Digging Out

A laborer making cement at a hospital being rebuilt by British forces in Basra, in southern Iraq. He earns just a few dollars a day but is lucky to have a job at all.

Orphans serenade British Army Captain Stephen Morte in Basra. Using American money, the facility has launched a business providing sewing classes to women.

At least that's the plan. As a strategy for defusing an ongoing conflict and supporting reconstruction, microfinance is nothing if not experimental. It has been only in the past couple of years that the concept has "gotten a level of visibility" as a major development tool, says Shari Berenbach, executive director of the Calvert Foundation, an investment organization in Maryland that funds some microfinance lenders. And it was only with the awarding of the 2006 Nobel Peace Prize to Muhammad Yunus, founder of the Grameen Bank in Bangladesh, the world's most successful microfinance institution, that the idea became anything like a household word.

Morte believed he could help build self-sustaining enterprises, thereby weaning the country from reliance on foreign aid and improving Iraqis' opinion of foreign forces.

Still, microfinance has hardly been a secret in international circles. It has been used in developing countries for decades. And it's a powerful model: Grameen, for example, made its first loan in 1976; 30 years later, it lends upward of $50 million a month to 6.6 million clients--less than $10 a head--and enjoys repayment rates better than 98%. "During an eight-year period, among the poorest in Bangladesh with no credit service of any type, only 4% pulled themselves above the poverty line," according to a report from the Global Development Research Center (GDRC). "But with individuals and families with credit from Grameen Bank, more than 48% rose above the poverty line."

Reflecting that success, the global microfinance portfolio has been growing at 30% annually, the GDRC says, and today there are an estimated 13 million borrowers worldwide, with $7 billion in outstanding loans. (Unlike the old-school not-for-profit/charity lending scheme, the term "microfinance" tends to imply set interest rates and repayment schedules. Some firms keep the interest as revenue; others plow it back into their pool of available capital.)

Aside from some halting efforts in Afghanistan, however, microfinance has rarely been tested in places as dangerous as Iraq. Just 2% of all microfinance has been directed toward Iraq and the region, estimates Isobel Coleman, of the Council on Foreign Relations. And as a percentage of the total postwar reconstruction budget--most of it poured into billion-dollar contracts to firms such as Bechtel and Halliburton --microfinance funds scarcely register. "Microfinance operations are small scale and long term and not particularly exciting," explains Robert Templer, director of the Asia Program at the International Crisis Group, a nonprofit based in Brussels. "They don't involve great returns to foreign companies that want contracts to build things."

Not that the American taxpayer has been getting a great return on the rest of the $25 billion the government has spent on rebuilding Iraq. Thousands of temporary generators still provide much of Basra's power, and many people throughout the country drink untreated water, if they have access to running water at all. Meanwhile, attacks and neglect have quickly ruined much of what has been built. Baghdad's Kerkh sewage plant, reconstructed at a cost of nearly $6 million, was abandoned in 2004 after insurgents threatened its technicians. That is just one example among thousands. Even successful improvement projects have been subject to sabotage and violence, leading many contractors to devote as much as 22% of their budgets to security. Fadil himself employs an armed guard because thieves have been known to slip in and nab orphans to sell on the black market.

"It is unclear how U.S. efforts are helping Iraqi people obtain clean water, reliable electricity, or competent health care," reads a 2005 report by the United States Government Accountability Office. "Measuring the outcomes of U.S. efforts is needed to determine how they are having a positive impact on the daily lives of the Iraqi people."

Frederick Barton, from the Center for Strategic and International Studies in Washington, DC, says the reconstruction of Iraq has all but ground to a halt. "There's not really new money coming in," he says. "We made a huge assumption that things would get safer and undertook huge projects vulnerable to sabotage. It might have been different if we'd attempted smaller projects in communities."