Microfinance 'raises hopes but makes some people poorer'

Issue of Discussion: Microfinance projects in the developing world makes some people poorer, not richer, a major academic study has concluded. It should not be seen as a panacea in the fight against poverty, nor as a blanket tool to empower women. Aid programmes providing small loans and savings accounts to those who have no access to traditional banking services have been hailed as an important way to use the market to help people improve their lives, and particularly to support poor women.

By whom and where: Dods Monitoring [In Microfinance Practice Yahoo Group]

Respondent 1


Milford Bateman- Some might find interesting the results of the DFID-funded systematic review of the evidence of microfinance impact in Sub-Saharan Africa.

Respondent 2


Fehmeen- After reading the article, my humble opinion is that microfinance itself isn't (potentially) damaging but that the popular interest-based microcredit model is. High interest rates are the main issue and alternative models such as micro-grants and islamic microfinance deserve more attention.

Respondent 3


Greg- In some ways I find myself a little surprised by the kerfuffle about recent happenings in the world of microfinance -- large personal gains from IPOs, interest rates considered higher than ethically acceptable, over-indebtedness of clients as new lenders saturate particular markets, and patchy evidence as to whether or not MF is achieving its stated goal of making a serious permanent dent in the incidence of poverty.

As I understand it, a simplified explanation of how MF is to achieve its poverty-reducing effects is by facilitating the increased participation of the poor in the market mechanisms enjoyed by the rest of us. Access to credit will enable those who would not otherwise be able to increase their economic activity beyond subsistence level to utilise borrowed capital to increase their net economic returns sufficiently to make lasting changes in their quality of life-- to become `not poor'.

Whether the process involves unleashing the restrained-by-absence-of-capitalentrepreneurs amongst the poor, or by giving the non-entrepreneurial poor access to an expanding number of jobs created by these new business operators, the long-term impact on society will be a dramatic reduction in the proportion of people living in poverty, and, presumably, a corresponding increase in the proportion of the `middle class'.

If the early rhetoric of global MF promoters is still to be believed, it will bring about a socioeconomic revolution of unparalleled proportions.

The key to the process appears to be an uncritical faith in `the market' and its ability and willingness to absorb such revolutionary consequences. A faith that has come into its ascendancy around the time that national economic strategies have been under maximum pressure to allow `the market' to operate with the minimum of external controls; a paradigm loosely represented by the Washington consensus and post-Keynesian `globalisation'.

Yet some seem to have been taken aback by how the market has embraced the technology of MF. Why should we be surprised that in a context of maximising economic value and returns for users of capital -- a philosophy we expect the microentrepreneur to observe as enthusiastically as JP Morgan and Bernie Madoff -- there are many who seize upon MF as a tool to do just this?

As MF is a market-based mechanism, albeit first devised for the benefit of the poor, then is it surprising that any savvy market participant will figure out how they can make it work for their benefit too? Without the sort of proprietary protection that would be considered unreasonably protectionist in today's world, MF remains an `open source' means for the entrepreneurial to make money from the disadvantaged.

To expect that MF would somehow remain undefiled, failing to attract anybody other than those steadfastly pure of heart and resistant to the siren call of profits to be made from a generally uncritical market segment of low financial literacy, seems to me to be quite naive.

Initiatives such as MF Transparency, the Social Performance Task Force, the Smart Campaign, and others are going a long way to try and set standards of good behaviour, but, like all voluntary systems, they will only be taken up by those already accepting the ethical roots of MF. However, the market will continue to also be open to those who have no interest in the welfare of MF clients, only in their profit-maximising utility value.

I regard MF as being no more than another option in the repertoire of the poor to cope with the injustices of the structurally biased socioeconomic environment in which we live.

My roots are in the credit union, or savings & credit cooperative, system -- in its original European form a product of those at the `bottom of the pyramid' working together to minimise the negative impacts of the industrial revolution.

Like 20th century MF, those cooperatives are founded on a set of ethical principles not shared by dominating market structures, yet they are not intended to inhabit a parallel universal but to be a part of the same market system. By providing members with an opportunity to participate in economic activity on slightly different terms, the intent of those cooperatives and credit unions is for their members to shield themselves somewhat from the poverty-maintaining behaviours of those that dominate the market.

Accepting such pro-poor initiatives as being coping mechanisms, not instruments of socioeconomic revolution, does not devalue their usefulness for those who successfully use them to make meaningful positive changes in their lives and I remain devoted in my professional life to assisting those I work with to be as effective as they possibly can.

I'm just not holding my breath for a brave new world to emerge from our work.

Respondent 4


Jeffrey Ashe- An articulate and well formulated statement. You need not hold your breath any longer because there is an option that serves the poorest where all the profits return to the members, that is easily scalable, self-replicating and growing at an accelerating pace - 2.5 million members in Africa and counting. Like the earliest credit unions savings groups - VSLAs, Saving for Change, Saving and Internal Lending Committees, etc. - of about twenty mobilize savings from the members, lend it to each other at interest, and divvy up the fund at the end of the year so that all the members have a lump sum that they can invest in business or agriculture or to tide them over the hungry season.

Instead of losing money on their under the mattress savings members realize a 40% return. No one pretends that this is a commercial undertaking but the costs are exceedingly low considering the massive start up costs of MFIs or the many years of technical assistance provided to credit unions. It cost Oxfam America with funding from its donors, the Norwegian Stromme Foundation and later the Bill and Melinda Gates Foundation about $7,000,000 to bring 15,000 Saving for Change groups with 338,000 members to 4,000 villages in six years with the outcome more money and power for the world's poorest women.

Ninety-five percent of the groups trained six years ago are still functioning and well over half the groups are trained by group leaders as volunteers. Seventy to one hundred million dollars could bring savings groups to the poorest rural regions of at least ten countries. In two or three years these groups become platforms for a variety of development initiatives including collective businesses that could have commercial impact.

Saving for Change has become one of the largest microfinance initiatives in Africa with not much fuss or fanfare and a whole lot less effort than the institutional alternatives.

So what do you think?




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