Category Archives: Microfinance

Posts about the practice of microfinance

Why Government Microfinance Doesn't Work

"I've got this thing and it's fucking golden!"

One of the reasons a lot of people find microfinance attractive is that it is a fundamentally capitalist approach to economic development. Done right, it can be sustainable and even profitable. By focusing on a social mission, successful microfinance institutions (MFIs) can reach more clients by leveraging capital, similar to commercial bank. And just like the Ice Queen warns in Atlas Shrugged, government intervention in capitalist programs spells disaster. Whether or not this is true for other industries (it’s not), it is most definitely the case in microfinance. Successful government-run microfinance institutions are the exception, not the rule. And not only are governments generally bad at administering loans, they can be destructive to the market as a whole. On the CGAP website question 13 of the FAQ is “Do governments do a good job of delivering microfinance?” The answer is thorough:

There are several highly successful government MFIs, such as Bank Rakyat Indonesia’s microfinance department. However, the vast majority government microfinance programs do a poor job of delivering retail credit. Such programs are usually subject to political influence, high default, continuing drain on national treasuries, and sometimes lending based more on the borrowers’ influence than their actual qualifications. Among government programs reporting to international databases, only 1/8 of clients are being served sustainably.

To begin thinking about why government microfinance doesn’t work, it is important to think about the types of governments serving microfinance communities and the nature of government in general. Continue reading →

The "Entrepreneur Myth" Myth

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Muhammad Yunus, the godfather of microfinance, contends that everyone is an entrepreneur. And microfinance is about individual economic empowerment, built on the premise that credit is both a human right and a path to economic freedom. This reading has been distorted by those who talk about the “entrepreneur myth,” which says that microfinance romanticizes the poor by pushing a false by-your-bootstraps narrative. This narrative, in turn, undermines development by giving the poor something they don’t want – credit for a business – instead of something they need, which is steady employment. This argument isn’t necessarily untrue, but it is irresponsibly oversimplified and demonstrates a lack of grounding in reality. I want to discuss two articles that address this issue and use them to explain why this reading of microfinance is not only flawed, but is counterproductive in serving the poor.

Rational actors in the U.S.

The first one, titled “Romanticizing the Poor” from the Stanford Social Innovation Review, is a bit more difficult to refute, in part because I agree with the premise but not the logic, and also because I am intimidated by the fact that the author, Aneel Karnani, is an economics professor of South Asian descent and, I would have to assume, intellectually superior to me. But I’ll try. The article is less a refutation of microfinance as a poverty alleviation strategy as it is a caution against the merits of market-based solutions in general. According to Mr. Karnani, the poor are not rational actors when it comes to economic decision-making. Therefore, the argument goes, it is misguided and potentially harmful to try to apply free-market strategies – like microfinance – when the spending behavior of the poor is irrational. He highlights the fact that the poor spend a disproportionate amount of money on booze and cigarettes at the expense of healthcare and education (Nicholas Kristof’s most recent article discusses the same issue). The poor are more prone to impulse buying, so introducing more money and more material product choices will just drive them deeper into debt:

Many advocates of market-based solutions to poverty view poor people as rational consumers who, if given more options, would make better choices—that is, choices that would increase their economic welfare. They see no problem with encouraging the poor to spend their already meager incomes on low-priority products and services. They further argue that the poor have the right to determine how to spend their limited income and are in fact the best judges of what is in their best interests.

I don’t dispute the truth of these statements, mostly because I haven’t read the research. I would say it’s not unreasonable to say that adults should be treated like adults when it comes to making decisions about how they spend their money. Either way, they are irrelevant to an argument against microfinance. Continue reading →

Competition, Saturation, Interest Rates, and Microfinance

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CGAP, the World Bank’s microfinance arm, turns 15 this year, having been formed ten years prior to Muhammad Yunus winning the Nobel Peace Prize. In commemoration, Alexis LaTortue, the CEO of CGAP, wrote a summary of the state of the industry and the key transformations that have occurred over the last decade and a half. There is a lot of to unpack for a 500-word article, but I want address one point in particular that I found interesting:

More institutions are sustainable. Very few institutions were at the beginning, and there was even disagreement about whether they could be or should be. Yet, today, once you take away clients served by state banks, about three-quarters of total clients are served by sustainable institutions. In a few markets, we are even approaching saturation or real competition.

When I think about this statement, it leads to ask more questions about the implications of market saturation and sustainability for the microfinance community – the providers, the clients, the funders, everyone. I had always assumed that saturated markets already existed, but the fact that, by CGAP’s own estimate, there are only 100-150 million microfinance clients globally and a potential market of billions. It makes sense that, while some countries have relatively mature microfinance markets – Bolivia, Kenya, Bangladesh – most are far from being saturated in the way that, say, Boston is saturated with pizza shops. But in the same way that Boston has damn good pizza, when microfinance markets mature and become saturated with sustainable institutions, they begin to offer damn good financial services to the poor. Continue reading →

