Should we invest in people instead of money?
So, as someone who wants to work on helping to improve living conditions for people locally and globally – one of the ideas I’ve been experimenting with is putting aside a portion of my income to invest in people. This includes providing micro-loans to those living on the margins of poverty through organizations like Kiva. Now, people can get into very heated arguments about whether microfinance is the right tool to invest in. I am simply going to share what I know about it and the broader debates around it here.
I first learned about microfinance when I was a student studying international development at the University of California, Berkeley. Microfinance was pioneered by Muhammad Yunus, founder of the Grameen Bank in October 1983. The Grameen Bank served the impoverished population in Bangladesh by offering small loans to small businesses. The model was considered a success, and Yunus, along with the Grameen Bank, received the Nobel Peace Price in 2006 for his work in reducing poverty and stimulating growth in developing countries. It has since then become a widely popular solution to stimulating growth in developing countries. It is now even being used in some developed countries including the United States.
So, let’s talk about the pros and cons of microfinance.
The Pros:
Typically, the poor in developing countries and some developed countries have no way to receive formal loans or credit from big banks because they are deemed too risky. As a result, the poor will borrow from informal lenders, receive loans from informal organizations, and engage in an informal economy. Microfinance serves as a means to formalize these transactions for the poor and connect them to established economic institutions and markets regulated by the governments of their countries. The purpose of this is to bring people out of poverty by investing in their businesses, building their credit, and making them self sufficient; and strengthen the overall economy of the country.
The Cons:
Microfinance is definitely not the cure-all for worldwide poverty that international organizations, financial institutions, and countries have claimed it to be. Microfinance is not designed to end the cycle of poverty. The microfinance system is rooted in the idea that, by funding impoverished entrepreneurs, within a few years borrowers will create large businesses that stimulate the economy and help their communities rise out of poverty. Unfortunately, real life doesn’t always work that way. Not everyone seeking microloans and credit has the next big idea that will drive their country into becoming a major global player. With most microloans, the returns will not be significant on a global scale. Even if the focus is shifted on just borrowers’ villages or communities, the borrower is likely part of an oversaturated industry in their village and community. Thus financing the borrower and their neighbor just perpetuates unprofitable competition in an industry that already does not yield immense profits.
Conclusions
Does this mean that I should not invest in organizations like Kiva?
As an individual donor who might instead be doing nothing to assist those living on the margins, this seems like a useful financial tool that I could use to help support people as part of a larger portfolio. Can the model be improved? Yes. This tool, on a large scale, however, is not a “silver bullet” for poverty reduction. In order to create that level of social change, state-sponsored social initiatives would need to take place in these countries. I will talk about examples of these in a later blog post.
However, I sometimes wonder, as a society, do we always have to have a high return on investment in order to support things? Instead, what if always investing in the most lucrative, high-return financial investment, we chose to invest in uplifting marginalized communities and building robust social supports? Would our world be different? Yes, we may not be financially better off – but could our world be better off?
