To Alleviate Poverty, Is It Better to Lend Than to Give?
Cal Turner Professor of Moral Leadership,
Vanderbilt Owen Graduate School of Management
Ph.D. candidate, Vanderbilt Owen Graduate School of Management
Commentary & Opinion: To Alleviate Poverty, Is It Better to Lend Than to Give?
Recent news highlights 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, Muhammad Yunus and Grameen Bank, the institutional lender to the poor he founded, were jointly awarded 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 Grameen 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. We believe that the resolution of the paradox is found in how 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.
The vulnerability and critical needs of the poor seem to call for absolute and unquestioned generosity. Every day, all over the world, private gifts and public welfare relieve the immediate experience of poverty through their support of programs that feed the hungry, secure shelter for the homeless, protect the health of individuals and communities, and offer positive experiences and even joy. At the same time, the poor around the world are preyed upon by lenders who offer debt that actually tightens the grip of poverty. On the surface, then, charity would appear to be 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 principal, would always appear to be more costly to the poor in comparison to outright gifts or charity. But if the ultimate objective is the alleviation of poverty, are there conditions when lending might be preferable to charity?
Development experts such as Nobel Prize-winning economist Amartya Sen have demonstrated that being poor involves much more than simply having little or no income. In Sen's research, the quality of life — indicated by such measures as life expectancy, overall 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 quality of life through the effective or substantive freedom to choose. In other words, poverty alleviation is a question of increasing substantive freedom, not simply increasing wealth. Critical capabilities that constitute substantive freedoms include political and economic participation, social opportunities, security, and liberties of voice, faith, and movement. In practical terms, alleviating poverty requires enhancing the capability of the poor to make their own choices and create value; linking the poor into the larger economy; and enriching the social and reputational capital of the poor. With productive capability, access to markets, and a reputation as reliable borrowers, the poor become like the non-poor; able to exercise their freedom to choose a better life.
The Debt of Charity
Gifts of charity do provide income to the poor, but they do not necessarily increase their freedom. Only the poor receive gifts of charity, and only the poor truly understand the weight of the debt created by such gifts. All gift-giving creates some form of indebtedness. For the recipients of charity, that debt can never be repaid. As a result, charitable 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 that create and perpetuate poverty. In fact, charity frequently 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 resources and they are not irretrievably lost. "Microlending" is an approach that begins with assumption that poverty, not the poor themselves, is the problem. 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 in the service of small-scale entrepreneurship or development, most institutions retain the basic features of the pioneering work of Mohammad Yunus and Grameen. These include small interest-bearing loans (typically less than $1,000) for the capitalization of productive or entrepreneurial activities; borrowers who because of their poverty have not had access to traditional banking; and loans often collateralized by shared group commitments. Such loans generally are 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 debt offered by predatory lenders, microlending offers the poor a debt 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 Power to Transform
The promise of microlending is that it can transform the conditions of poverty, and the initial research is promising. Repayment rates for microfinance are typically between 95 percent 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 is evidence of more intangible psychological benefits from microlending such as increases in self-confidence and esteem.
Before and after receiving a gift of charity, the poor remain the poor and in debt. But through approaches such as microlending the poor borrower gains new capabilities developed to meet the demands of repayment, a greater connection to the world, and the reputation as someone with whom others can do business. That is, when it works, the poor become more like the non-poor: free, productive, hopeful, and able to pay their debts. Of course, it doesn't always work. And not everyone (poor and non-poor alike) can or will make the changes required. But among the four billion poor in the world, there are many who desire, and can achieve, a way out of poverty. And we can actually help.
Bart Victor and Woodrow Lucas
Cal Turner Professor of Moral Leadership, Ph.D. candidate
Vanderbilt Owen Graduate School of Management
Bart Victor is the Cal Turner Professor of Moral Leadership at the Vanderbilt Owen Graduate School of Management and director of the Cal Turner Program in Moral Leadership Across the Professions for Vanderbilt University. Woodrow Lucas is a Ph.D. candidate at the Vanderbilt Owen Graduate School of Management.