How Microfinance Changes the Lives of Millions

One person at a time.

A recent op-ed in the Boston Globe argues that microlending "doesn't actually do much to fight poverty" and that it may be time to "think macro rather than micro." Maybe the hype surrounding microcredit as a panacea for everything from poverty to discrimination is undeserved. But debunking the whole bottom-up, micro approach on the basis of two unpublished papers is not just premature, but dangerous. Macro, trickle-down development policies have rather effectively kept billions of people poor for decades. In comparison, the microfinance field is young, evolving, and ripe with innovation. Lending to the poor is just one facet of microfinance. And helping the poor save, before or along with providing credit, might be the missing piece to help solve the poverty puzzle.

Some argue that it is naive or even cruel to suggest that the poor should save. How can people living in destitution be asked to set money aside? It turns out that even very poor people can and do save if provided with the right opportunities. After two decades of providing microloans to the poor, Bangladesh's Nobel-winning Grameen Bank, for instance, started offering savings products to its clients in 1998. Just seven years later, Grameen's clients started saving more than they borrowed -- around $460 million.

Although most banks aren't interested in handling small nest eggs, poor people desperately need a safe way to save. Small-scale farmers, for example, often need to stretch out three months of income over an entire year. "During the time between harvests, my family still has needs, and we utilize everything we have in order to survive until the next harvest," explains Benito Ojeda Juárez. He and his family participate in a program set up one year ago by the World Council of Credit Unions, It gives people in rural Mexico the opportunity to save for things like home improvements, business investment, health care, and education.

Such programs, which are becoming more common around the world, also provide a wonderful vehicle for charitably minded people who want to help the poor help themselves. provides a forum for potential donors to read participants' stories and choose a goal to support. This makes it possible for new savers, after making six monthly deposits to their account, to receive a matching donation. Juárez hopes that building his savings will prevent him from going deeper into debt. Maria Alejo, another participant of the program, used her matched amount on a long overdue visit to the dentist.

These people never had access to such financial services before. There is a credit union in their village, but neither Juárez nor Alejo could afford its membership fee. Now, with the MatchSavings program, they can build enough capital to join the credit union, allowing them to keep their savings accounts and gain access to microloans.

Such programs are also popping up -- and thriving -- in Africa and Asia. In Uganda, Stanbic (a large African banking company) partnered with the start-up Assets Africa to create a mobile bank for young women in rural areas. Each week, a van travels from village to village, taking deposits. Local committees help by selecting participants and coordinating with Assets Africa to make sure the program runs smoothly. Similarly, Oxfam's Saving for Change helps members save small amounts and pool them into a common fund, which disburses loans for various needs and investments. Initiated only four years ago, the program now reaches 250,000 in villages across Africa and Asia. Building a reserve of savings empowers the groups to make investments and have access to formal credit. Thus, creative microfinance programs clearly have the capacity to fill in gaps the financial world has not, despite what the Globe op-ed says.

Another issue raised in the op-ed is that of aggregation. "Forty workers at a textile plant are going to be much more productive than 40 microentrepreneur weavers each working by themselves," the Globe op-ed says. It argues against microlending because it says that dealing with thousands of microsavers and microentrepreneurs is time-consuming and costly.

But many microlending institutions can aggregate workers and savers, beneficially and efficiently. Take, for instance, the large-scale, grass-roots savings project in Andhra Pradesh, India, the "Indira Kranthi Patham." The project aids poor female farmers who have no access to the formal banking infrastructure and are geographically dispersed. When distressed and in need of cash, these farmers sometimes have to sell their produce to middlemen or, worst of all, make emergency sales at a loss. The project helps them collectivize: Neighbors form local savings groups, which become part of village groups, which form larger district groups. At each level, the program helps participants save money and access microloans. Further, private players can negotiate at the district or village level to buy produce from the previously dispersed poor farmers. Thus far, the program has helped nearly 9 million women, who have seen their incomes rise at double the regional rate. There's nothing micro about that.

Another benefit of savings-led programs is psychological -- a point unnoted in the Globe. Savers don't just acquire capital. They experience what Michael Sherraden, a professor at Washington University in St. Louis, terms "asset effects." These include a greater sense of control over their lives and a more positive attitude toward the future. A participant of the MatchSavings program, Gloria Gomez Lauriano, points out, "I was saving to fix my house and make a better living. It's good to save so you can move forward." Many savers in the program felt that even after the program ended they would continue their habit of saving every month to help build a more secure future.

