Beware: the handout approach to development assistance is back in fashion.

The rationale behind the handout approach seems straightforward enough: the most efficient way to help people living in poverty must be to give them money. That is why the earliest large-scale international development assistance efforts, in the 1950s and 1960s, were largely handout-based.

The results, though, were mostly awful: the international development handouts led to massive waste and corruption - and they imbued relations between wealthy countries and poor ones with a paternalistic, dependency-ridden flavor from which we have yet to recover.

That is one reason "capacity building" approaches, which aim to help people in developing countries via training and education, became popular. These had the advantage of not creating dependency on monetary handouts. Unfortunately, they didn't do much else either. Research showed that simple cash transfers to low-income individuals generate more benefit than spending the same amounts on providing them with business training.

The catch is that giving handouts to impoverished households creates a perverse incentive. It rewards lack of progress out of poverty - especially in programs that deliberately target the most impoverished households in a community - and it encourages a begging, helpless mentality. Psychologically, it is not good for either donor or recipient. The damage is intangible, but it is real and devastating.

As a former US government employee responsible for managing grants in Africa, and now founder of Zidisha, the first direct person-to-person lending platform for microfinance, I've witnessed time and again the transformative impact of simply having access to a functioning market service, as opposed to a handout.

That is why I prefer microfinance, where people are using a tool and repaying it with interest. On the surface it may seem similar to a cash transfer, but the incentives and psychology at work are worlds apart. A loan is a business transaction: I decide to purchase capital, invest it in an asset and generate returns for both lender and myself. There is no need for fawning or flattery or profuse thanks. It is simply a mutually beneficial collaboration of the type that happens every day among healthy businesses. My success is a result of my own choices, not of courting others for handouts.

James Wainaina, a smallholder farmer in Kenya who has taken and repaid several Zidisha loans, put it this way in a recent blog post:

"It is amazing how ones life can change so dramatically... Prior to Zidisha era, my life was just dragging on, each day preceded by nothingness. Just waiting for the day to drag on to the next one. Currently, my family and I are more anticipatory of the next day. We are purposeful; our life is full of purpose. We now have things to do each and every day. Work dignifies a person. When I buy a cow, milk the cow, dig a well or see people working on my farm, I feel dignified and worthwhile."



If you want your generosity to make someone feel dignified and worthwhile, think twice about making it a handout. Make it a business transaction - or a business growth loan.