Grants vs. Loans

By January 13, 2015 Core Program

A frequently asked question is, “Why does Village Enterprise give grants and not loans?”

Our mission is to end extreme poverty through the creation of sustainable businesses. We serve people living on $1.25 per day or less in rural Kenya and Uganda. We believe that by generating income, people are able to address the deficits in nutrition, health, education, housing and so on that constitute the roots of poverty.

After 27 years in the poverty alleviation sector—including forays in both microfinance and unconditional cash transfers— we have honed a multi-faceted, integrated and highly cost-effective method that works best in rural East Africa where few, if any, banks exist.

Here are three reasons Village Enterprise provides grants rather than loans:

• We work with people who don’t already have a business. A $150 micro-grant serves as a spark to light the fire of entrepreneurship and awaken the capacities of potential entrepreneurs who are willing to invest time and energy into improving their lives. Loan repayments must typically start immediately and don’t provide the critical “breathing space” to nurture a new business to success.

• The rural ultra-poor seldom have the knowledge to use a loan effectively. The heart of the Village Enterprise model is our nine-month training program that imparts business and financial information and provides mentoring to often illiterate but hardworking participants. We believe in the proverbial “teaching to fish” method rather than just providing money to buy fish.

• A small seed grant gives business owners an immediate kick-start in improving their family’s standard of living. Profits generated from their new enterprise can be used to address critical family needs (food, medicine and school fees) and build capital and savings for their fledgling business rather than to repay high-interest loans.

Completing the picture, Business Savings Groups (BSGs) act as a safety net and provide access to growth capital (and serve as our exit strategy). Borrowing and lending to and from one another through self-governed and self-funded BSGs protects our new business owners from the shocks of illness or natural disaster that can otherwise lead to debt and despair. BSGs give participants a way to pay for unanticipated essentials like medicine or funeral expenses without using (or putting at risk) productive business assets such as seeds, tools, and livestock. The BSG also provides access to capital when a business opportunity presents itself.

Our results speak for themselves. On average, people begin the program living on the equivalent of $1.18 a day and graduate one year later with resources equal to $2.07 a day, an increase of 75%. This impact is long-lasting: 75% of our businesses are still operating four years later and over 30% of our recipients start a second or third business. Eunice and BOVillage Enterprise give the rural ultra-poor an opportunity to secure a rung on the economic ladder in their communities. Later on, a loan from their BSG (or from a micro-finance institution) can make good business sense, once an individual has a reliable income stream and business experience.

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