Our Errand

You are not here merely to make a living. You are here in order to enable the world to live more amply, with greater vision, with a finer spirit of hope and achievement. You are here to enrich the world, and you impoverish yourself if you forget the errand. (Truman)

How Micro Finance Works

In my previous post I introduced the concept of Micro Credit or lending. I'd like to expand on that here.

There are many models for Micro Lending around the world. However, probably the most common is group lending. Poor entrepreneurs in developing countries don’t have collateral to put against a loan. So, instead Micro Finance Institutions organize their borrowers into small groups of 5 or ten borrowers. The borrowers in the group help to guarantee each others loans. If one of the borrowers does not pay back their part of the loan, the entire group will not be able to get another loan even if the rest pay theirs back. This puts peer pressure on the entire group to be responsible for paying back their loan.

Typically Micro Finance organizations do not set up an office where people come and talk to the loan officer about getting loans. The loan officers go out into the field and meet the borrowers in group meetings in their homes. They may have weekly or biweekly meetings with each group where they discuss business plans and collect payments or savings deposits. As this would indicate, payments are made regularly and often. Not monthly as is typical in the US.

Many Micro Finance Institutions offer business training, savings as indicated above, as well as money transfer products, and some offer insurance products.

All these products are great but the product that fuels the development opportunity is access to credit for the poor. These loans give small entrepreneurs the opportunity to buy a cow or goat to provide milk which they can sell in the market. Or to provide materials for making a product like belts or furniture. Or to purchase inventory for their small shops.

More on Systemic Need

I believe that all peoples and societies everywhere have the capacity to excel and thrive when it comes to generating economic value. Stated negatively I don’t believe that there are some groups of people who lack individuals with the innate talents needed to generate wealth as society as a whole. That is, under developed countries have just as many people per capita with the talents and aptitudes needed do drive economic success as developed countries.

For example some of the human aptitudes for affecting economic growth are leadership, the ability to organize, analyzing, working well with people, and being competitive. There are of course many others. If you took a random selection of say 1,000 people from the U. S., another set of 1,000 from Laos, another from Nigeria, and another from El Salvador you would find that roughly the same percentage of people in each group has strong leadership aptitude, and roughly the same percentage of people in each group has an aptitude for organizational skills, and so forth.

This thought just reiterates that for most people in underdeveloped countries the problem is not with the individuals in the society but rather how the society is organized. It is not set up to leverage the talents innate in the given society. If we want to help people in these situations we don’t need to send them aid (the solution for acute aid). Rather, it makes more sense to assist in fixing the system. So, the society does a better job of leveraging the innate aggregate talents of its society.

One might propose many approaches to changing the system from military coups and interventions to install new governments to various macro economic policy changes. I would like to suggest one a little less radical but empowering. In developed countries most people have easy access to credit for things like home mortgages, school loans, and the financing of business ventures. Traditionally in most developing countries poor people have do not have this same access to credit and when they do it is at exorbitant interest rates from loan sharks. Micro Credit is a means to provide very poor people with small loans they can use to expand their small business ventures and improve their lives.

Human Economic Need

Human economic need (by which I mean the lack of the ability to successfully feed, house, and clothe oneself and those one loves and is responsible for and to advance their wealth) can be categorized into three types. These categories are acute need, personal need, and systemic need.

Acute Need:

This is human need that is born out of some type of catastrophe. A flood has wiped away a person or family’s or community’s home(s) and their means of producing food. Under normal circumstances they get along just fine but something has happened that in the short term puts them at a distinct disadvantage. People in this situation need help. They need to have others come to their aid on a temporary basis to provide them with food, water, shelter and clothing until they can get back on their feet.

Personal Need:

Not put too delicately, this is need that arises because of a gap in individual competency. An individual may be blind or have a mental handicap which inhibits their ability to generate economic value and provide for their needs. As an example, in America many homeless have mental illness which is the main reason for their poverty. This need is best addressed by family support and special accommodations and programs supported by their society.

Systemic need:

This need occurs when the way in which a society organizes itself does not promote but rather discourages economic prosperity. Examples of this may be a land ruled by an extreme communist regime or a corrupt dictator or government that siphons off resources for the elite. People can not provide for their own needs or improve their lot because their societal system prevents them from doing so. There is nothing wrong with the individuals that prevent their success. There is no calamity that has wrecked their system of commerce. They are just stuck in a system that makes it difficult if not impossible to escape poverty.