Book Review: “Why microfinance doesn’t work”

Monday, June 7, 2010, 1:32
Featured News
14 comments

By Malcolm Harper,

Microfinance Focus , June 07, 2010 : Microfinance, like all fashions, generates a lot of writing. Some of it is not worth the paper or the screen space which it occupies, and much of it is unashamedly promotional; Bateman’s new book is different, and much better. He has an axe to grind, and he sometimes grinds it too hard, but he presents a very persuasive, readable and well-argued case. Microfinance has many millions of clients, and it employs many thousands of staff. Few of them are likely to see this book, or to have time to read it, but there are also large numbers of investors, researchers, consultants, advisors, donors and others who feed on the frenzy it has generated; all of them should read the book.

whymicrofinancedoesnotwork Book Review: Why microfinance doesn’t work”

Milford Bateman – “Why microfinance doesn’t work” Zed Books Limited, London, 2010

Few readers will agree with everything in it, and most will be irritated by some of it. All of us, however, should think carefully about what Bateman writes. If we disagree, we should pause and ask ourselves why; if we cannot justify our views, we should change them.

The book starts with a short but useful history of microfinance, tracing its evolution from a subsidized approach to poverty alleviation to a highly profitable business. Bateman goes on to state, and then purportedly to demolish, the main ‘myths’ which underpin it. His criticism of current evaluation methods is particularly telling and should be noted by anyone who is involved in assessing the impact of microfinance. He argues more generally that microfinance perpetuates rather than removes poverty, and that its commercialization merely exacerbates this failure. The case is supported by well-chosen contemporary and historical examples from the United Kingdom, Cambodia, Poland, Peru, India and elsewhere; Bateman knows the Balkan nations of South Eastern Europe very well, but his analysis goes far beyond their rather unusual situation.

The next chapter, which is perhaps the weakest part of the book, is about the ‘politics’ of microfinance. It attempts to locate microfinance in the ‘neo-liberal conspiracy’. The poor scrape a precarious living in informal microenterprises, profitably financed by the elite, and are thus prevented them from uniting to improve their position. In this chapter, and in the book as a whole, Bateman makes the same mistake as the more enthusiastic proponents of microfinance. He over-exaggerates its importance.

Microfinance reaches a growing but still quite small proportion of its potential ‘market’, and it involves only a tiny part of the world’s financial resources. Microfinance institutions merely provide temporary second-rate financial services to those who cannot afford anything better. These services can benefit them, and can injure them, just as ‘our’ banks can benefit or injure us. Most of the world’s poor, however, either lack access to it or do not want it, and its clients still rely on informal financial services and their own resources for much of what they need. Microfinance is important, but is generally not a life-changing a phenomenon, for good or ill. Those of us who are associated with microfinance should not delude ourselves that we are more important than we are.

As I have already said, it is not difficult to find fault with many of Bateman’s assertions, or to point to his omissions. He omits any mention of the remarkable and successful programmes which institutions such as BRAC in Bangladesh and Bandhan in West Bangal have introduced to assist the ultra-poor and destitute. He does not acknowledge the many new and rapidly growing programmes which assist poor people to save, and borrow from their savings, without any links to other institutions. He also reminds us that most microfinance is not actually used for microenterprise, in spite of the rhetoric of it promoters, but then attacks microfinance mainly because it is used to finance microenterprises; he cannot have it both ways.

The final chapter is the best part of the book. It is all too easy to criticize, but critics often fail to suggest alternatives. Bateman adduces a number of good examples to show that a quite different approach to financial service provision can achieve far better results. He shows how conditional cash transfers can effectively address poverty, how the state can play a more productive role, and how community and co-operative driven approaches can help to build sustainable economies, on the basis of businesses which provide jobs rather than micro-enterprises which sustain only their owners. Here again, he may exaggerate the role which financial services as such have played in the relative success of economies such as Vietnam, China, Southern Italy, Kerala or Northern Spain, but he does show quite clearly that there are alternatives, that microfinance is not the only show in town.

***

About the author:

Malcolm Harper

Malcolm Harper was educated at Oxford, Harvard and Nairobi. He first worked in marketing in England, and then taught at the University of Nairobi. He was Professor of Enterprise Development at Cranfield School of Management, and since 1995 he has worked independently, mainly in India. He has published on self-employment, enterprise development, micro-finance and livelihoods, most recently ‘Inclusive value chains in India – Linking the poor to modern markets’, ‘What’s wrong with microfinance?’ (Co-edited with T Dichter) and ‘Development, divinity and dharma – the role of religion in development and micro-finance institutions’ (co-authored with DSK Rao and A K Sahu). He was Chairman of Basix Finance in India for ten years, and is Chairman of M-CRIL, the international microfinance and social rating company.