Recently, the Gates Foundation announced a $35 million grant for designing and delivering new savings products for the poor across Africa, Asia, and Latin America. This is welcome news. There are many more ideas to choose from, fitted to different local economic and political conditions. Good old-fashioned thrift, it turns out, can be married to 21st-century technologies like mobile banking and Web-based fundraising to provide a powerful engine of self-help to the world.

So, let's not be so dismissive of micro, and let's give up the idea of going back to the old days of thinking only at the macro level. A million people here, and a million there, and pretty soon thinking small can have a very big impact indeed.



Call in the Civilians

Counterinsurgency is at least 50 percent civilian. So where have all the Foreign Service officers gone?

Amid the roiling controversy over U.S. strategy in Afghanistan, one fact often gets lost: The soldiers are only half the picture. It will take both combat troops and civilians to tackle what the Army's new counterinsurgency manual sees as objective No. 1: "foster[ing] development of effective governance by a legitimate government." Such a task entails ensuring personal security, public participation, and social and cultural acceptance of the regime. The Afghan government is going to need a lot of help on its way there -- help from expert civilian advisors. Yet those civilians are nowhere to be found.

Call it Washington's blind spot. Since the September 11 attacks, the United States has suffered from a myopia that sees military expansion as paramount and civilian support as an afterthought. As a result, the State Department's ranks have been depleted and overstretched to the core. And the civilian half of warfare has suffered.

Just think back to a few years ago in Iraq. In 2004, the Pentagon brass realized that guns alone wouldn't bring security, but there weren't enough civilians at the State Department and the U.S. Agency for International Development (USAID) to get the state-building job done. The Defense Department has about 2.3 million uniformed service members and more than 800,000 civilians. The State Department and USAID combined have about 8,000 Foreign Service officers. The Defense Department had to fill 350 civilian positions in Iraq and is preparing to fill 300 in Afghanistan.

Those two perilous countries are just the beginning. Some U.S. embassies are as much as 30 percent understaffed. Things are so bad that the State Department has had to hire 2,300 family members to fill positions overseas.

Up until today, the situation has continued to deteriorate, even as the military promotes stability operations -- capabilities like "strengthening governance and the rule of law" and "fostering economic stability and development" -- as a mission of equal importance to combat operations. Trouble is, these really aren't tasks for soldiers. But the civilians are missing in action, so the Army has to step in.

Development and diplomacy, like defense, are clearly defined and specialized fields. No one would task a USAID agricultural economist with helping develop Afghanistan's or Iraq's internal defense strategy. But with the current deficit of Foreign Service officers (FSOs) at the State Department and USAID, the government routinely tasks U.S. special operations forces with implementing development and public diplomacy tasks. One exasperated officer asked me, "How am I, as a military professional, supposed to know what's best for the development of this country? That's USAID's job." But there is no USAID officer in the area, so she soldiers on.

Worldwide, the State Department and USAID need about 5,000 new FSOs to conduct core and public diplomacy, oversee foreign assistance, and manage stabilization missions. The State Department has been hiring about 700 new officers a year, a rate that barely beats attrition in the rapidly graying Foreign Service. USAID is 75 percent smaller than it was a generation ago, and despite bringing in 300 officers a year, it is still not meeting the global demand for development specialists.

U.S. Secretary of State Hillary Clinton's two immediate predecessors tried to get funding for more FSOs from Congress. Colin Powell, for example, increased the Foreign Service by about 1,000 people a year. But most of these newbies went to consular and diplomatic security positions, not core and public diplomacy jobs. Condoleezza Rice asked Congress for 1,100 more FSOs annually, but she got considerably fewer. Still, it's a question of scale; Congress and the administration need to open the taps and hire thousands, not hundreds.

These personnel shortages reduce the United States' ability to project what Clinton calls "smart power." Absent civilians place an unfair burden on the U.S. military and present the wrong image of America to the world: that of a country which implements foreign policy with a bayonet. In the end, the sorry state of State reduces the effectiveness of U.S. efforts to promote international security and make the country and the world less secure.

The Afghan people won't stand for long any force that they view as an occupier. Time to move quickly and fill the ranks of the civilian brigades who can fight the other half of the war.