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Micro-Loans Solve Many Problems of Poverty

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Hello everyone. Here's a research paper on micro-loans that I did for my English class. I'm not about to put it up for peer review or anything. It's far from perfect, but here you go.

Micro-Loans Solve Poverty Problems

No one denies that poverty is a large problem in today’s world. Approximately 1.1 billion people live in extreme poverty and 8 million people die each year because of shortages caused by the failures of their economies (Sachs 1-2). For the benefit of the United States economy, as well as for the benefit of the over-all world economy, it is imperative that we heed these concerns and arrive at a workable solution to the problem of global poverty. Although no one solution will do to solve the entire problem, micro-loans can play an effective role in reducing global poverty.

The idea of micro-loans originated in 1972, when Muhammad Yunus returned to Bangladesh to visit Jobra, a village near his home-town (Kurlantzick 1-2). There he discovered that a number of women were indebted to local loan-sharks, with no hope of escaping their plight. Mr. Yunus decided to help them. The way in which he decided to help them was very innovative. Rather than make an outright gift, he decided to loan 42 villagers $27 each. The result was very encouraging: Each and every villager who was given a loan paid Mr. Yunus back.

When Yunus took his idea to commercial banks, they ignored him, refusing to give credit without collateral of some sort. It was impractical to try to charge collateral: the poor people of Bangladesh had no collateral to pay. Undaunted, Yunus used personal funds to give loans to another 100 women. These too paid Yunus back. On the strength of these results, Yunus went on to establish an official bank named Grameen, a word which means “rural.” Grameen has now distributed around $3 billion to the poor of Bangladesh, and claims a rate of repayment greater than 90%.

Francisca Lucia Velli of Sao Paulo, Brazil, is an example of a micro-loan success story. Velli had worked as a seamstress in a Sao Paulo ghetto for a decade, and her equipment was aging. After receiving a $350 micro-loan, Velli was able to purchase a new sewing machine which sewed 7,000 stitches per minute. Soon she was able to hire three new seamstresses, and even advertised for a fourth. (Jones 1)

Kamela Sediqi of Afghanistan experienced even greater success. In 1996, Sediqi started a tailoring business on a $100 micro-loan. As that business steadily expanded, Sediqi saved her profits until she had $50,000, with which she started a construction company called the New Pimar Group.

The New Pimar Group employs over 200 Afghani women and has secured several public works projects. Now that Sediqi’s business turns $28,000 per year in revenue, it is safe to say that she has out-grown the micro-loan program. Sediqi is currently looking for a $70,000 loan to continue the expansion of her business. (Cummings 1-2)

Of course, not all micro-loan recipients can claim a similar level of success, but that such a level is possible demonstrates the merits of the program.

Micro-loans make sense in a capitalistic as well as philanthropic context. Alexandre de Lesseps , an international businessman, is financing them as a business proposition. Lesseps is a co-owner of BlueOrchard Finance, whose primary business is investment in micro-loans.

BlueOrchard has spent millions financing micro-loan efforts, and their profits are 2 to 5 percentage points above the standard London rate. “The reason we lend money to poor people is not only so that they can make money, but also so that our investors can make money,” said Lesseps. Lesseps has said that it makes financial sense to put up to four percent of one’s net worth into micro-loans, but the lack of collateral scares off some investors, and for a long time government organizations would not get involved because of its status as a for-profit venture, but both groups seem to be coming around. Investors are being wooed by loan re-payment rates that are actually higher than those on loans with associated collateral, and the UN has programs in place that incorporate private investment. (Hurt 1-2)

Micro-loans produce a vital, self-sufficient economy. Residents of an area are the ones that have the best knowledge of the economic needs of that area; in other words, they “know the market.” Unlike aide programs which often merely throw money at problems, micro-loans are directed. Micro-loans give citizens the tools they need to fix the problems and, in the process of improving the situations of their neighbors, they are also lifting themselves from poverty. Centralized programs are, inevitably, inefficient.

When the United Nations proposes that all nations pay up a percentage of their GNP, it’s basically income redistribution. It’s socialism dressed up in philanthropic clothes. Attempts at globalized socialism in the past have always been unsuccessful, because they assume that a central governing body has a better idea of what’s going on than the people at a local level. That the UN offices will know better how to fix the problems of a village in Lesotho than residents in that village. This is simply not the case. Local efforts at solving civil problems work better, simply because local people and organizations have better knowledge of the issues involved.

A huge bureaucratic body, no matter how efficient or comprehensive, is bound to overlook things and make mistakes. And the money that’s pumped into this body must go first to the bureaucrats.

In 1999 the U.N. Development Department’s budget stood at $2.2 billion, a paltry sum compared with, say, the amount spent on the war in Iraq. However, that same $2.2 billion pay-rolled almost 6,000 employees and 130 offices, at a cost of $300 million. (Miller 1-2)

Sachs’ “End of Poverty” article explains that although actual contributions amount to $30 per year per Kenyan, about six cents per year is actually making it to Kenyans. And then he goes on to explain why this means that we should pour more money into the same system. This is simply ludicrous.

Micro-loans and capitalistically supportable systems work because they don’t rely on kindness. No one has to reach deep into their souls and pull out their pocket-books. No one has to trust that some nameless, faceless, entity will spend the money in the best possible. Micro-loans involve trust of a different kind. Instead of treating the problems of the poor like they are a disease, we put our faith in the ability of the poor to, given the resources, improve their condition. Shouldn’t mankind be prepared to put its faith in man?

Works Cited

Sachs, Jeffrey. "The End of Poverty." Time 14 Mar 2005: TIME Magazine Archive. 1 May, 2005 .

Kurlantzick, Joshua. “10 Muhammad Yunus.” U.S. News and World Report 20 Aug. 2001: 51.

Grameen Foundation USA – fighting poverty with micro finance. Grameen Foundation USA. 1 May 2005 Grameen Foundation

Jones, Patrice M. “Micro-loans fund dreams of Brazi’s aspiring poor.” Chicago Tribune 24 Oct. 2002.

Semple, Kirk. “Tiniest of Loans Bring Big Payoff, Aid Group Says.” The New York Times 3 Nov. 2003: A6, col. 6

Dowla, Asif. “Microfinance Systems & Women Development Workers: Implementing Rural Credit Programmes in Bangladesh.” Journal of Development Studies

Dugger, Celia W. “Debate Stirs Over Tiny Loans for World’s Poorest.” The New York Times 29 Apr. 2004: A1, col. 3.

Cummings, Betsy. “Tiny Loans Stimulate The Appetite For More.” The New York Times 27 Jan. 2005: C20, col. 1

Abdallah, Sana. “Microcredit and the Empowerment of Jordan’s Poor.” United Press International Dec. 2004.

“Microcredit’s Limits.” The New York Times 5 May 2004: A26, col. 1.

Hurt, Harry, III. “A Path to Helping the Poor, and His Investors.” The New York Times 10 Aug. 2003: BU4, col. 1.

Miller, Judith. “Poverty Agency Vying with Aid Offices for Cash.” New York Times

11 July 1999.

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  • Mallie

    Sam – great paper! I love that you view people with dignity no matter what their socioeconomic status, race, nationality, etc.

    Did you know Mohammad Yunus opened up a Grameen Bank branch in New York City? I just found this out because of a documentary that is premiering at Sundance this week. It tracks Grameen America’s first year offering micro-credit to the poor in the US. Check it out.