Skip to main content

Mini-Loans to Small Rural Businesses can Reduce Poverty

There is considerable publicity these days about micro-credit as a tool against poverty. There is no doubt that a loan of $100 to an impoverished person can help him or her tide over personal emergencies such as payments toward dowry for a daughter’s marriage, a medical surgery or fixing a leaky roof. In some cases, micro-loans to local merchants might help them overcome temporary financial difficulties. However, there is no substantiated evidence that micro-loans are creating sustainable businesses run by the poor (whose daily income are below $1 a day, or family income below $2 a day). Further, micro-loans barely add any significant new employment among the poor.

It is not possible for even a very small fraction of the 3 billion living in poverty (below $2 per day in income) to become successful entrepreneurs. Most of them do not have any education, business skills or financial resources. In countries like India, the poor are both illiterate and socially disadvantaged; there is little chance that micro-credit or even larger funds can help them plausibly start and run businesses. The present generation of impoverished people can only hope to earn a living by working in the fields for landlords or at businesses nearby.

If vibrant business activity and the associated new employment opportunities are what will reduce poverty, we have to think of ways to promote existing small businesses. In my social work in rural Tamil Nadu, India, I frequently get to meet owners of local businesses – furniture manufacturers, auto repair shops, welding and fabricating facilities, and so on – each employing a few workers. With meaningful financial assistance, many of them will be able to expand their businesses, while hiring several more employees. These are businessmen with the proven skill-base and sales ability to successfully run enterprises. As they employ more workers from nearby villages, poverty is correspondingly reduced.

Micro-credit is inadequate to meet the needs of businesses that have the potential to expand and add new employees. They require significantly larger credits – mini-loans of $1,000 to $10,000 or more for each activity – for such things as new machine tools, additional hardware and supplies, or a vehicle to transport the merchandise. Small contributions from individuals and institutions may be combined to offer such mini-loans. With additional capacity to meet the needs of a wider customer base, these small businesses have the potential to grow.

Hardly any venture can be expected to sustain itself when financing costs are exorbitant. If small businesses are to be helped, they must be able to borrow at reasonable interest rates. Regardless of the justifications given by lenders for charging 24-36 percent annual interest rates, there ought to be a realization that such practices are simply not viable if the goal is to help small businesses succeed. The business of credit to the poor cannot ride on exploitation.

Combined with efforts to attract large businesses to rural and other economically deprived areas, mini-loans at modest interest rates to small businesses with good track records can be an effective tool in addressing poverty. When the poor gain the opportunity for income generation from employment, they will one day become self supporting and in turn, their children will have expanded opportunities. Until then, the goal of poverty programs ought to be the delivery of basic services (such as education and healthcare) at affordable prices and the creation of employment.

Please visit us at and


Merchant Loans said…
Yes you are right, Mini loans for small businesses can help to reduce poverty in India..
joe said…
This comment has been removed by the author.

Popular posts from this blog

Simple Solutions to the Rural Education Crisis

It seems many people are trying to find innovative solutions to improving the quality of education in rural areas, especially among the poor. Since most rural children study at government-run schools, the focus of any effort to improve quality and performance must be on those institutions. Without waiting for the state government to act, NGOs can directly interact with the administrators of those schools, especially the headmasters, and village leaders to implement measures that can yield positive results. That is precisely what The George Foundation has been doing since 2004 in the 17 villages surrounding its own school, Shanti Bhavan.

Three years ago our foundation initiated a community development plan that included working with government-run schools in our area. Deverapalli Government School was the first one we took on, and within two years of starting the program, it was judged as the “best” in the district by the educational authorities. Based on this project and our Shanti Bha…

Self-confidence, the Answer to Better Learning

I am frequently asked by visitors to Shanti Bhavan from America whether our educational model would work in the West.  They are curious to know how caste and class prejudices experienced in India can be overcome by our graduates when they enter the workplace. These are complicated questions, and they need a broad explanation that cannot be fully covered in this blog. The landmark 1954 U.S. Supreme Court ruling in the case Brown v. Board of Education was meant to rectify the unequal status of racially separate schools. Now, even after several decades of desegregation measures, including busing children from some affluent families to poor neighborhood schools, their impact on the academic progress of minorities is being questioned. Many factors contribute to reducing the achievement gap in American schools, and racial integration may not necessarily be a solution to the difficulties faced in lifting the educational levels of minority students. As an Asian immigrant who came to America fif…

A Second Front

It has been quite a while since I wrote my last blog. For some reason, I had concluded that there wasn’t enough readership interest in my personal notes and critiques of the country’s system. But recently, a friend of mine who stumbled upon my earlier blogs urged me to continue. Moreover, I had promised in my last blog to write about my experiences as an artillery officer along India’s western border with Pakistan, but I hadn’t kept my word. So finally I made up my mind to venture into writing blogs once again. My medical leave following the dynamite explosion in which I was injured while at Se La Pass was to last six weeks. I had returned home to Trivandrum sufficiently frost bitten to have my large ear lobes and nose turn dark, and skin pealing like a snake’s scales. It was a central topic in several hilarious conversations with guests when they visited our home, and I had a lot of stories to tell about my adventures in the snow-covered mountains of the Himalayas. Everyone wanted to …