Microfinance debunking

[Riaz K Tayob]

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(A similar set of findings is here:
http://www.ukzn.ac.za/ccs/default.asp?3,45,10,3396)

The Times
April 28, 2009

Microfinance comes under the microscope

Our correspondent finds doubts raised about the effectiveness of one of
the big ideas in the fight against poverty
Parminder Bahra

The statistics make mightily impressive reading: microfinance is worth a
dizzying $6.5 billion; its ten largest funds grew at an equally
impressive 32 per cent last year alone. It is, according to a report
published yesterday, “unscathed” by the global recession. So why is the
apparently well-meaning practice of lending small amounts of money to
people in poverty so controversial, so much so that its critics think
its time has already passed? In short, does microfinance really work?

According to Aneel Karnani, Associate Professor of Strategy at the Ross
School of Business at the University of Michigan, the answer is, in
short, no. “The problem with microfinance is that it simply doesn’t do
that much to lift the poor out of poverty,” he argues.

“Countries that have lifted people out of poverty have not done it
through microfinance. It’s been through the development of larger
enterprises which create jobs – for example, in places like China and
Vietnam. The question is: ‘Could we not use the resources in a better
way?’ – for example, creating garment factories rather than creating
individual entrepreneurs by giving them each a loan to buy a sewing machine.

“Unfortunately, microfinance will grow and take in more public and
private money.

“There is a lot of romanticisation of microfinance: the United Nations
and the World Bank is enamoured by it and putting money into it. Even
private money is going into it – you see a lot of rich entrepreneurs,
like Pierre Omidyar [the founder of eBay], giving money to microfinance
because this is what they think is helping the poor. It sounds like a
wonderful notion: give someone a $100 loan and they can lift themselves
out of poverty. But the evidence suggests otherwise.”

Such criticism, as Professor Karnani says, is not entirely fashionable.
Ever since Muhammad Yunus, founder of the Grameen Bank, loaned a
Bangladeshi woman $27 to start a business in the mid-Seventies,
microfinance has been seen as the saviour of the world’s poor. Dr Yunus
has loaned more than $7.6 billion to 7.7 million people in Bangladesh,
at interest rates lower than those of local loan sharks, with Grameen a
famously not-for-profit organisation. He was awarded the Nobel Peace
Prize in 2006 for his work.

But talking microfinance now comes with caveats, qualifications, nuances
– not least judging the priority that should be given to alleviating
poverty over driving efficient economic growth, be it on a personal or
national level.

Vineet Rai, chief executive of Aavishkaar, a micro venture-capital firm
in India, says that banks now focus on making finance available as
cheaply as possible rather than on poverty reduction: “The desired
outcome is that people will come out of poverty – but unfortunately it
is not the outcome on which microfinance focuses. Having a microfinance
loan does not mean that you will get out of poverty and therefore it
does not really matter if the money comes from private equity funds or
venture capital funds or government or not-for-profits.”

Xavier Reille is a senior manager at the Consultative Group to Assist
the Poor (CGAP), a consortium of agencies trying to expand access to
financial services for the poor in developing countries, whose report
has high-lighted the recent rise of microfinance. He says that
microfinance “provides financial services for the poor and the
financially excluded and recognises that the poor need a broad range of
financial products” – but adds that things are getting “blurry” as more
commercial companies jump on to the microfinance bandwagon.

“Using the term microcredit is so loaded nowadays,” says Helen
Alexander, of ProCredit Holding – the top microfinance investment fund,
according to the CGAP research. “Dr Yunus’s approach is totally
legitimate, but while we give uncollateralised loans and give them to
very small enterprises, we would never claim to be lending to the poor.
We do not give consumer loans, but entrepreneurs can increase their
income using loans from us.

“We’re somewhere in the middle between the Grameen approach and the
commercial banking system. We define our social objectives differently.
We see our role as deepening the financial sector and strengthening the
enterprise sector and the banks in the countries in which we work with a
view to having them create the employment and wealth that the countries
need.”

Things have moved on a lot since Compartamos, the Mexican microfinance
bank, angered Dr Yunus’s followers by going through a stock exchange
flotation in 2007. The bank was accused of profiteering from the poor
with its 100 per cent APR interest rates. “The rate should be low enough
to support income generation for poor people rather than generating
income for investors,” Dr Yunus said.

The bank responded that “the challenge of poverty is much larger than
microfinance itself”. The Mexicans, some now argue, may have been right.