Microcredit and the Results Giver
April 6, 2008 by markhsmith
By Phil Smith, author of A Billion Bootstraps
When Andre Aggasi first started playing tennis, it was relatively easy and inexpensive to improve. He probably bought his first racket for a few bucks, played at public courts for free, and improved his skills rather quickly. As time went by, he found that better equipment costs more and more, having a private court and lessons cost a small fortune, and to improve he would have to spend increasing amounts of time, energy and money. At his current excellent level, he can spend immense amounts of resources and barely see any improvement at all. However, if he doesn’t spend the time to practice, his level of play will diminish.
Andre’s tennis history is an excellent illustration of the ladder of well-being. There are three curious aspects of this ladder that you find as you climb higher and higher: it gets more and more expensive to go the next rung; the rungs get closer together, so at the top it is hard to tell you are climbing higher even after a major expenditure of your resources; the rungs get more slippery at the top, so if you don’t continually spend some of your resources, you will likely fall back a few rungs. This is true for individuals, and true for society.
The developed countries (i.e. US, Canada, Japan and Western Europe) comprise approximately one-quarter of the world’s population. Through the social programs provided by their taxes, the people living in the developed world have virtually eliminated deep poverty from their countries. Virtually everybody in these countries has access to sufficient food, shelter, education, and health care. Because of broad social safety nets, on a scale relative to the world, everybody in these countries is at least three-quarters up the ladder of well-being.
In America, we have chosen to use much of our taxes to eliminate dire poverty, but there are many other worthwhile and important things that are not funded by the government through our taxes. So, the role of individual givers in America is to improve our excellent living conditions even more by funding such things as the arts, medical research, churches, and helping the poor even more. Yet, America is so far up the scale of well-being that the costs are incredibly high and it is often hard to determine if improvement is being made even after the expenditure of a significant amount of resources. Yet, if we givers don’t make these expenditures, our communities certainly won’t advance, and we may even go backward.
Renata J. Raferty is an expert on charitable giving. She believes givers in America can be described in four ways:
- Social Donors: These givers place a high value on personal visibility and prestige brought by a gift, and they highly value the importance of interacting with others in the high-profile community.
- Quid Pro Quo Donors: These givers donate to organizations in which a close friend or colleague is involved. The contribution is based on a respect or trust in the person making the request. There is often an unspoken agreement that a return request will be made by the donor.
- Social Conscience Supporters: these people give to organizations or individuals because they believe in the importance of a mission or react to an impassioned request. These people are often genuinely altruistic in their motives and selflessly dedicated to their causes.
- Results Givers: These contributors carefully invest in the nonprofit sector specifically to effect substantial, measurable change in their communities and the world. These givers require levels of improvement big enough to change people’s lives on a long-term basis.The vast majority of Americans exhibit characteristics of the first three types of givers. Working together, we both support and perpetuate a system that allows many important organizations to exist and worthwhile actions to be taken. The results of these organizations are usually measured against their missions rather than against a particular standard of cost effectiveness. For instance, results might be measured by finding out if a hospital wing got built for the budgeted amount, how many people attend the ballet each season, or how many school buses show up in front of a museum.
The cost of improving well-being in America is so expensive and so hard to recognize, that it is virtually impossible to be a Results Giver except for very small projects. This is not because we want it that way, but it is an inherent result of our system of life. For one thing, the recognition of benefits for non-profit programs is very personal. Who of us would like to compare how much good the Boy Scouts do versus Gilcrease Museum versus John 3:16? Also, since America is so high on the economic scale, improvements in life caused by any one program are small on a relative basis and are difficult to measure. Consequently, most of us inherently believe it is highly unlikely that any one non-profit activity adds social benefit an order of magnitude better than any other.
Now, let’s go back to the rest of the world. Remember, one-quarter of the world’s population lives in developed countries where there is no abject poverty. Approximately one-six of the world’s population lives in developing countries but is not impoverished. That is a total of about 2.6 billion people who live in relative economic prosperity at least three-quarters up the ladder of well-being.
Here is how the other 4 billion, or about 60% of the world’s population, lives. One billion live on $2-$4 per day – they are maybe half way up the ladder of well-being. Two billion live on $1-$2 per day – they are maybe a quarter of the way up the ladder. One billion live on less than $1 per day – they are still trying to get on the first few rungs of the ladder. Many of these men, women, and children will not survive until tomorrow.
In terms that may hit closer to home: about 3 billion people have no access to sanitation, 2 billion have no access to electricity, 1 billion cannot read or sign their names.
Until recently, individual Americans did not have many good options to help these four billion impoverished people. But an option exists now that not only helps these people, but is incredibly cost effective since they live so far down the ladder of well-being. That option is microcredit. As I have gotten involved with microcredit, it has changed my entire perspective about what my money can accomplish.
Microcredit means making very small loans to poor people to help them start or improve their businesses. These loans are very effective because there are absolutely no other sources of capital available to these people. With a loan in size of $50 to $500 a poor person can often significantly improve their income on a permanent basis. Over 80% of microloans are made to women, so they are also a very important tool to help women’s and children’s economic situations.
Loans are usually made through organizations which form small community banks. Loans are individual signature loans, but are cross-guaranteed by other borrowers, so the default rates are often less than 1%, which is lower than in America. People are focused on repaying these loans because they don’t want to lose social status and want access to future loans. They know this may be their one and only chance for them and their children to rise from poverty. Loan terms are usually six months, and interest rates are 10-15% plus the rate of inflation. So, a typical interest rate is 35% per year.
Because loans are cross-guaranteed, payments are usually made weekly in mandatory meetings of all borrowers. Anyone missing a payment has a lot of explaining to do. At these meetings, it is very easy for organizations to cost-effectively provide other services such as health and nutrition information, business training, or other financial services. As you can imagine, in many cases the borrowers value this training and information as highly as the loans.
Microloans and these related services are usually made through well-established and credible organizations. Without going into detail, I believe I help change people’s lives for a total cost of $1 to $5 per person. On a relative basis, this is thousands of times cheaper than in America. As a famous Tulsa giver said, “In America I help bring people from here to here and it costs this much. With microcredit I help bring people from here to here and it costs this much. If I value human life equally, the conclusion is obvious.”
Without trying to sound like Sally Struthers, I would like to introduce you to Crucita, a lady that my daughter recently met on a trip to the Dominican Republic. Crucita lives in a tiny village near the sugar cane fields in a remote part of the island. With her first microloan, she purchased more inventory of food and drinks for her little stand. She has since taken and repaid 5 more loans, and has purchased an oven, freezer, washing machine, and a small motorcycle for her son to transport goods and people. She makes money by baking, laundering, and selling frozen and fresh foods. She is a perfect example of someone who needed a hand-up, not a hand-out.
Through microcredit, I believe ordinary individuals, like you and me, can change the lives of billions of people. My family still gives to many organizations which benefit my communities, but I feel compelled to give increasing amounts to microcredit projects where I can do so much more good for so much less money. And as a side benefit, now that I am able to become a Results Giver, I am becoming more enthusiastic about giving.
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