Church Implemented
Microcredit
Microenterprise development (MED) is a powerful strategy for helping low-income people to become financially self-sustaining through starting or growing their businesses. One component of MED is typically microcredit, making small non-collateralized loans to the poor. While there are noteworthy successes with very large MED programs, the last 40 years of development experience have also demonstrated that microcredit is extremely difficult to do well for a variety of technical reasons.
The basic problem is this: How can an institution lend very small amounts of money to poor people, who usually lack acceptable collateral, a credit record, and verifiable income and still get the money repaid? The microcredit movement founded by Dr. Yunus and others has found a way to do this in many settings by using peer pressure and the promise of future loans and services as incentives to get people to repay their current loans.
Microcredit
There are several key elements to making microcredit work. One of the keys is that the lender must be fully financially sustainable. If the borrowers sense that the lender is not fully sustainable, they will suspect that the lender might not be around in a year or two. Once the borrowers expect the lender to disappear, the borrowers have no economic incentive to repay their current loans, as they have no hope of getting any future loans.
Because financial sustainability of the microcredit program is fundamental to success, microcredit providers must reach a large scale of operations so that they can lend out enough money in order to pay the costs of their overhead. This drives microcredit programs either to expand rapidly or die as most find it very difficult to maintain high levels of external donations over extended periods of time.
Church Implemented Microcredit
Unfortunately, the local church has several features which make it a particularly bad institution for implementing microcredit initiatives.
- Church-run microcredit programs usually cannot reach sufficient scale to become financially self-sustaining, making them very prone to weak economic incentives for loan repayment
- Churches are typically not very adept at collecting loans, as the message of grace tends to undermine hard-nosed loan collection
- Churches usually have a reputation of giving handouts—e.g. clothes closets or food pantries—and the culture of handouts undermines the discipline necessary for loan repayment
- Many churches think that their mission is purely spiritual and that business and money matters are “worldly” endeavors. In principle, points #2-4 can be overcome, but point #1 cannot.
A microcredit program usually needs about ten thousand clients or more to become sustainable, depending on the context. The typical church or ministry does not have the capacity to implement a large-scale, high-accountability organization of this size.
Appropriate Microfinance and MED Strategies
So what is the solution? What can the local church do in the area of areas of MF/MED? Although the Chalmers Center heavily discourages churches or small, para-church ministries from setting up microcredit lending programs, we believe—and our experience confirms—that churches can use one or all of the following strategies:
Strategy 1: The church can promote user-owned and managed savings and credit groups, such as ROSCAs and ASCAs. In this strategy the local church helps the poor to save and lend their own resources to one another. The church never handles the money, and the church does not run the group. The loan capital comes from the savings of the poor themselves. Contrary to what we might think, the poor can and do save.
Strategy 2: The local church can partner with financially sustainable Microfinance Institutions (MFIs) that exist in various regions. As the sizes of the poor people’s microbusinesses expand, larger loans are sometimes needed than can be generated by the savings and credit groups mentioned in the previous paragraph. The good news is that there are often Christian relief and development agencies operating MFIs in the same region in which a local church or denomination ministers. The church can partner with the MFI, the church providing evangelism, discipleship, and other services to the poor while the MFI does all the very hard work of lending and collecting the loans.
Strategy 3: The local church can provide small business training to the low-income entrepreneurs. Most big large-scale, sustainable MFIs do not have the time to do this. They just lend money and collect it back again on their quest to achieve financial sustainability. Churches can complement the MFI’s loan services by providing a strategy of small business training to enable the low-income entrepreneurs’ to grow their businesses.
The Spring 2003 issue of our Mandate newsletter elaborates on these three strategies.
Chalmers Center Training on Microfinance and MED
The Chalmers Center International Ministry Track provides training on all three strategies. This track consists of a series of courses intended for local indigenous pastors and church members, missionaries and international ministry staff, Christian relief and development workers, and US/Canadian churches who minister abroad. The training will benefit individuals and ministry teams and is also appropriate for members of a church foreign missions committee.
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