The Movers vs. The Shakers: The Microfinance Debate

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In the noisy echo chamber of the development community, there are a lot of arguments for (emphatically) and for (tentatively) microfinance as a tool of poverty. The debate surrounds a series of experimental studies questioning the impact of microfinance in achieving its stated goals – specifically, empowerment of women and poverty alleviation. The participants are the critics and the practitioners. The practitioners tend to dismiss the critics as having blind faith in statistics and either ignoring or being ignorant to the realities on the ground, while the critics contend that the practitioners drank the Kool-Aid long ago and refuse to admit that, while microfinance is impactful, it is perhaps not to the extent they believed. Those are both exaggerated overstatements and many people bridge the divide, but it is close enough. The debate reached a fever pitch recently, with some of the biggest practitioners – Accion, Grameen Foundation, Finca, Opportunity International, Unitus, and Women’s World Banking – jointly issuing a statement defending the impact of their trade. It is a short statement and worth a read, offering a distilled version of the practitioner argument. The authors describe what they consider to be the major flaw in the critics’ argument:

Unfortunately, it is extremely difficult for studies to quantitatively demonstrate the impact of microfinance. Such studies face two fundamental challenges: their ability to capture and analyze all the benefits of microfinance, and the duration of the study itself. To obtain quantifiable data, researchers have to ask narrow questions over relatively short periods of time–-14 to 18 months in one case–-which does not always allow the time necessary for impact to manifest itself. And because of the growing penetration of microfinance, researchers are finding it increasingly difficult to find homogenous geographical regions that contain both clients who have access to financial services and those who have none.

This is all true. Statistics give an incomplete picture and do not pick up the nuanced effectiveness of microfinance, which is manifested in individual success stories rather than a large group of people moving out of poverty. Negros Women for Tomorrow Foundation is a good example of this principle at work. It periodically measures the poverty level of its clientele using the Progress out of Poverty Index (PPI). Over the last five years, 22% have moved upward, 19% have moved downward, and the remaining 59% have remained pretty much the same. On balance, there is a net upward poverty movement, but not by much. Also, the number of clients that moved downward might have been much higher had they not been receiving microfinance services. Continue reading →

The Right Conditions for Microfinance

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Across the world, there are a lot of poor people. In the developing world, 1.4 billion people live on less than $1.25 USD per day. While this catch-all gives an idea of who is struggling to get by, the impoverished are stratified in terms of desperation. Some live in extreme poverty, racked by hunger and disease with little hope of “pulling themselves up by their bootstraps.” Combating this type of poverty requires humanitarian and development aid. But those higher on the ladder can be served by microfinance institutions. But according to the latest statistics from the Microfinance Exchange (MIX), about 100 million people worldwide receive microfinance loans (these figures are self-reported, and the actual number is much higher). There is still a large underserved population, and microfinance institutions (MFIs) are working to close the gap. Continue reading →

How the Newspaper Discusses Microfinance

Microfinance and Job Creation

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The staff of the NWTF branch in Puerto Princesa

“So health care reform and reducing taxes and reining in spending has got to accompany tax reductions, and tax relief for Americans, and trade — we have got to see trade as opportunity, not as, uh, competitive, um, scary thing, but one in five jobs created in the trade sector today. We’ve got to look at that as more opportunity. All of those things under the umbrella of job creation.” – Sarah Palin

The international economic development community is constantly holding its own feet to the fire. I sometimes describe the push for transparency and demonstrated as a circular firing squad. It s probably an unfair characterization, since a lack of oversight leads to billions of dollars in squandered aid and international investment. Microfinance, in particular, is a frequent target of scrutiny from economists. It is the darling of the development world, and often mischaracterized as the long-awaited solution to poverty alleviation. But the impacts of microfinance are nuanced and cannot be reduced to a simple formula (i.e. poor woman starts business, business earns money, woman no longer poor). In reality, microfinance smoothes consumption, offers money for non-livelihood expenses, like tuition and home repairs, and, in a few cases, propels women above the poverty line. The impact on poverty alleviation is real, but perhaps more muted than the literature would have you believe. Continue reading →

Microenterprise to SME: A Thought Exercise Pt. II

Microenterprise to SME: A Thought Exercise pt. I

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This is the third post of a three–part series on small- and medium enterprises. It is a two-part post.

[youtube=http://www.youtube.com/watch?v=6Z66wVo7uNw]

A month ago, I attended a conference in Manila sponsored by the Microfinance Council of the Philippine Islands. I wrote briefly about the level of cooperation among the participants, but have yet to share what I learned. The conference – titled “Operationalizing Social Performance Monitoring (SPM)” – brought together a dozen microfinance institutions (MFIs) and lenders from across the country to discuss best practices for focusing on the social mission. In the microfinance world, theoretical solutions to problems, like how to focus on the poor and remain financially sustainable, are often incompatible with the nuanced realities on the ground. This gathering offered a chance for MFIs to share what has worked and what has not, so that the microfinance community at large can be more effective at addressing poverty alleviation in the Philippines.

The keynote speaker, Prof. Ron Chua, functioned more as a facilitator and moderator than a lecturer. He asked the MFIs to present a specific social goal and discuss the measures each would take to achieve it. One nameless participant set an organizational goal of transitioning 30% of existing clients from micro-enterprises to SME (small- to medium enterprise) within five years. They presented a laundry list of programs designed to aid in this process. The underlying assumption behind each of these measures is that financial services (microcredit) must be complemented by the provision of non-financial services, including business development and support services and integrated community development. Provision of financial services alone is not enough to bring people out of poverty. This exhaustive list addresses all of the key issues in moving a client out of poverty. I will present the first six here, and the remained six in the next post. Continue reading →

The Tradeoffs of Serving the Poorest