The Upcoming Crisis in Microfinance
I recently wrote a case on a microfinance organization, and that gave me the opportunity to learn a great deal about the field. Microfinance is an amazing idea that took a long time to gain acceptance, but it's also a limited tool that is becoming too popular for its own good. Fortune Magazine seems to be the first major publication to point this out, with a very thoughtful article called "Easy Money" (11/27/06).
Decades ago, helping the poor was about charity. Then, about 35 years ago, came the bright idea that loans could help the poor start businesses, and the businesses could allow people to pay back the loans and to work their way out of poverty - in a dignified and sustainable way. At first, many observers were repelled by the idea of asking disenfranchised people to repay the small sums they borrowed, at what seemed like very high interest rates. But the idea caught on - slowly at first, and then very rapidly over the last decade. Finally, 2005 was declared by the UN to be the "Year of Microcredit" and in 2006 the Nobel Peace Prize went to microfinance pioneer Muhammad Yunus. Today, nearly everyone seems to be keen on microfinance.
The problem is, microfinance is not a panacea. It can help a great deal in certain situations, but it can hurt in others. Take the example of a woman in rural India who operates a small produce stand, and who cannot afford to buy enough inventory to expand her business or to buy at bulk prices. She can benefit from a loan because it will directly contribute to her revenues and profit margin.
On the other hand, take the example of a woman who is struggling to afford school fees for her children, or medicine for her baby; she needs the money, but how will she pay it back? Also, some microcredit programs have adopted "client retention" as an organizational goal, and are pushing borrowers to come back for more and larger loans - potentially trapping them in a cycle of debt while promising a way out of poverty.
Microcredit can be a powerful tool, under the right circumstances, but a blind push for more and more of it is dangerous. Even more worrisome, perhaps, is that when the microcredit bubble bursts, its supporters will be disappointed and disillusioned. Will they be less likely to pin their hopes on other idealistic plans in the future?
There are plenty of good (yet imperfect) ideas for helping to end world poverty. They all need people who believe in them. We need to use the tool of microcredit wisely, so that it can bring as many people as possible out of poverty, trap as few people as possible in debt, and inspire as many supporters as possible so that they can find more good ideas in the future.
Decades ago, helping the poor was about charity. Then, about 35 years ago, came the bright idea that loans could help the poor start businesses, and the businesses could allow people to pay back the loans and to work their way out of poverty - in a dignified and sustainable way. At first, many observers were repelled by the idea of asking disenfranchised people to repay the small sums they borrowed, at what seemed like very high interest rates. But the idea caught on - slowly at first, and then very rapidly over the last decade. Finally, 2005 was declared by the UN to be the "Year of Microcredit" and in 2006 the Nobel Peace Prize went to microfinance pioneer Muhammad Yunus. Today, nearly everyone seems to be keen on microfinance.
The problem is, microfinance is not a panacea. It can help a great deal in certain situations, but it can hurt in others. Take the example of a woman in rural India who operates a small produce stand, and who cannot afford to buy enough inventory to expand her business or to buy at bulk prices. She can benefit from a loan because it will directly contribute to her revenues and profit margin.
On the other hand, take the example of a woman who is struggling to afford school fees for her children, or medicine for her baby; she needs the money, but how will she pay it back? Also, some microcredit programs have adopted "client retention" as an organizational goal, and are pushing borrowers to come back for more and larger loans - potentially trapping them in a cycle of debt while promising a way out of poverty.
Microcredit can be a powerful tool, under the right circumstances, but a blind push for more and more of it is dangerous. Even more worrisome, perhaps, is that when the microcredit bubble bursts, its supporters will be disappointed and disillusioned. Will they be less likely to pin their hopes on other idealistic plans in the future?
There are plenty of good (yet imperfect) ideas for helping to end world poverty. They all need people who believe in them. We need to use the tool of microcredit wisely, so that it can bring as many people as possible out of poverty, trap as few people as possible in debt, and inspire as many supporters as possible so that they can find more good ideas in the future.
posted by Melissa Paschall at 12/02/2006 04:02:00 PM
1 Comments:
I don't think there are too many people who view micro-finance as the end-all for the world's poverty ills. Those that do are micro-finance idealists at best and naive at worst.
The benefit of using micro loans to help impoverished people is that it gives them the means to bring themselves out of poverty under their own terms but with incentives applied locally. By that I mean, it's one thing for a woman in India or Bangladesh to stiff some banker that is removed from their local village, but when the bank and bankers is woven right into the fabric of the community as is the case with the Grameen Bank, then there is immense social pressure and support to succeed. I think it's this difference that has lead to both the success and overwhelming support from the international community that micro-financing has enjoyed over the past decade.
Micro-financing is not, nor should it be, related to getting medicine or other related materials for an individual. That is where foreign aid and charity should exist to work in concert with micro-financing.
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