The Complementary Use of Loans and Grants

There is an ongoing debate on whether grants and loans can exist in the same environment without grants undermining microfinance institutions (MFIs). Experience illustrates that grants and loans can complement one another when administered and monitored properly.

For example, grants can target individuals who are not eligible for loans and graduate them to being eligible for credit, thus reaching the most vulnerable populations while increasing the client base for MFIs. As microfinance products, grants and loans have the same objective alleviating poverty and reducing vulnerability though each address different needs of the client.

Grants are a financial product that can reach those most vulnerable groups who do not have access to credit. It is a risk-free opportunity for the poor to start a business, build assets, expand an already existing business, or reestablish assets that have been lost. A grant may be the first and only access to capital a person ever has. It can contribute to the sustainability of the individual and families receiving the grant. The following examples show how grants have been used to reach vulnerable individuals or populations:

• After the February 2000 floods in Mozambique, CARE Mozambique provided safety net grants through two MFIs established in the area. Clients used the grants to recover from their loss by erasing their debt, restoring their credit line, and obtaining new loans. They were a one-time, temporary solution to move people out of the immediate crisis and protect them from long-term problems.
• The American Refugee Committee (ARC) provides grants, loans, and business training to Sierra Leonean refugees returning from Guinea and Liberia after the civil war in Sierra Leone. With few possessions or job prospects, these services helped returnees increase their incomes, self-confidence, improve their standard of living, and assist in reintegration.

Precise targeting and proper administration of grant programs can address the concern that grants cause long-term dependence, delay the transition from relief to development, and distort the market for credit. When targeted at those who do not qualify for credit, grants can be used as safety nets; and with appropriate training and monitoring, grants can be used to graduate people to credit and other services provided by MFIs  Rather than competing with or detracting from MFIs and their client base, grants can create customers for MFI services.