Microfinance

Microfinance as Business, Faults and All

I have been a long-time skeptic of Microfinance and my posts on the subject receive more than average traffic for this modest blog. I am disappointed, therefore, to have missed a CGD report titled “Microfinance as Business“, that seems to support, at first, my skepticism.

The CGD points to coverage of the report in Salon. That piece and the author’s response (Rodham) are extremely insightful, and highly recommended (see also, Hype & Hope).

Conventional wisdom suggests that microfinance must help people because the creditors are successfully paying off their loans. Yet, that is a naive, if not dangerous assumption. Despite the haloed status of microfinance in development circles, no study has proven that it does in fact help socio-economic development.

The CGD report further undermines conventional wisdom, showing that the loan may create little of economic value, and its repayment may be completely unrelated to the loan itself. As Salon points out:

Roodman and Qureshi note that the recipients of most microfinance loans must begin repayment almost immediately. This raises a fundamental paradox about the provision of credit to the extremely poor. Where do they find the money to repay the loan if they use that loan to invest in some profit-making enterprise?

“Thus, microcredit restricts itself to those who already have enough income to repay the loan from other sources, regardless of the success of any new enterprise they pursue.”

Microfinance pundits presume, also, that lack of credit is the problem. Yet, the ones that most need credit are those already engaged in productive activities (micro and SMEs) - an audience MFIs typically ignore. The very poor, by contrast, may be using microcredit simply to ’smooth out consumption’.

The CGD report introduces a further, related problem. Credit can be good, but also bad. And business - which microfinance is - can exploit just as it can provide services:

What I worry about with microcredit is what I worry about with all credit when it is pushed hard by the supplier…For some, debt becomes a debt trap. That doesn’t mean we should ban credit cards or ARMs. Credit is extremely useful…But the dangers of credit should remind us of the need to deploy it with care when targeting poor people, with clear and watchful eyes. It is an empirical question whether, in any given place, it is helping people on average. The available evidence suggests that microfinance sometimes doesn’t help people and sometimes does. It does not appear, on average, to transform lives, to end poverty.

Yet, if the CGD report questions Microfinance’s efficacy as a development tool, Rodham himself provides a convincing argument to keeping it around, nonetheless. The report, tellingly, is titled “Microfinance as Business”.

The report is doubtful of microfinance’s success as a development tool. But it is not skeptical of its success as a business. Microfinance may have started as a development tool, but it now mainstream - it is a business. It is perhaps time to change our viewing lens accordingly. Viewed that way, and as a great believer in Friedman, maybe I’ve found a reason to support Microfinance. Perhaps the mere existence of a business that caters to the poor, even a potentially exploitative one, is better than no business at all?

ASIDE: See also a NYTimes article on remittances and how they could tie into microfinance and development.

© 2006 The Discomfort Zone.