A veteran in the world of international development is voicing both optimism and caution about a relatively new leveraging system known as microfinance.
Last Saturday, dozens of social innovators, economic officials and First Nations leaders met in Toronto to discuss the practice.
Started decades ago in the developing world, microfinancing usually involves loans of just a few hundred dollars.
The money goes to many rural people who don’t qualify for traditional loans.
Tools can be purchased and other means of increasing the borrower’s chance for economic productivity.
Many women have benefited from the program, as few qualify for help in many countries.
Ian Smillie is an international development specialist and author.
Together with his friend, former Liberal Leader Bob Rae, the two are pitching the idea in Canada with a focus on First Nations communities.
“We need to look at what it can do in Canada’s First Nations communities, where access to affordable capital is a real issue,” Rae said in a release.
Smillie has worked extensively with a lending agency in Bangladesh, and has seen the benefits it can bring.
He says there are some lessons to remember, though.
Smillie notes some private companies have tried to take advantage of borrowers, often charging them 200% or more for a repayment rate.
Some organizations got especially aggressive in India a few years ago, he says.
He also believes most people aren’t born entrepreneurs:
“You know if somebody gave me $500 and said, ‘Find a business opportunity that you can spend this money on and will repay the $500 and the interest and keep going afterwards’, I’d have a pretty hard time figuring it out.”
Most loans succeed when the lender works with the borrower, he says, adding: “It’s not a good idea to lend money and just hope for the best”.
Last weekend’s conference brought together several people to discuss what has worked in places like Africa and Asia and what doesn’t.
Smillie repeats his belief that a combined approach between a lending agency and individual borrowers is the most successful model:
“So I think where microfinance has worked best is where lending organizations have worked with borrowers on new kinds of agricultural opportunities or small business opportunities, small manufacturing, repair businesses, that kind of thing.”
He notes some people want money for a house or to pay for a funeral, but he says that won’t help them financially down the line.
He adds, in the past, this has meant that money can be lent without collateral having to be thrown down.
At the same time, the two sides can agree upon a fair repayment rate.
Smillie says there seem to be some micro-financing operations in Canada, but it has yet to really take flight:
“It’s the opportunity that matters. I often say that micro-finance is not the engine of development — it’s the gasoline in the engine. The engine is going to be new productive opportunities for investment.”