What Works: Microcredit

By Matt Styslinger

This post is part of a series where Nourishing the Planet asks its readers: What works? Every week we’ll ask the question and every week you can join the conversation!

Microcredit is the lending of small loans to the very poor to allow them to start or expand small entrepreneurial projects. In order to bring financing appropriate for the poor to impoverished communities, micro-lending organizations make small loans to women with little or no collateral by doing rural outreach—unlike traditional banks. Poor farmers can use loans to purchase seeds or farming tools and other inputs they need. With the extra profit from bigger harvests, the farmers can pay back the small loans and increase their incomes.

BRAC women’s microfinance meeting in the Korail slum in Dhaka, Bangladesh (Photo credit: Matt Styslinger)

But several micro-financing organizations have been criticized for charging high interest rates and making huge profits that outweigh the benefits seen by the poor families who take their loans. Sam Daley-Harris—founder of the micro-lending group Microcredit Summit Campaign—says he hopes that the future of microcredit will be guided by “redemption” instead of profit. In a July 2010 TEDx talk, Daley-Harris tells the story of an ex-gang leader in Kenya who was approached by a grassroots microfinance organization in Kenya to rebuild a market that his gang had destroyed during the post-election violence in 2007. The organization paid the gang members to build the market during the day and to guard the building materials at night. And once the market was complete the organization provided the gang leader and approximately one-third of the gang members with a loan to create a small business producing small metal cases for children’s school supplies.

BRAC—formerly Bangladesh Rural Advancement Committee—is the largest lender of micro-loans in Bangladesh. BRAC aims to improve the livelihoods of women and help them realize their potential through entrepreneurship. BRAC uses its microfinance programs as a conduit for engaging the public in heath, education, and other poverty alleviation programs that it runs. After 30 years in Bangladesh, BRAC has gone international and is now the biggest NGO in Afghanistan, Tanzania, and Uganda where it uses microcredit programs to connect borrowers to other assistance services. To date in Afghanistan, BRAC has disbursed USD$234 million in microfinance loans. The organization is operating in 24 of the country’s provinces.

In Mali, an agrodealer named Dinnah Kapiza—who has organized several women’s farming groups—connected the Kanananji women’s group with a microcredit organization where her reputation and promise to purchase their goods is accepted as collateral. The women spend their loan money to buy agricultural inputs and to make clothing. Access to credit allows women farmers to afford inputs, tools, seeds, land, labor, transportation, and training that can help them increase production and access to markets—and earn higher incomes.

These are just a few of the ways that micro-credit projects are helping to empower poor entrepreneurs to lift themselves out of poverty. We know there are many more inspiring examples. Do you know of other microcredit projects reaching those who need it most?

Tell Nourishing the Planet what works and have your answers featured on the blog. Email me at dnierenberg@worldwatch.org or tweet your response to @NourishPlanet.

Matt Styslinger is a research intern with the Nourishing the Planet project.

To read more about ‘What Works,’ see: What Works: Innovations that protect both agriculture and wildlife, What Works: Improving Health with Agriculture, What works: Making the Most of Small Spaces, and For Sharing the Best in Agricultural Innovations, Nourishing the Planet Asks You: What Works?.

To purchase your own copy of State of the World 2011: Innovations that Nourish the Planet, please click HERE. And to watch the one minute book trailer, click HERE.

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