He was the founding editor of ‘Small Enterprise Development’ (now ‘Enterprise Development and Microfinance’), and is a director and trustee of Homeless International, EDA (UK) Limited, Musoni microfinance, APT Enterprise Development, PA Publications in the United Kingdom and other related institutions. He has also worked on poverty issues in Bangladesh and Pakistan, and in East and West Africa, Latin America and the Caribbean, the Middle East and Gulf area, South and South East Asia and China, and in the United Kingdom.

Know more about the Publication

@ Amazon.com : Click

@ Zed Books : Click

Share/Save

14 Comments on “Book Review: “Why microfinance doesn’t work””

Graziosi Ascanio wrote on 7 June, 2010, 12:49
We need books like this because the contents urge each one and everybody to think about microfinance what’s about and where is leading. Four months ago I founded CDB Microfinance by commenting a provocative article written by Jeff Raderstrong, founder of Social Entrepreneurs of Grinnell, “2009: The Year Microfinance Died.” Here I can reiterate what I said. In my view the answer is Yes and Not: it depends on the angle the assessment is made.There is a methodological approach that deserves to be clarified. In the micro finance movement there are three big categories of providers providing financial services for: “enterprise development”, “income generating activities” and “food security”. These categories of enterprises deserve different approach and modalities of intervention.

Indeed in the first case the objective is based on the intent to create a return on investment, which contributes to a capital formation. By contrast, income generating aims at increasing a person’s disposable income by having social empowerment and self-reliance as a primary goal and business development as a secondary goal. The third category targets the subsistence sector. Under above circumstances the expectations of the financial providers should be different because the reasons behind the intervention are quite different. Once this point has been clarified it will be easier for the funds’ providers to set out the objectives of their interventions and accordingly the scope of financing. This approach will affect the ROI’s expectations and once the lenders are aware of that there shouldn’t be surprises.

I can add that the forthcoming regulation within the frame of Basle II is an opportunity to take in view of properly plan the future of the the microfinance industry.

Ascanio Graziosi

http://www.cambridgedata.com/GraziosiAscanio
Agus Gunawan wrote on 12 June, 2010, 15:23
Micro finance will be success if there is a real political committment and affirmative action taken for it. The local economy system is also play important role. When the system is the opposite as many claim to run on neo liberalism then micro finance is away from reality
Raj Kumar wrote on 28 June, 2010, 17:08
I do agree with the proposition that microfinance can not stake claim for bringing some change in the lives of poor. However, it remains an immensely important limb which can be productively used by the poor. Others non-financials could be skills, market linkages/value chains and product aggregation that need to happen. So far, microfinance institutions have worked largely alone without closely working with institutions which could provide the non-financials. MFIs and other support providers (also called livelihoods providers but they may be just as profit making as the MFIs are) need to come together to serve segemts so far remained unserved by the MFIs and also to make a greater impact on poverty.

We must not lose sight of what microfinance has been able to achieve – it has proved a model that could reach millions, and yet self-replicates, which no other model was ever able to do. Whether microfinance has actually made poor people poorer may only be a partial truth and can not certainly justify the title of the book – ‘why microfinance does not work’. We must rather talk what more can be done to increase the efficiacy of microfinance and not dump it straigaway. I would rather have the book titled – ‘how can microfinance be more effective’ and suggest how it actually can be.

Raj
Remy Olson wrote on 9 July, 2010, 20:09
My primary objection upon seeing a book or article touting microfinance as either a miracle cure or a complete waste of resources is that we just don’t know. In your review of Bateman’s book, you emphasize this point and argue that, while microfinance is not the cure-all that some may wish it to be, it does serve an important purpose. On this point, your readers may benefit from learning about a recently published paper sponsored by the Grameen Foundation.

Kathleen Odell, a professor of economics at Dominican University’s Brennan School of Business, released a paper summarizing and reviewing several significant microfinance impact assessments published between 2005 and 2010. Her work is important as she provides a strong, objective assessment of the microfinance studies conducted to date. Her conclusions highlight both the obstacles inherent in measuring the impacts of microfinance, and the generally positive results gleaned from the body of microfinance research.

Professor Odell approaches microfinance as a field in flux. Her conclusions both demonstrate positive results in terms of the impact of microfinance on microbusinesses, and present more questions whose answers would provide a greater understanding of its social impacts. Odell refrains from labeling microfinance as an ultimately positive or negative force, instead she determines that it has its benefits but needs to be better understood. Further research would not only shed light on the effects of microfinance, it would also enable microfinance institutions to innovate and change their practices in order to maximize their socially beneficial impact.

