Microfinance

Questioning the Impact of Microfinance

I am very hopeful for the potential impact of microfinance in helping the poor sustainably earn their way out of poverty. I am also a fan of listening to constructive and thoughtful critique on my ideas and perspectives. Previously, I reviewed a study which concluded that microfinance was having a generally positive impact on defeating poverty.

Another study by Thomas Dichter, long-time practitioner in the international development industry and author of “Despite Good Intentions: Why Development Assistance to the Third World Has Failed,” takes a critical look at the microcredit movement and argues that it has done more harm than good.

A few highlights of arguments that Dichter makes:

  • Many microfinance institutions (MFIs) are over-hyping their impact (using unrestrained superlatives) in order to continue to raise donated capital.
  • Very little impact assessment of microcredit on poverty is actually being done because it is too expensive and complex to perform.
  • It has become standard practice for many/most development-related projects to now have a microcredit component in order to be cutting edge and get funded even if a microcredit component makes no sense or is ill-conceived.
  • He notes that incoming smoothing and empowerment are the only benefits consistently delivered and wonders if this justifies the cost of (monies invested in) microcredit.
  • Why do we expect to find so many entrepreneurs in poor countries when (he asserts) we have so few successful entrepreneurs in developed countries?
  • He argues that there are other more structural issues which need addressing (e.g. stable governance, less corruption, better schools, better infrastructure, etc.) before business credit capital can be used well.

He concludes with the following:

To move forward the best operators of microcredit need to become banks, move more seriously into savings mobilization, and learn to deal with banking policy and other (institutional) aspects of the enabling environment. And they need to come to terms with the constraints imposed by political correctness – by being unafraid of lending to real businesses, and unafraid of abandoning the subsistence activities in the informal sector.

My response:

  • I think that many of these are fair criticisms of the industry.
  • I think he is right that microcredit is by itself insufficient and wholeheartedly agree that the provision of broader financial services for the poor are required.
  • From what I have observed, entrepreneurship is a matter of degree and scale. When you’re talking about growing something into a large business, few people have the genes. When you’re talking about running a one-person/family business which enables you to earn enough for basic necessities, I’ve seen almost everyone in a developing country able to succeed at this as failure = perishing.
  • I don’t think a MFI has to abandon the poor clients (and just serve wealthier clients) to succeed long-term. Many MFIs are now demonstrating business sustainability in serving even the extreme poor.
  • MFI’s run as NGOs and without the customer service, financial and operational discipline required of real businesses are going to quickly be eclipsed by a new breed of MFIs functioning as customer-driven banks for the poor … and the poor are going to benefit!
  • Finally, I think that this article is severely lacking in detailed examples to back up incredibly broad generalizations. I look forward to reviewing a more substantive set of objective objections … the same challenge he is making about microfinance.

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