A recurring theme in this journal is the amount of self-criticism within the development community. There is no shortage of critics of an academic mind to point out the flaws in an approach to development without offering a reasonable alternative. One common criticism is that microfinance doesn’t really offer a sustainable long-term economic solution to the problem of poverty. It is too focused on the individual and not enough on the big picture – what is good for the population as a whole. Most micro-businesses will never grow to a meaningful size because the capital provided by microfinance is not enough to bring them to scale. So, the reasoning goes, poor people are destined to amble along without actually making their financial situation any better, while the small and medium enterprises (SMEs) that actually create the jobs needed to move the needle on macroeconomic development and poverty alleviation are neglected.
This critique is too simplistic. For one thing, the argument that microfinance institutions operate at the expense of SME financing is a straw man. It is true that there are a limited number of aid dollars in the world and allocation is a zero-sum game, but that is irrelevant here since the largest microfinance institutions are financially sustainable, raising money through unsubsidized loans at commercial rates, public equity, and their own operations. The World Bank, the IMF, and NGOs around the world do provide a lot of money for research, seed capital for smaller MFIs, and pilot programs for non-financial services. But, for the most part, there is not much diversion of aid funding as a result of microfinance. This is more of a gripe with how some critics frame their arguments. The more important point is that there is a tendency among critics on both sides of the debate to ignore the complexities of the issues and create false tradeoffs in order to simplify the debate. It is easier to argue in black and white than deal with shades of gray. Continue reading →
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The narrative of microfinance reads that it provides money to the poor to start businesses and, in doing so, lift themselves out of poverty. The idea that everyone is an entrepreneur plays into this understanding of microfinance. Perhaps the leading beneficiary of this narrative is my former employer, Kiva since people generally like the idea of empowering these proto-entrepreneurs to go out and change their situation. People struggle to make an impact in their approach to philanthropy, but microfinance and Kiva specifically allows them to be a mini-venture capital firm. But this narrative is, at least, an oversimplification of the reality on the ground.
