“We ourselves feel that what we are doing is just a drop in the ocean. But the ocean would be less because of that missing drop.”
– Mother Teresa
A curious quality about statistics is that they have no faces. Even while we cite numbers to draw the attention of others when we speak of social issues like poverty and suffering, we often fail to understand that behind each one of the numbers lies a story. These are the stories, not just of little people, but of big problems.
As the world moves increasingly toward a global market, the pursuit of profits has trapped a marginalized people into poverty, disempowering them and reducing them to statistics. Even while there have been attempts to “fix” some of these problems, the traditional form of direct aid has often been inefficient and unsustainable. Most resources are lost in overhead and are ultimately a temporary solution at best to a permanent problem.
An alternative approach is needed—and an alternative approach has indeed emerged. While many seniors spend their fall semesters vying for positions at bulge bracket investment banks, a different breed of finance is taking hold in underdeveloped areas of the world.
INVESTING IN THE POOR
Thirty-three years ago, recent Nobel Peace Prize recipient Muhammad Yunus was Head Professor of Economics at Chittagong University in Bangladesh. Though he had devoted his entire life to the study of economic theory and application, he was appalled at how classroom academia could not explain the tragic state of the impoverished and destitute during the Bangladesh famine of 1974. Confronted with this dissonance between theory and reality, Yunus and his colleagues established Grameen Bank, a financial institution dedicated to investing in the poor through microcredit, a then novel concept designed to revolutionize markets from the bottom-up. Now, three decades later, Grameen Bank has provided $6 billion to benefit seven million people, changing seven million otherwise faceless stories.
The mission behind microfinance is both simple and remarkable: microfinance institutions (MFIs) grant very small loans—typically less than $100 to the entrepreneurial poor in developing countries. That seed money is used to help individuals with proven, actionable business plans get started in self-sustainable ventures that provide an opportunity for economic freedom. Instead of spending daily revenues on servicing debt burdens and middlemen, this nest egg can advance projects such as agricultural productivity enhancement, arts and crafts production, and a wide assortment of other entrepreneurial endeavors.
At the core of microfinance’s success is the group-lending model. Jia Hu ’07, a board member of the Harvard International Development Organization, cites the model as an “ingenious mechanism to curb two issues that limit lending to the poor: asymmetric information and moral hazard.” The group-lending model requires a core unit of 5-8 people to sign on a loan together, offering joint collateral of some kind (i.e. a TV set) and agreeing to repay the sum together. As lending institutions are wary of defaults on loans, this approach ensures that not only will the group members peer-monitor one another and mutually cooperate to increase prosperity, but they will also self-select only the most committed members. As a result, “impossibly high interest rates are mitigated by this reduction of risk for both parties,” increasing both viability and distribution of loans to those who need it most.
Since Grameen’s founding, many other MFIs have followed in its footsteps. Today, more than 10,000 MFIs operate all over the world, largely concentrated in South America and Asia, but with satellite clusters in other areas of great need, such as Africa. According to a joint report by the United Nations Capital Development Fund and the World Bank, MFIs have an annual turnover of about $2.5 billion in credit to 30 million recipients. Though MFIs serve an impressive number of clients, they still only access 6% of the potential market; the other 470 million people remain waiting.
Yet, even as the microfinance sector grows, operations must continue to be executed at the local level. A larger umbrella organization would be incapable of accounting for cultural idiosyncrasies that determine conceptualizations of business, money, and the very idea of a loan itself. Thus, building and growing a sound microfinance industry is both an exciting and intimidating challenge that will require many hands at the grassroots level.
HARVARD: A DROP IN THE OCEAN
Harvard has its own initiative to further this movement. In 2002, undergraduate Melissa Dell ’05 spent her summer conducting data analysis on a longitudinal study for EMCOP, a small-scale MFI working with the poorest of the poor in rural Peruvian communities. After returning to Harvard, she founded an organization in collaboration with other social-justice-minded peers. Thus was born A Drop in the Ocean (ADITO), as named after Mother Teresa’s vision.
Since 2002, ADITO has lent their efforts to five institutions in Argentina, Peru, Mexico, and India. Current President Wojtek Kubik ’07 explains that ADITO works with smaller, understaffed non-governmental organizations (NGOs) who “are much more mission-based than the banks.” Because of transaction costs associated with issuing loans, banks are often unable to cater to the needs of the marginal bottom, and the burden of providing the smallest-sized loans to the most underprivileged falls instead on NGOs.
It is to these organizations with the least working capital, that ADITO strives to make the largest difference. During the school year, twenty-five undergraduates convene every other week to provide strategy consultation on instrument portfolios (i.e. loan type offerings and management), assess the performance of businesses, and, most importantly, produce impact reports for publications and funding proposals. This last responsibility is particularly critical, as the staffs of ADITO’s partner organizations are stretched thin and often don’t have the capacity to handle these projects themselves.
In recent years, ADITO has even started an internship program for interested students to “immerse themselves in the field,” according to Kubik. For example, one student spent his internship in Argentina working on methods to improve monitoring for current borrowers; his data is now being analyzed and prepared by ADITO’s technical team for an impact report, a crucial update to the MFI on their lending health and mission progress. Through their involvement, ADITO aims to raise awareness, both on campus, and on an international scale, about microfinance and its goals.
FACING FORWARD
As microfinance continues to expand its borrower base by nearly 30 percent year-after-year, the issue of sustainability is paramount. One of the greatest obstacles in addressing the lowest income brackets is the transaction cost involved with issuing loans, which is identical for both a $50 loan and a $5000 loan. Since interest rates in the microfinance sector are kept low for the purpose of affordability, variable costs are not recovered. According to Hu, there is significant debate over the long-term trajectory of MFIs, with “a strong division between those who believe that subsidies should be continually channeled in to help the poorest, and those who believe MFIs should ultimately attain self-sustainability through a profitability model.” The adoption of the latter, specifically through higher interest rates and attrition of loanable funds to commercial alternatives, will increase the footing of the MFI, but at a cost to the very people it is established to serve: the poor.
As for ADITO, Kubik is focusing on the smaller picture. As long as the need exists—and, truly, the need is endless—ADITO will continue to directly service MFIs, regardless of which direction the overall industry takes. “[We will] help their needs and wants in whatever way we can,” affirms Kubik. The organization is also partnering with campuses across the nation to start up local chapters with the same vision.
News of microfinance is spreading, and even laypeople can contribute from the comfort of their own home computers through websites like Kiva.org, which connects individual contributors with individual borrowers seeking microcredit for their entrepreneurial activities. Loaned amounts are aggregated and lent to local MFIs at zero percent interest, which, in turn, are then offered at only half the typical microfinance interest rate to local borrowers. Partially circumventing the aforementioned cost restraints, these personal loans function as a free subsidy to MFIs, allowing them to maintain and improve their existing business model—and continue to provide help where they are needed most.
As an approach that targets the roots, microfinance is one that offers a sustainable path out of poverty. It is not charity, and it is not relief. Rather, it is a source of hope that enables and empowers the poor with choices and freedom, both economic and social. For the millions of lives it has changed already, each small loan has been a drop in the ocean. But even single drops form ripples, and ripples combine to form waves, such that there is no action too insignificant: not that of a bank whose entire operating budget is less than the expense account of its corporate peers, not that of an organization of committed twenty-five college students, and not even that of a single economics professor who decided thirty-three years ago to actively confront what he witnessed around him.
No comments:
Post a Comment