The case for giving grants, not loans

Micro-grants? Micro-loans? A conversation with a friend about how our Small Business Fund grants compare with micro-credit programs gave me the chance to explain why SIA gives grants and not loans to help alleviate poverty.

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It used to be common sense that micro-loans were the only way to ensure the sustainability of a micro-finance program and that the act of paying back the loan would instill the sense of “ownership” in the grant recipients. How could a micro-grant – labeled a “hand out” – do anything but create a sense of entitlement on the part of the grantee? We’ve thought that loans were better than grants because they promoted long-term, individual responsibility; but in some markets, loans wreak havoc with indebtednesshostile payment collectors and inflexible repayment schedules. Grants, unlike loans, can create independence and cultivate sustainable development in a community.

A new pottery business in Uganda.

A new pottery business in Uganda.

In 2006, just as the Grameen Bank and Kiva were becoming household names, there was a rush to start new micro-finance organisations and benevolently provide money to the poor. Unfortunately, those funds come at a great cost and with inconclusive effects. Interest rates of 40-100% of the loan principle and travel costs to get to and from the bank mean that people are stuck from the moment they get the money.

Why grants?

A loan is just a financial arrangement in the business of making money for a bank, but a grant creates space for positive relationships and an empowered individual. Spirit in Action provides $150 micro-grants to groups of 3-5 people throughout communities on the African continent. Instead of a debt-collector, we have local coordinators who train grant recipients in business planning, marketing, and basic accounting. The grant cohort also forms a support group.

Receiving a $150 grant – rather than a loan – means that the first $150 in profit from their successful enterprise can help group members go to school, improve their house, or pay for medical care, and is not used to pay back donors. And through our program, some of the additional profits are gifted to others in the community, generating goodwill and further development on the local level. (Read one family’s success story here.)

Sharing the Gift in Malawi.

Sharing the Gift with a cash grant in the community (Malawi).

We are Grant Recipients

Our model for micro-grant sustainability reflects our home-office organisational practices. We recognise that since Spirit in Action relies purely on donations from individuals for our funding, we also are grant recipients. Our supporters don’t ask us to pay them back – they ask us to pay the gift forward to help people as defined in our mission and programmatic plans. By asking our Small Business Fund grant recipients to pay it forward to a neighbor or community member rather than paying the organisation back, we are asking them to do only what we ourselves do. Paying it forward starts with our donors and passes on to many more throughout the world.

Becoming a Giver

Our paying it forward program, Sharing the Gift, suggests to grant recipients that they have received the gift of a grant from Spirit in Action and asks them, “How can you share this gift with others?” The actual form of sharing varies among groups, with input from the local coordinators. Some tithe a percentage of profits toward future groups, others contribute seeds or baby animals to a new group, and sometimes business groups come together to support a project that benefits the whole community.

Sharing the Gift of a pig in Uganda.

Sharing the Gift of a pig in Uganda.

After receiving a grant, people are empowered to be givers in their communities. Fundraisers know that people receive genuine happiness from giving to others; the Small Business Fund and Sharing the Gift enable people who have grown up with very little to have more to share with others and to be respected for their gifts to neighbors.

Unlike loans, which create an immediate indebtedness in the community, grants and a “paying it forward” mentality make development sustainable in the communities where we have funded small businesses. Even without additional grants, local growth comes from small business owners themselves. The development of their community originates with their desire to pay forward what they have received. Grants are not a hand out; they enable people to invest in their communities in a grassroots manner.

**I originally wrote this post for the WhyDev blogWhyDev is an online community for individuals passionate about development, aid, and other global issues. This post was previously on the SIA blog on December 18, 2012.

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2 Responses to “The case for giving grants, not loans”

  1. Nkemasong Rufus C. Esandem September 18, 2013 12:51 am
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    Spirit In Action micro grants is a real approach in fighting poverty right from the grassroots level. This is loudible enough to be appreciated. And it is my high wish to invite Spirit In Action to extend her services to Cameroon because a vast number of the population find themselves in the same situation like the people in Uganda, Kenya etc. So, how can we start off?
    Thanks.
    God bless.
    Nkemasong

  2. marsha johnson September 18, 2013 11:56 am
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    From Spirit in Action’s beginnings, we have followed the philosophy of grants instead of loans. To me, this wisdom has always felt right for SIA. Thank you, Tanya, for pointing out that this is exactly how SIA moves forward, by donors giving “grants” to SIA that are then “paid forward” to the grant recipients.

    I celebrate the grant recipients over the years and give thanks that the benefits are passed on from generation to generation and to the communities as well. Also, GREAT thanks to those who give personal “grants” to Spirit in Action, that this vital ministry sustains and moves forward.

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