04/13/2017

The Best Way To Help The Poor Is To Lend To Them

Syed Kamall, CapX

If you are poor in Britain today, you will find it hard to borrow money for a new venture. Not surprisingly, you also have a lower chance of becoming an entrepreneur.

In every country of the UK, the most deprived 20-30 per cent are far less likely to be self-employed. For the poorest 10 per cent, the level is about half the national average, with just five entrepreneurs for every hundred people. Britain has a shocking 1.5 million people who are entirely financially excluded.

That is three times the population of Edinburgh. People with no bank account. No sort code. At least a third of the financially excluded are stuck on welfare. And the financially excluded are only the worst-off.

There has been much attention paid recently, for example, to the plight of the just about managing. These are six million households of working age, sitting in the bottom half of the nation’s income distribution, on low to middle incomes. They are not reliant on benefits, but struggle to live modestly whilst spending almost everything they earn just to get through the month. They lack savings and disposable income, thus investing to secure their future is a luxury they can’t afford.

Unsurprisingly, the government has tried to tackle the twin challenges of financial access and entrepreneurial activity among the least well-off. In particular, considerable political energy and taxpayers’ money has been spent to encourage entrepreneurship at the bottom of British society. Yet the level remains intractably low.

Most recently, Baroness Mone’s 2016 review brought in a voice from the business world, with personal experience of escaping poverty, to provide fresh insight. The report offered tweaks to the status quo but failed to deliver a radical breakthrough.

Similarly, access to finance has also received attention, with many worthy initiatives, including tax breaks such as Social Investment Tax Relief (SITR). But SITR only extends to individuals, not companies, requires a three-year term and is structured to favour larger investments.

In America, however, there has been a breakthrough. A new, non-state model of microfinance combined with digital platform technology is proving effective in ways that government intervention has failed to achieve.

Digital platform technology – the enabling force behind global successes such as Facebook, Twitter and Kickstarter – is significant because it is ever more accessible across socioeconomic boundaries. It cuts out bureaucratic middlemen and its efficiency and automation allows it to process many small transactions at scale. These platforms permit far more direct connections between citizens. These can be as trivial as liking each other’s selfies, but also as transformative and valuable as e-commerce and crowdfunding.

Microfinance, like crowdfunding more generally, is nothing new. The Great Exhibition of 1851 was crowdfunded. Jonathan Swift, the author of Gulliver’s Travels, started his own tiny microfinance fund in the early 1700s: he offered small loans to poor Irish tradesmen, charging no interest.

Today, digital platform technology has enabled microfinance to expand as never before. So far, microfinance has had its biggest impact in developing economies. But in recent years, a few experiments have started exploring the model’s potential in developed economies. Kiva began introducing a programme of its zero-interest-rate loans to American entrepreneurs in 2009, and rolled out its national US platform in September 2015. (The lack of any potential gain for lenders removes Kiva from the costs and barriers of regulatory scrutiny, making the initiative practical.)

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