Zach Dawes’ article on microfinance opened up a number of issues that may have left readers unsure about the place of microfinance among poor communities. Here I would like to provide reassurance and further insight.
The first thing to say is that microfinance has evolved from just providing small loans. Microfinance now includes micro-savings, insurance and money transfer by mobile phone.
This is important because the criticisms Zach quotes – over-indebtedness, irresponsible lending and excessive interest rates – are confined to the micro-credit sector. Such concerns have not arisen with micro-savings arrangements.
In Five Talents’ micro-savings arrangements, for example, members save small amounts together. As the savings pot grows, they begin making micro-loans to each other for small business development.
It is members themselves who set the interest rates and decide who takes a loan while Five Talents funds facilitators who establish, monitor, train and mentor the groups.
These groups have a strong sense of community ownership and are extremely successful in communities too poor or remote to access mainstream banks.
Where we operate micro-credit arrangements, we use a “group” method, too; anyone who wants to borrow first has to become a member of a “trust group.”
Trust group members approve and co-guarantee each other’s loans. This gives a strong basis for encouragement, transparency and accountability.
Interest rates are set locally, not by Five Talents, and all members receive business training before they take a loan. Training is costly and many profit-making microfinance arrangements skimp on it, but we believe it is crucial to helping our members succeed long-term.
We would like to thank Zach for his comment that “churches … have strong motivation for establishing or supporting microfinance institutions.” What does it mean for Christians to support microfinance?
The commercial microfinance industry will never serve the most marginalized and is not motivated to care for the whole person. Nor need it feel any obligation to prevent usury or encourage wise stewardship of money, which, as Zach points out, is a Christian responsibility.
Of course, there is a place in the market for commercial microfinance, but our mission as a Christian microfinance charity is to transform lives, not to make money.
Our work takes us to places and people ignored by micro-financiers more interested in profit than poverty relief. Our work is holistic, caring for the person and not just the transaction.
Our local teams visit clients regularly to give them business training, support and pastoral care. Our services go way beyond financial services.
More than 2 billion people are financially excluded worldwide. In sub-Saharan Africa, only 24 percent of the population have a bank account. This will not do.
Poor communities won’t develop unless there is economic growth. Small businesses need financial services and training.
Zach is right that microfinance is not a panacea – but used responsibly, it can be an important catalyst.
Maybe the poor will always be with us, but, more encouraging, the “parable of the talents” teaches us that responsible investment – entrusting the poor to use their talents – will always bear fruit, too.
Anthony McKernan is the United Kingdom development director for Five Talents, a Christian-led microfinance organization with offices in the U.S. and the U.K. A version of this column first appeared on The Baptist Times of Great Britain and Five Talents’ U.K. blog. It is used with permission.