Tiny Loans Seen as Big Way to Invest in Developing Nations’ Poor

Friday, July 28, 2006

It was at the end of a long, dusty road in Guatemala that Mike Galgon, a Seattle tech entrepreneur, became a believer.

He met a woman who used a $50 loan to buy a simple metal-bending machine, allowing her to increase her daily production of buckets from two to 10. By selling the extra buckets, she was able to buy medicine for an ailing daughter, send several other children to school and purchase a second machine to expand her business.

“At two buckets, you can’t save anything,” said Galgon, 38, co-founder of AQuantive Inc., one of the nation’s largest online marketing firms. “But with 20 buckets’ worth of income, for the very first time she could save money?. It was a miracle of economics.”

Microcredit programs that deliver money to poor people have been one of the fastest-growing tools in the anti-poverty arsenal, spurred by a generation of high-tech entrepreneurs attracted to its “hand-up, not a handout” philosophy, said Sam Daley-Harris, head of the Microcredit Summit Campaign.

The Washington-based group has set a goal to have loans as small as $30 granted to 175 million of the world’s poorest families by 2015.

That effort got a boost with the recent news that Microsoft Corp. founder Bill Gates and his wife, Melinda, planned to devote more of their philanthropy to areas such as microlending.

At a conference with investor Warren E. Buffett, who is giving the bulk of his wealth ? about $31 billion ? to the Bill & Melinda Gates Foundation, Melinda Gates said poor people, particularly women, needed better ways of getting the money necessary to move beyond mere survival.

Bangladesh is often cited as a microcredit success. That’s where pioneer Grameen Bank and other providers of small loans are credited with 40% of the reduction in “moderate poverty,” according to a 14-year study by the World Bank. The loans have translated into a dramatic improvement in the quality of life there, including lower infant mortality rates and improved education levels.

This month, BRAC, a leading Bangladesh microcredit provider, sold off $180 million worth of loans to investors. RSA Capital and Citigroup were among those participating in the deal.

Microcredit providers have found that women, who receive the bulk of these small loans, are better credit risks and more likely to spend their additional earnings on their families.

Backed by a multibillion-dollar purse that dwarfs the annual budgets of many governments, the Gates Foundation has already reshaped the global health arena, spurring innovative research and marshaling treatment of long-ignored diseases such as malaria that kill millions of poor children each year.

If the Gates Foundation chooses to apply itself to microfinance full force, “it’ll be another tectonic shift in financial services,” said Bruce MacDonald, a spokesman for ACCION International, a Boston-based organization that received a $5.8-million grant from the foundation to expand microlending in West Africa and India.

Source: LA Times (link opens in a new window)