Microlending and Afghan reconstruction?

USAID announced this month (clip below break) that $80 million will be distributed in small loans to rural Afghans over the next three years. This is a welcome initiative. Credit programs exist in Afghanistan, but on too small a scale to compete with the array of traffickers who already occupy the role of lender. These traffickers extend cash to impoverished farmers at usurious rates (and with predictably harsh penalties for non-payment) in return for future payment in cash or poppy sap.

Micro-lending programs are powerful because they correct a market failure--the stifling absence of credit for poor people. For years, Muhammad Yunus, who received the 2006 Nobel Peace Prize for his work at the Grameen Bank, has argued that despite their lack of collateral and traditional "creditworthiness," poor people -- and especially poor women -- can make highly reliable borrowers.

You can read Dr. Yunus's excellent Wall Street Journal op-ed here (A Hand Up, Not a Handout.) He argues that loans are usually more effective than grants, even -- and especially -- when the needs are greatest.  Counterintuitive? Read his argument:

In Bangladesh, we've learned that when aid is free, not only do the poor get the least of it, but everyone inflates their needs. While some handouts are clearly necessary in such times, we focus on lending small amounts of money. This lets us keep costs down and rebuild funds for the next disaster. Most importantly, our Grameen banks are ready to act at a moment's notice. They can respond to a disaster without waiting for anyone's permission, immediately becoming like humanitarian agencies by suspending loan payments, and providing cash, food and medicines.

Micro-lending provides a counterbalance to the two biggest problems we've seen in reconstructing Afghainstan--the problem of administrative costs and bureaucratic delays implicit in foreign aid. The point of Yunus's article is to recommend microlending for Katrina victims, but it raises the question: are we doing enough to support microlending in Afghanistan?

 

Here are some details on the USAID program:

USAID to provide small loans to thousands of farmers
KABUL, 10 Oct 2006 (IRIN) - An estimated US $80 million will be distributed over a three-year period in the form of small loans to some 60,000 people across Afghanistan to boost rural development and livelihoods, the United States Agency for International Development (USAID) said on Tuesday. . .The USAID director said the purpose of the project is to provide expanded access to rural financial services in key areas of Afghanistan. The goal of the new programme is also to establish 50 new credit unions providing services to 50,000 clients, and to establish 30 farmers’ cooperatives to provide services to 20,000 clients, USAID officials said.

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