The Poverty Paradox
Is It Ever Better To Lend Than to Give?
The vulnerability and critical needs of the poor seem to call for absolute generosity. Every day, all over the world, private gifts and public welfare relieve the immediate experience of poverty. They sate hunger, secure shelter, protect health, and offer positive experiences and even joy. At the same time, around the world the poor are preyed upon by lenders who offer debt that tightens the grip of poverty. On the surface, charity would appear preferable to lending simply because the poor are by definition severely resource limited. The debt burden of a loan, even if that debt is limited to the principle, would always appear to be more costly to the poor in comparison to outright gifts or charity. But, are there conditions when, towards the objective of alleviating poverty, lending might be preferable to charity?
Recent news is highlighting an apparent paradox at the heart of the relationship between business and poverty. Pawnshops, payday lenders and other “fringe” lenders to the poor are often considered predatory at worst and vaguely unsavory at best. Yet in 2006, the Grameen Bank, a lender to the poor, was selected for the Nobel Peace Prize. Why does one kind of lender deserve disdain and another, so apparently similar, the Nobel Peace Prize? There are no easy distinctions between the Grameen Bank and other lenders to the poor. All make interest-bearing loans; all require some form of collateral; all actively “sell” their loans; and all seek sustainability and growth for their banks. We believe that the resolution of the paradox is found in how, as one kind of business has discovered, that under the right conditions and with the right approach, the greatest gift to the poor can be the opportunity to repay a debt.
Development researchers such as the Nobel Prize-winning economist Amartya Sen have demonstrated that being poor involves much more than simply having a low income. In Sen’s research, the quality of life, indicated by such measures as life expectancy, health, physical security, hunger, and homelessness is associated with, but not directly caused by, income insufficiency. Income provides a degree of freedom of choice. However, this freedom of choice can only enhance the quality of life through the effective or substantive freedom to choose. In these terms, poverty alleviation is a question of increasing substantive freedom, not simply increasing wealth. In practical terms, alleviating poverty requires: (a) enhancing the capability of the poor to create value; (b) linking the poor into the larger economy; and (c) enriching the social and reputation capital of the poor. With productive capability, access, and reputation, the poor become like the non-poor; able exercise their freedom to choose a better life.
Gifts of charity do provide income to the poor, but they do not necessarily increase their freedom. But all gift giving creates some form of indebtedness. Only the poor receive gifts of charity. And only the poor truly understand the weight of the debt created by such gifts. For the poor, their gift debt can never be repaid. As a result, charitable gift giving can increase the unfreedom of the poor by confirming to themselves and others their status as distant, needy, and different from the non-poor. It is perhaps not surprising that while charity may work well to temporarily ameliorate the suffering of the poor, it has been criticized for failing to transform the conditions which create and maintain poverty. In fact, charity has been associated with not only not changing the conditions of poverty, but even deepening them.
The lives of the poor are precarious, dangerous, and disadvantaged. However, the poor are not without any resources and they are not irretrievably lost. “Microlending” is an approach that begins with assumption that poverty is the problem, not the poor themselves. Further, it assumes that under the right conditions and with the right methods, the poor can become non-poor.
While there are numerous variations and innovations on the theme of microlending for small scale entrepreneurship or development, most institutions retain the basic features of the pioneering work of Mohammed Yunus (Vanderbilt PhD’71) and the Grameen Bank. These common features include a) small interest bearing loans (typically less than $1,000) for the capitalization of productive or entrepreneurial activities, b) borrowers who because of their poverty have not had access to traditional banking, and c) loans often collateralized by shared small group commitments. Such loans are generally made for working capital or other commercial purposes although real estate and housing financing are sometimes also available.
Unlike debts of gratitude or the crippling debts from predatory bankers, microlending offers the poor debts that can be repaid. Microlending gives the poor the opportunity to use the bonds of trust which they have established with one another as collateral. By partnering with one another and with the lender, the poor take what they have—each other—and transform it into a gateway to the greater economic community. Microlending asks the question, “What can you do of value with the money lent?” rather than “Are you needy enough to deserve the money given?”
Microlending seeks to enable the impoverished to in fact “produce” enough value to pay back the loan.
The promise of microlending is that it can transform the conditions of poverty. The initial research is promising. Repayment rates for microfinance are typically between 95 and 100 percent. Those poor (primarily women) who have participated in microlending have been shown to increase their personal spending on their children’s education, improve their own housing, and enjoy better nutrition. There have also been claims of other social benefits such as opportunity for political empowerment and choices of public versus private schooling for children. Finally there are claims of psychological benefits from Microlending such as increases in self-confidence and self-esteem.
Before and after receiving a gift of charity, the poor remain the poor and in debt. But through microlending the poor borrower gains both the new capabilities developed to meet the demands of repayment and the reputation as someone with whom others can do business. That is, when it all works, the poor become more like the non-poor: willing and able to pay their debts.
Of course it doesn’t always work. And not everyone can make the changes required. But among the 4 billion poor in our world, there are billions who desire and can achieve a way out of poverty.
Copyright 2007 Vanderbilt Owen Graduate School of Management