Reprinted from the Chalmers Center.
Maria walked to the front of God’s Compassion Church of Manila and testified, “My child would have died had it not been for the help of the members of the savings group. I was able to get a loan for the medicine, and they also prayed for me and visited my sick child.” Maria sat down, and then Camilla stood and explained how the savings group members had encouraged her to borrow some money so that she could start a small cookie-selling business. She went on to share that the profits from this business were enabling her to meet the daily needs of her children.
The three hundred people in the church listened intently as Maria, Camilla and the other twenty-four members of the church’s savings group shared how God had used it to bless their lives. The economic benefits were obvious to all in attendance. Lacking access to formal banking services, these mothers had always struggled to save and were usually unable to borrow at all without resorting to expensive and risky loan sharks. In contrast, the savings group enabled the mothers to save and lend these savings to one another. The results had been nothing short of phenomenal, the loans made by the group had a 100% repayment rate, and the interest paid on the loans enabled members to earn dividends averaging 50% in annual terms.
How could something so miraculous happen in a place with so few resources? God is at work, to be certain, and He is working here through the tool of church-centered microfinance.
Making of a Legend
The standard story of microfinance has become almost legendary:
Lend money to materially poor people so that they can start or expand microenterprises in order to earn a living. As a result, the incomes of the borrowers go up, lifting them and their families out of poverty. Moreover, as loans are repaid, the money can be lent over and over to lift even more people out of poverty. If one is looking for a sustainable approach to poverty alleviation, it doesn’t get much better than this!
Indeed, this “microcredit-for-microenterprises” story of microfinance is truly inspiring – so inspiring that for the past several decades it has been one of the leading strategies for alleviating poverty in the Majority World.
In reality, microfinance is both so much less and so much more than this story suggests. It is less, because it is unlikely that the vast majority of the world’s poor will achieve a substantial increase in their incomes through loans to microenterprises. It is more, because researchers and practitioners are discovering that poor households need a vast range of financial services – including many types of loans, savings, insurance and money-transfer services – and they are experimenting with innovative ways to address those needs. Seen in this light, microfinance has the potential to impact materially poor households in more ways – albeit more subtle ways – and on a much larger scale than the original “microcredit-for microenterprises” story.
There has been some recent disillusionment with the “microcredit-for-microenterprises” story. In contrast to the legend, a number of studies have found that microloans are not launching most materially poor microenterprise owners on a rapid upward trajectory out of poverty. In addition, reports of unscrupulous practices by some microfinance institutions have left many wondering if lenders are more interested in lining their own pockets than helping the needy.
Why don’t microloans put most borrowers on the upward escalator out of poverty? There are a number of factors at work, the most important one being that most microenterprise owners are not actually entrepreneurs. In the absence of jobs, many poor people are forced to operate their own businesses as a means of survival. But being an “entrepreneur by force” is quite different from having the skills to launch an expanding small business.
However, the fact that microfinance is not what many thought it was doesn’t negate the fact that it can be a powerful tool to improve the lives of billions.
Think of it this way: What if you were told that there was a low-cost, church-centered ministry that could save the lives of vulnerable children, keep them in school, improve their parents’ marriage and lead their entire family into a deeper relationship with Jesus Christ? That would sound pretty fantastic, wouldn’t it? While microfinance is unlikely to dramatically increase a poor household’s income in the short run, it can and often does have these very positive effects.
Microfinance needs a new narrative – one that recalibrates our expectations. This new narrative needs to expect less out of the “microcredit-for-microenterprises” approach. At the same time, this new narrative needs to open our eyes to see the incredible opportunities for microfinance as a whole.
The Vast Potential of the “Microfinance-for-Households” Approach
In order to understand this broader perspective, it is helpful to start by focusing on materially poor households rather than on the microenterprises that only a small fraction of those households own. Then we can ask: What financial services are needed by the nearly 3 billion people living in those households?
Detailed research has found that materially poor households need financial services for a wide range of needs:
- Consumption Smoothing: Households are engaged in continuous financial management, saving and borrowing to ensure they can meet their daily consumption needs in the face of incomes that are small, irregular and unpredictable.
- Business Investments: Due to few employment opportunities, many materially poor households are forced to be self-employed (see above). They need financial services to provide capital for start-up, day-to-day operations and business expansion.
- Household Investments: Like any of us, materially poor households need financial services to enable them to save or borrow for relatively large expenditures such as repairing a leaky roof, buying a cooking pot or paying school fees for their children. Although these expenditures may sound less exciting than business investments, they are crucial for the family’s health and long-term survival. In particular, keeping children in school is absolutely essential for the family’s long-run economic health.
