Mini-loans to small rural businesses can reduce poverty
April 27, 2007
By Abraham M. George
There is considerable publicity these days about micro-credit as a tool against poverty. There is no doubt that a loan of $100 to an impoverished person can help him or her tide over personal emergencies such as payments toward dowry for a daughter’s marriage, a medical surgery or fixing a leaky roof. In some cases,
micro-loans to local merchants might help them overcome temporary financial difficulties. However, there is no substantiated evidence that micro-loans are creating sustainable businesses run by the poor (whose daily income are below $1 a day, or family income below $2 a day). Further, micro-loans barely add any significant new employment among the poor.
It is not possible for even a very small fraction of the 3 billion living in poverty (below $2 per day in income) to become successful entrepreneurs. Most of them do not have any education, business skills or financial resources. In countries like India, the poor are both illiterate and socially disadvantaged; there is little chance that
micro-credit or even larger funds can help them plausibly start and run businesses. The present generation of impoverished people can only hope to earn a living by working in the field for landlords or at businesses nearby.
If vibrant business activity and the associated new employment opportunities are what will reduce poverty, we have to think of ways to promote existing small businesses. In my social work in rural Tamil Nadu, India, I frequently get to meet owners of local businesses – furniture manufacturers, auto repair shops, welding and fabricating facilities, and so on – each employing a few workers. With meaningful financial assistance, many of them will be able to expand their businesses, while hiring several more employees. These are businessmen with the proven skill-base and sales ability to successfully run enterprises. As they employ more workers from nearby villages, poverty is correspondingly reduced.
Micro-credit is inadequate to meet the needs of businesses that have the potential to expand and add new employees. They require significantly larger
credits – mini-loans of $1,000 to $10,000 or more for each activity – for such things as new machine tools, additional hardware and supplies, or a vehicle to transport the merchandise. Several small contributions may be pooled together to make larger loans for each business expansion. With additional capacity to meet the needs of a wider customer base, these small businesses have the potential to grow.
Hardly any venture can be expected to sustain itself when financing costs are exorbitant. If small businesses are to be helped, they must be able to borrow at reasonable interest rates. Regardless of the justifications given by lenders for charging 24-36 percent annual interest rates, there ought to be a realization that such practices are simply not viable if the goal is to help small businesses succeed. The business of credit to the poor cannot ride on exploitation.
Combined with efforts to attract large businesses to rural and other economically deprived areas, mini-loans at modest interest rates to small businesses with good track records can be an effective tool in addressing poverty. When the poor gain the opportunity for income generation from employment, they will one day become self supporting and in turn, their children will have expanded opportunities. Until then, the goal of poverty programs ought to be the delivery of basic services (such as education and healthcare) at affordable prices and the creation of employment.