Business of poverty reduction in the third-world is broken

New research from Western Sydney University and Cass Business School has analysed the impact of business loans to those in third-world poverty. The research found that far from entrepreneurs’ kick-starting jobs, microfinancing led to a higher level of debt among already impoverished communities.

Poverty is big business globally, worth (US)$33 billion a year comprising of payday loans, credit cards and microfinance. Between 1.2 and 1.5 billion people are still living in poverty, and microfinance has been viewed by more than 60 countries as a sound poverty reduction strategy.

The research, Microfinance and the business of poverty reduction in Human Relations focuses on three villages in Bangladesh - indicative of a wider global trend - looking at how microfinance affects the daily grind of the rural poor and the choices that they have to make to stay financially afloat.

“The theory behind microfinancing poor nations is that it will encourage entrepreneurial skills, increase income generating activity and empower the poor. This will in turn increase access to health and education. However, our research tells a different story," said Dr Laurel Jackson, from Western Sydney University’s School of Business.

Despite there being some entrepreneurs who use microfinancing to their benefit, the research revealed that the vast majority of third-world poor do not possess the skills and creative visions that are required for successful entrepreneurs. It even deems it as "unreasonable and unrealistic" that the third-world poor would use the loans to make wise business decisions that would generate long term income. It also cites that the inability to pay back loans has led to “hundreds of suicides among borrowers in India”.

Professor Bobby Banerjee, from Cass Business School, said, the findings show that vulnerabilities were exacerbated as a result of taking out the loans in the name of self-financing.

“We therefore need to change the conversation about market-based development by changing the lens with which we view poverty reduction. Not from the perspective of the providers, government organisations or NGOs, but from the perspectives of the receivers of microfinance,” Professor Banerjee said.

Better social and economic outcomes could be achieved if investment was directed at building hospitals and schools, supporting local businesses to provide employment, and a steady income for family members or fair and equitable access to land for farming. The study concludes that a collectivist approach, rather than individual finance, could potentially be the answer.

"If impoverished communities are to truly be empowered, we need to provide more opportunities for these communities to tell their own stories about the real situations to help with their real needs. Basically, we can start to empower them by listening,” said Dr Jackson.