- Life-Cycle Needs: Weddings, funerals and other significant milestones can consume a very high percentage of a family’s annual income. Savings and loan services can help to pay for these events, as can insurance products such as life insurance and burial insurance.
- Emergencies: Unexpected events can put an enormous strain on poor families. In particular, health emergencies are one of the leading reasons that families fall into a financial crisis. Thus, in addition to being able to save and borrow, multiple forms of insurance to help with emergencies are vitally needed throughout the Majority World.
Note that within each of these categories, a range of financial services need to be developed, and each of these services needs different pay-in and pay-out structures for people living at different levels of poverty. The possibilities for developing much-needed financial interventions are virtually endless. That’s where the “microfinance-for-households” approach steps in. By creatively offering a range of savings, loans and insurance services, it is possible to stabilize the household, reduce its vulnerability, and increase its ability to take steps out of poverty.
Although stabilizing a family’s consumption seems less exciting than dramatically increasing it, the effects may be more profound than meets the eye. When a household is brought back from the edge of a financial cliff, the effects can be dramatic. With death and disaster less imminent, it becomes possible for the household to catch its breath a bit, to have a bit more peace of mind, to dare to think about the future, and maybe even to acquire a small dose of one of the most powerful antidotes to human suffering: hope.
Moreover, the methodologies employed in microfinance ministries allow for even more powerful effects. Since poverty can be conceived of as brokenness in people’s foundational relationships with God, self, others and the rest of creation, by intentionally incorporating evangelism and discipleship, church-centered microfinance ministries are able to address all four of these relationships, thereby having more profound effects than immediately meets the eye.
The Materially Poor Can Save
The Chalmers Center has been deeply invested for over 20 years in training churches and development workers throughout Africa, Asia and Latin America in biblically-integrated microfinance strategies. As in every area of our work, Chalmers tries to use an asset-based approach in microfinance. As we sought to develop a “microfinance-for-households” approach, we discovered two crucial assets: First, poor people can save, if provided with a mechanism to do so. In fact, because saving is less risky than borrowing, very poor households, which are highly vulnerable, would actually prefer to save than borrow. Second, poor people have actually developed their own financial systems!
In many places around the world, people join savings groups (also called savings and credit associations) that can help them weather the storms of life. In a typical savings group, 10 to 20 people meet regularly to save money, create their own rules, elect their own officers, and if they wish, give out loans to members from their combined savings.
Savings groups can be powerful, but they are also fragile. If the group members do not follow the key principles that make them work, the loans will not be repaid or the money will be stolen, and very poor people will be hurt in the process. So Chalmers and other organizations have found ways to build on local knowledge by teaching poor people the key principles they need to form and operate their own savings groups successfully.
The Church Is the Key
For many years, the Chalmers Center has worked with churches in the Majority World to help them launch, sustain and multiply savings groups. Why the church, though? Churches are often stable, trusted institutions in their communities, places where people already gather to share the deep things of their lives and serve one another. But the reasons are so much more than just practical. Local churches are the living embodiment of God’s kingdom here and now—the place where the various causes of material poverty (individual and systemic brokenness, false stories of change, destructive formative habits, and demonic forces) are all rightly addressed in a loving community under the authority of Jesus. The church should be the place where healing happens!
Indeed, in the church-based savings group mentioned at the start of this story, the blessings were so much more than economic. Group members testified that they had developed a strong community as the mothers prayed for each other and their families. And God had regularly answered their prayers, providing jobs for their husbands, healing their children, and mending their broken relationships. The group had also enabled its members to be salt and light in the wider community. Neighbors of the members commented about the love and concern that members showed to each other, so members invited these neighbors to attend their weekly meeting and Bible study. These non-members were allowed to borrow money from the group at interest rates much, much lower than available from local loan sharks, and when the group started its second cycle, these borrowers were invited to join and save.
Through the Chalmers Center’s Restore: Savings curriculum and our network of trainers and partners, thousands of local churches have been equipped to launch savings groups like this. Further, as groups grow and develop stability and confidence, Chalmers trainers and partners introduce them to our Business, Home and Health curriculum, which offers a biblical framework for the everyday issues of life in the Majority World.
Through such church-centered microfinance ministries, Chalmers longs to see local churches across the Majority World use their own gifts and resources to foster lasting spiritual, social and economic change in the lives of the materially poor. And we want to help other organizations, as well as well-resourced churches in North America, to encourage their church partners in the Majority World to use these approaches to promote dignifying and sustainable poverty alleviation.