Poverty is an enormous problem throughout the world. While many recognize that poverty exists there are many different schools of thought on the best steps to eradicate it. There are many advocates of micro-credit and there are critics as well. This post isn’t going to answer the question in finality, I’m simply raising the question for reflection and perhaps discussion. While I have a working answer (that may change as I take this journey) I’m only one voice, I invite you to weigh in with your own insight.
Defining Poverty
Before we can adequately answer the question we have to first define what poverty is. In Muhammad Yunus book “Creating a World Without Poverty” he wrote “Every country and every region will probably have their own definition of poverty…At Grameen Bank, we had to develop our own definition of poverty so that we would be able to measure our success in helping people rise out of poverty through micro-credit”. He goes on to write ten points that they utilize for measuring the poverty of their borrowers.
For this post I’m going to simplify things. I’ll use Wikipedia’s definition of poverty taken from the Encarta Encyclopedia that says “Poverty is the condition of lacking basic human needs such as nutrition, clean water, health care, clothing, and shelter because of the inability to afford them.” Dependent upon where you live in the world the cost of these things will be different.
Micro-Credit as a Tool to Reduce Poverty
One major roadblock that an entrepreneur may encounter when seeking to create an enterprise is access to affordable credit. If the entrepreneur doesn’t have savings there isn’t any money to draw upon to cover start up costs for the business. Without funding to start a business the entrepreneur is unable to move forward. Micro-credit (idealistically) gives entrepreneurs access to money at a cost that is less than other options.
The Cost of Capital Determines Effectiveness of The Loan
When determining if Micro-credit reduces poverty it’s critical to understand the costs that the entrepreneur assumes when accessing credit. If the rate the entrepreneur pays for the credit matches or exceeds the amount of money the entrepreneur makes then the answer is simply “no”, in this case access to capital cannot reduce poverty. There would be no financial gain and thus no benefit to accessing the capital. Conversely if the money that is made exceeds the amount that is borrowed the borrower needs to determine if the profit meets needs. In some cases there may be profit, just not enough profit to justify the amount of time that was needed to generate it. In short there is a cost reward analysis needed for determining if a loan is worth the amount of time spent. The cost reward should be measured against other opportunities that may exist.
The Amount of Profit Should Meet and Exceed Needs
If the profit gained from an enterprise (after paying the cost of the loan) meets the daily needs of an individual we could say that the profit will keep the individual in the same societal circumstances (if all variables remain the same) for the duration the profit is received. If the profit exceeds daily needs then there is a surplus that can be used in for those things in excess of daily needs. How this surplus is utilized determines the effectiveness of micro-credit for eventually reducing poverty.
Micro-Credit Can Reduce Poverty
Micro credit can reduce poverty however there are many variables that need to be considered when evaluating a program. Some of these variables are:
1. What is the cost of credit?
2. How much profit can be made for every dollar borrowed?
3. What opportunities exist for the entrepreneur?
4. How much competition is there for the opportunity?
And many, many others.
Conclusion
It may be easy to say “yes, micro-credit reduces poverty”. There are many variables that need to be evaluated when determining how effective micro-credit can ultimately be. There are many organizations that offer credit at a rate that may be too expensive for the entrepreneur. Some are purely for profit and charge as much as possible without regard for the needs of individual people. Others are only regarding the needs of the people and are not sustainable.
I really believe that micro-credit can reduce poverty. In the coming months and years I will be evaluating these ideas and reporting them here.
