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RASHMI DYAL-CHAND

The pitfalls of microlending

ARE MICROLOANS the miracle cure for poverty in developing nations? While the exceedingly generous $100 million gift to Tufts University last week to fund microlending initiatives supported that notion, it may be premature to declare this hyped program to help the poor a success.

At first glance, the goal of microlending is exciting and innovative: By making small loans to help impoverished people start small businesses, microlenders appear to turn those who are marginalized by mainstream banks into successful entrepreneurs.

The gift by Pierre and Pam Omidyar is certainly a wonderful example of innovative philanthropy, as it creates a new opportunity for an educational institution to experiment with major development goals such as using ''bootstrap capital" to develop self-reliance and a respect for Western-style capitalism.

However, even the most established microlending programs have yet to prove that microlending is more successful than welfare-style programs in lifting people permanently out of poverty. According to studies by anthropologist Aminur Rahman and reporter Helen Todd (both of whom studied the Grameen Bank in Bangladesh) and a world-wide study of microlenders sponsored by Oxfam, microlenders regularly fail to help people attain permanent self-employment, often because they fail to ensure that the loans are actually used by their borrowers to start small businesses.

Most disappointing, as these studies of the Grameen Bank and studies of similar programs (such as one by development experts David Hulme and Paul Moseley) show, such programs have been unsuccessful in reaching the poorest individuals who are the purported targets of their efforts. Meanwhile, as development experts such as Jude Fernando and Philip Nichols have acknowledged, even the most successful microfinance programs are unable to sustain themselves without additional aid.

Like any other development strategy, microlending for the purpose of developing small businesses is a complicated endeavor that requires a localized understanding of the particular economic, cultural, and social factors affecting entrepreneurial success.

Given these concerns, Tufts may find that it is more of a pioneer than it had hoped to be. If it chooses to provide capital to microlenders that exist in its target countries, it must find programs that have a track record in addressing these problems.

If the university seeks a more direct role, it will have an enormous task in monitoring its loans adequately in order to provide any lasting benefit for its target populations. In the process, Tufts may help prove that some of the assumed development benefits of microlending are either nonexistent or less beneficial than the microlending community had hoped. While this may be an important discovery, it may not be what Tufts hopes to gain by being at the forefront of institutional investment in microfinance.

Does this mean that innovative philanthropy is a hopeless endeavor? Certainly not. By facing realities, microlenders can play an important role in development efforts.

First, microfinance, when defined as a one-time infusion of capital to a start-up business which results in a profit for the microlender, is too good to be true. Microlenders rarely attain self-sufficiency from their lending activities, and those that do are not financing the very poor.

Second, as the work of organizations such as Accion International shows, those microlending programs that work best generally invest enormous resources in training and support services. Thus, in order to achieve long-term poverty alleviation, Tufts should plan to provide sustained and broad-based funding for education and training, housing, child care, and the myriad other pieces of the infrastructure that supports a successful entrepreneur in any country.

Finally, Tufts has a responsibility to look beyond the seductive rhetoric of globalization that microlenders have so successfully deployed. It is not always clear that self-reliance, entrepreneurialism, and market participation provide the same benefits in other parts of the world as they do in the West.

Tufts has an opportunity to explore how microfinance contributes to poverty alleviation. But it will have to keep an open mind about how its success ultimately will be defined.

Rashmi Dyal-Chand is an associate professor of law at Northeastern University.

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