves pragmatic global interests. Global poverty creates instability, which in turn breeds dangerous extremism that can be taken advantage of by groups like Al Qaeda. Furthermore, the economic development of previously poverty-stricken nations opens the door for mutually-beneficial trading opportunities. But since the prevailing model of foreign aid has largely been a failure, what can be done?


The answer may lie in a relatively new concept for global poverty reduction: microfinance. This new approach to poverty reduction in the developing world has been pioneered over the last few decades by Muhammed Yunus, the founder of Grameen Bank and the winner of the 2006 Nobel Peace Prize.


The idea behind microfinance is quite simple. Very small loans are made to people living in poverty, who use the loans to start small business enterprises. These people would obviously be ignored by conventional banks and are thus unable to gain access to financial capital, or would otherwise be taken advantage of by loan sharks and driven even deeper into poverty. By gaining access to the microfinance loans, these people are slowly able to build up their own self-sufficiency, all the while paying back the loan with the profits made from their small start-up businesses. Eventually, the loan will be paid back, and the person will have pulled themselves up from poverty into a position where they can stand on their own feet.


The genius behind microfinance is that it does not trap the person in a cycle of dependency, and lets loose the natural human impulse for self-improvement. This is not a case of some governmental or organizational bureaucracy micro-managing things, but of an individual gaining control of their own destiny. Between being forced to take a handout or having the opportunity for improve one's situation using one's own abilities, all people with the spark of humanity inside them will take the latter every time.


Western donor nations would do well to shift a large proportion of their foreign aid budgets away from projects using the prevailing model and instead turn their focus more to microfinance efforts along the lines laid down by Muhammed Yunis. If demonstrable successes can be achieved, an entirely new approach to reducing and eventuy eliminating global poverty could be formulated.
Below is a video about Grameen Foundation USA, the leading microfinance organization in the United States. It provides an excellent overview of microfinance in general.