A featured op-ed in The Wall Street Journal last week documented the recent, surprising successes of Bangladesh. Henry Kissinger dubbed it a “basket-case” at its inception. It has little economic freedom, and many in the international community saw little hope for it, but it has made some large achievements in recent years. The economy is on an upward spiral, birth rates are down, and commendable progress has been made in tackling the influence of Islamist extremism in a Muslim majority country.
The current government has helped with these upswings, but there is a stronger and more influential force in this equation: the effect of microfinance. First conceived of as a tool to alleviate the widespread poverty plaguing the country, it is a process in which small loans are issued to people, mainly women, with little or no collateral which they are obligated to pay back with interest.
Microfinance has been a presence in Bangladesh almost as long as the country has existed. Pioneers of the process—most notably Fazle Hasan Abed and Mohammed Yunus, founders of BRAC and the Nobel Peace Prize–winning Grameen Bank—made their start lending to only a handful of women in remote villages. Today, microfinance’s reach extends through the entire country.
Many on the left have hopped on the bandwagon, which is welcome but still a bit surprising, given that microfinance resonates so perfectly with conservative thinking. Unlike most foreign aid—a temporary and oftentimes unsustainable solution that can leave its recipients ultimately worse off—microfinance is a market-based solution. Borrowers gain access to capital not available before and are able to generate their own sources of revenue using individual skills and abilities. They become entrepreneurs.
Microfinance would help a village once home to 10 women who owned nothing become a village with 10 women who have money to put back into the economy—and 10 new businesses to boot. The woman who made money selling milk from the cow she bought with her loan could now buy food at the small store another woman opened up with her loan and shoes for her children from a shop that struggled before 10 extra people had money to buy the owner’s goods. Every time a woman pays back her loan, she can receive another slightly larger loan to expand her business. This struggling village would now be a growing micro-economy.
What happened in one village 30 years ago is affecting thousands of villages and towns throughout the country. Trade across communities is expanding. Millions more children can get an education instead of working. Birth rates have decreased for multiple reasons related to improved economic well-being.
Microfinance likely plays at least a small role in preventing the spread of Islamist extremism. In the absence of economic opportunity, extremists can more easily recruit young men on the brink of poverty and struggling to survive with money, a sense of camaraderie, and a scapegoat on which they can blame their troubles. The economic benefits brought with microfinance can help prevent such a situation.
Bangladesh would not be where it is today without microfinance. For over 30 years it has endured and advanced throughout the country, leaving behind positive results. Adam Smith argued that nations with institutions in place that encourage entrepreneurship and savings will experience opulence and peace. In nations with little economic freedom, microfinance fills the gap in providing these institutions, and like what is happening in Bangladesh, they will eventually experience the beginnings of peace and prosperity.