Remy Olson
Special Programs & Communications Assistant
Grameen Foundation
Professor Satchidananda wrote on 12 July, 2010, 7:07
Dear All,

Bateman’s book and scholarly reviews and critical comments thereon are all exciting reading and great intellectual feast!

That precisely is my problem!

I would suggest all of us to consider one simple thought experiment:

To come up with a brand new and practical method to better the poor and the world

Like the Professor from Chittagong did ( Not Harward or MIT or Oxford, Sir!)!

Intellectualizing and evaluations are necessary and relevant. My humble request is that let us take care to upset the good work ( so much of it that is happening) in the name of any isms. The good thing about business, including MFI business, is that it will go away if it is not sustainable.
At this stage of MFI, I would like give practical suggestions for improving the flows rather than raise theoretical ( valid!) issues ans concerns!

Because destroying is easier than creating!

Because we still need passion to nurture Microfinance!

Thanks and regards
Satchidananda
milford bateman wrote on 25 July, 2010, 13:53
The points made by Remy Olson are just a little too self-serving for me. The publication by Kathleen Odell is pretty good as far as it goes, but the problem is that it doesn’t go very far at all. She confines herself to looking at all the previous impact evaluations undertaken mainly by microfinance institutions. But what if all these prior impact evaluations are in themselves flawed? This is indeed a major part of the case I make against the microfinance model in my book: that the whole ‘microfinance as poverty reduction’ mantra has largely been created and thereafter persistently verified using semi-fraudulent and self-serving impact evaluations. Of the hundreds of impact evaluations I studied, no more than 2 or 3 were willing to even mention – never mind factor into the analysis – the hugely important issue of job displacement (when a new or expanded microenterprise simply displaces an incumbent non-client). Yet from so much of economic practice we know that this factor hugely bedevils all microenterprise development programs, and very often results in no real net impact, and often a negative impact at the local level. Note that the currently fashionable randomised control trials (RCT) methodology is pretty useless here as well, being derived from medical trials where there are generally no important spill-overs you have to factor in (if I take an anti-cancer drug, my chances of recovery have absolutely nothing to do with anything that happens as a result of you also taking the same anti-cancer drug). In local economic development, however, the crucial problems are just about ALL related to such spill-over effects, so we simply must factor them in to get a true picture of what is being achieved or not. Nor were the impact evaluations summarized by Kathleen Odell willing to consider the issue of client failure (when the client microenterprise goes bust a few years later). Most impact evaluations take place just a few years, or even a few months, after the microcredit was accessed. This is hardly a decent time period for us to really evaluate the impact on the clients involved. In fact, again, we know already from many other countries that this client failure factor results in very many people coming into contact with microfinance being made far worse off than before (or if they had had access to other forms of support, such as conditional cash transfers for example). Again, this downside is simply not picked up in the impact evaluations summarized by Kathleen Odell, so we don’t know how far it goes. If you study and summarize largely flawed impact evaluations, it should come as no surprise when your conclusions and lessons are also flawed too.
Milford Bateman
Fehmeen | Microfinance Hub wrote on 16 August, 2010, 22:19
I actually agree with most of Milford Bateman’s arguments (such as the problem’s related to over supply, displacement, lack of horizontal and vertical integration and the potential perpetuation of poverty because of exorbitant interest rates), and we cannot discount the impact these factors have on the welfare of the poor. However, we need to realize that at the moment, microfinance is a much better alternative to traditional money lenders, but that shouldn’t be an excuse for MF practitioners, development agencies and governments to shift into complacency because the poor need much more than money. Moreover, we must remember that aim of microfinance isn’t to develop entire economies, but to empower to poor.

In short, microfinance isn’t the ideal solution, it’s only a practical one…so far.
David Roodman wrote on 27 August, 2010, 2:35
My own, negative, review is at http://blogs.cgdev.org/open_book/2010/08/why-doesnt-milford-batemans-book-work.php
Phil wrote on 14 September, 2010, 6:41
Malcolm, in my humble opinion this is the most worthy review of Milford Bateman’s book so far. I’ve tried to recap your points (and others’) in an article I just posted on governancexborders. I wonder what you might think of the analysis.
LINK: http://governancexborders.wordpress.com/2010/09/13/beef-with-bateman-or-why-cant-the-microfinance-community-handle-criticism/
john wrote on 21 October, 2010, 15:54
Although I find it pleasant to read different opinions on the intent and effect of microfinance, I do feel the diversity both contextual and in methodology do not allow for generalizations. Microfinance is neither completely good nor bad, as case studies can show. It is important however that microfinance steps backs to its roots and away from extreme commercialization as the interests of both are opposing.