“The value proposition of microfinance doesn’t lie in it’s being the strongest tool against poverty that we can possibly imagine. The value proposition lies in the fact that it is very helpful to cope with poverty, and it’s a very good value for money.” – Richard Rosenberg
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.
In actuality, microcredit is not always used for a business, despite the fact that they are often business loans. Microfinance clients use their loans for a lot of different things. They buy food for dinner, school supplies for their children, medical bills for the family, and amenities for their homes. These are called consumption purposes – in other words, the money is used for everyday consumption. This is actually a relatively new finding, highlighted by the new book Portfolios of the Poor. Because microfinance clients do not usually have a steady source of income, the amount of money they have to spend on basic items varies on a day-to-day basis. A microfinance loan guarantees that they will have enough to buy what they need today, since they will likely be making the money to pay it back tomorrow or the next day.
Will smoothing consumption lead to a mass upward movement out of poverty? Probably not. But, as Richard Rosenberg of CGAP points out, it is helpful to the poor in dealing with everyday issues and it is cheap to deliver. The perfect is not the enemy of the good, especially in development. And generating incremental improvement in people’s lives is a good thing.
Even if you are not interested in microfinance, this video interview with Richard Rosenberg is worth a watch. He has a thoughtful take on the value proposition of microfinance.