Whittle On Charity and Microcredit

Dennis Whittle talks about microcredit programs in the San Jose Merc.

GlobalGiving Chief Executive Dennis Whittle said: "There is no silver bullet in development and poverty reduction. Some things can be funded through microcredit and others need grants." To be successful, Whittle said, people need such basics as health care, clean water, education and transportation. The Web site lets you pick a project and see the results of your donation.

Then he blogs a clarification in the Huffington Post.

They are right about the appropriateness of charging market rates of interest for micro-credit in developing countries. But they are wrong to conflate that with charity or grants. In fact, subsidizing micro-credit via lower interest rates is usually a bad idea.

... There can be a healthy role for outside finance in micro-credit. Modern banks borrow through national and international bond markets all the time. There can even be a role for grants when micro-credit organizations are initially setting up operations, which can be very costly. Grants can also help bring excluded, vulnerable or traumatized populations into the micro-credit system. ... But overall, market-based financing works best for micro-credit.

I agree with Whittle up to a point. Microcredit programs that are market-driven are forced to streamline operations more than non-profit organizations that run on grants, and this of course makes them more sustainable.

However, the focus on profitability has led banks away from microcredit’s original focus on lending to the poor. Studies done in Bolivia showed that, as more microcredit banks established themselves in the same areas and began to compete with each other, the banks began to move away from serving the poor to serving people who were low-income but who were not the poorest of the poor.

Reaching the poorest of the poor, especially in rural areas, requires a great deal of overhead in terms of physically reaching the borrowers who may be widely scattered and maintaining the contact necessary to reduce default rates.

When microcredit banks begin to compete with each other, they tend to cut costs by dropping these very poor people from their portfolios. Without grants and subsidies, it becomes impossible to continue serving these populations. But the media tends to highlight only the fact that such agencies continue serving “the poor” without closely examining who these poor people are.

I of course agree with Whittle that grants are needed to provide the basic services (water, health care, etc.) before people can begin to take advantage of financial products. But I also think that there is a role for grants in generating the funds necessary to continue helping the poorest borrowers and savers take baby steps towards establishing themselves as legitimate financial services consumers.

---Julia Brown, Women's Initiative Research and Policy Assistant