As the United Nations prepares to mark the International Day for the Eradication of Poverty on Sunday, advocates of microfinance say small loans are one of the most effective tools to break the cycle of impoverishment. Critics of the model says it is not yet self-sustainable and also reaches only certain types of poor people.
Microfinance activists and donors exchanged business cards to the sound of African drums at a recent conference in the U.S. state of Virginia organized by the non-profit U.S-based organization Opportunity International.
The donor-funded group provides small business loans, bank services, insurance and training to more than two million people in over 20 countries, most of them in Africa.
Alice Gasatura is director of credit support at Opportunity Rwanda, which she says has a growing list of clients. "We started with small groups. Now we have seen the bank growing. We are serving 80,000 clients. We started giving out small loans. The initial loan was 27 dollars but now it has grown. The initial loan is now $150."
Ninety percent of the clients are women, most of them in hard to reach rural areas. Repayment levels of the loans, which come with some interest, are at about 98 percent.
Gasatura explains the loans also come with training: "We train them about how they can do business, how they can borrow the money, how they can save. We also train them about social issues. We also share with them the new laws that the government has passed, because being in the village, they are not well informed."
Loans are initially given out to members of groups of 30 people, who each guarantee each other's loans. Clients with good records can then qualify to groups of five where maximum loans are $3,500, before being considered for even higher loans.
At Malawi's Opportunity bank, Chance Tsamwa is one of the employees who reaches out to clients in rural areas. "I am really happy because poor people in Malawi, their lives have been transformed. Now I can see women standing, taking care of their children, taking care of their families," Tsamwa.
The U.S-based Grassroots Business Fund recently extended a new grant to Juhudi Kilimo, a micro financing organization for farmers in rural Kenya.
Christine Phillpotts, the Africa portfolio manager, explains it will go toward improving the Kenyan organization's data collection. "They have many branches in very rural, low-income communities, and it is very difficult for them to get appropriate data and information from those branches back to their headquarters in Nairobi," she said.
Gasatura from Opportunity Rwanda says difficult access is one of the major obstacles to self-sustainability for micro finance operations. She says travel to reach clients is also extremely timely and costly.
Phillpotts from the Grassroots Business Fund says her group only invests in organizations with the potential to become commercially viable, but that currently these still rely on external donations.
Another criticism is that micro financing only reaches certain types of poor people, as David Hulme, the director of the British-based Chronic Poverty Research Center, explains. "Even the best micro finance programs only get so far down. They only tend to work with energetic and dynamic poor people in the right locations who get on well with field staff," Hulme said.
Hulme co-authored a book published this year called "Just Give Money to the Poor." It makes the case that by simply giving money to the poorest of the poor, without any conditions, most of the anti-poverty aid industry can be bypassed. The book argues that cash transfers given directly to poor families will enable them to decide on the most effective way to escape from poverty.
Different international agencies evaluate the number of people now living in absolute poverty at between 1.3 and 1.7 billion people.
Absolute poverty is defined as lacking the ability to afford clean water, proper nutrition, health care, clothing, shelter and education.