Any movement to eliminate hunger and radically reduce poverty has to be built on a basic understanding:
The poor - even the very poor even the chronically hungry poor - are not passive victims of their circumstances. They're ready, willing, and able to actively use any help offered to them to help themselves.

Here are two corollaries:

  • The poor have the power of individual human spirit, which gives them resourcefulness and resilience. And...
  • They have each other their social capital the relationships, the solidarity, the collective courage that enable them to survive in conditions that would kill most of us who haven't grown up with them.

With these considerable strengths, just think how much better they could do with some help from outside resources and services that support rather than undermine their strengths!

Traditionally, help has come from public agencies and charities with dramatically uneven, unsatisfactory results, especially in poorer countries with small tax bases. The private sector has long offered help in the form of products and services to the better-off, but there has been a burst of experimentation in just the past two decades in serving the poor as well, while operating as self-sustaining businesses some for-profit, some nonprofit, but all covering the full cost of doing business with the revenue coming from poor people who buy the helpful products and services. These do-good business people are now called social entrepreneurs. And the best known and most widespread example of social entrepreneurship is microfinance.

Let me put it another way. Microfinance institutions make money from the poor by providing them loans, a safe place to save, and often other financial services (life insurance, for instance). This is a real breakthrough, what some might have called an oxymoron not long ago a private-sector approach to supporting the self-efforts of the poor, even the very poor, even people who are so poor they are chronically hungry. This works because the poor are accustomed to paying very high interest rates to get loans when they need them, usually from a local moneylender. Microfinance organizes itself to offer a much better financial deal to the poor who are looking for loans to start or expand their tiny businesses or to pay school fees, or to replace the roof, or to deal with a medical emergency.

Is this a social justice movement or a financial service industry? Making money from the poor to help the poor creates a split personality for microfinance. Like any good schizophrenic, microfinance is actually both, but you have to be careful to know which personality you're talking to at the moment.

"With these considerable strengths, just think how much better they could do with some help from outside resources and services that support rather than undermine their strengths!"

There are actually at least four distinct personalities in microfinance. Perhaps it's better to call them motives. What unites them is the basic relationship between a lender and a borrower and the transaction of extending and repaying a loan that traditional bankers consider to be absurdly small too micro to be profitable.

The first motive is to support family self-help. Better health and nutrition and ability to cope with economic shocks to the family are the common objectives. The lenders driven by this motive make a special effort to lend directly to the poorest people they can find, usually women and usually in fairly large mutual guarantee groups people coming together to guarantee each others loans, rather than providing physical collateral. Providing non-financial services, usually various forms of education and sometimes access to health care, is often deemed essential for the poor to make the best use of microfinance.

The second motive is to help micro-entrepreneurs build their tiny businesses toward viable growth and employment for local people and multiplier effects on the local economy. As in our society, truly entrepreneurial personalities are uncommon. These lenders often make a special effort to identify budding entrepreneurs and help them one-on-one to analyze their business prospects and invest their loans in business growth. They lend to individuals and small groups.

"This is a real breakthrough, what some might have called an oxymoron not long ago a private-sector approach to supporting the self-efforts of the poor, even the
very poor, even people who are so poor they are
chronically hungry."

The third motive is to restructure the financial service industry, to reform the national banking system to provide retail banking services to people who have not had access before, often in countries where banks have traditionally served only the elites. These lenders look at borrowers as customers to be satisfied, whose loyalty is the key to building a profitable institution. Women, men, poor, not-so-poor, groups or individuals, whatever works is their attitude. They steer clear of providing anything but financial services.

And the fourth motive is to build social capital: social solidarity, personal empowerment, collective courage, social problem solving, community development. Lenders driven mainly by this motive are likely to favor lending to groups, especially women in poor communities, and to favor linkage to non-financial services, especially education about rights and problem-solving, for instance.

Of course, this typology of motives could be extended or sliced and diced in different ways, but I think these four cover the ground pretty well. Just keep in mind that microfinance organizations and experts differ mainly in the emphasis they give to one or more of these motives. Few are moved by only one, and few are moved by all four.

For Freedom from Hunger, this is the most important question, taking us back to the desire to eliminate hunger and radically reduce poverty:

What makes microfinance work for the poor?

Those whose motives are primarily to support true entrepreneurs build their businesses and/or to restructure the national financial service industry say microfinance works best for the poor by building the local economy, especially by creating wage jobs for the poor and providing them access to financial services. This can and should be done by focusing on building profitable microfinance service institutions that provide loans and other financial services period preferably to individual entrepreneurs or the general public without an explicit bias toward serving the poor.

Those who are motivated to support family self-help and/or to build social capital say microfinance works best for the poor by focusing specifically on the needs and wants of the poor. This can and should be done by focusing on poor communities, especially poorer women coming together regularly as mutual-guarantee groups, and by offering these groups other, non-financial services, such as financial and health and nutrition education and access to heath products (like mosquito nets to prevent malaria) and services (like clinics to treat malaria). These add-ons reflect keen awareness that lack of basic knowledge and the prevalence of health problems are major obstacles to progress out of poverty; they are impediments even to using loans and saving opportunities effectively.

Both views of how microfinance can work for the poor are valid in the right context. Given our focus on hunger, Freedom from Hunger favors the second, more direct approach, because we see too many examples of development approaches that are supposed to benefit the poor indirectly and end up benefiting them very little. Many deserving people often do benefit, but in general the very poor, the people who are so poor they are chronically hungry, are bypassed as being too difficult and too expensive to reach. A more direct, often less profitable approach is needed to reach them.

In the case of microfinance, the more direct approach means focusing on poorer communities, focusing on women in those communities who come together regularly in groups, and working with those groups to address not only financial needs but also their non-financial needs for education and health.

Freedom from Hunger contends that microfinance works best for the poor when it is integrated with health and education services. Our distinctive contribution to the microfinance movement has been to show that microfinance institutions of many different types, including credit unions and rural banks, can increase their business and financial success by offering groups of women in rural areas both loans and learning opportunities at the same meetings with the same service staff. And we've been able to do rigorous research that shows this combination, widely referred to as integrated services, works for the poor, producing more confident women, more profitable businesses, better nourished children.

It works because the poor, even the chronically hungry poor  are ready, willing, and able to actively use any help offered to them to help themselves.