The Microfinance Narrative in Action

This is the opening paragraph from a recent article about whether or not microfinance is effective:

Yohane Mdeme owns a food market in Tanzania. Though poor and with little to no collateral, he applied for a loan of $850 through Kiva.org to expand his small business. Twenty years ago in such a place and for such a client, Mdeme would never obtain the capital to increase his business. No bank would have given out such a small loan, much less to a person without collateral.

Yet Mdeme is well on his way to receiving his requested amount in full.

This process, called microfinance, has been put on a pedestal by development economists thanks to its high repayment rates and ability to provide capital and growth where it used to be nonexistent. But recent research links its success with national economic growth, suggesting it only succeeds in economies that are already beginning to bloom.

This is a good example of how, for better or for worse, the narrative surrounding microfinance is accepted as reality.  But the truth is probably a little less cut and dry.  In reality, Mr. Mdeme is a client of a microfinance institution and has probably never heard of Kiva.  He applied for a loan with the microfinance bank, which gets some of its money from Kiva, and, if he is asking for $850, it is probably not his first loan.  He will probably use much of that loan for growing his business, but some might be spent on his kids’ education, clothes for his family, a wedding or a funeral (the two biggest expenses in a person’s life), or something else.  It isn’t entirely false.  It is just a simplified version of the truth that lacks a bit of nuance.

Some might argue that it’s more important to tell it like it is.  David Roodman blew the doors off the Kiva community with a blog post highlighting Kiva’s lack of transparency.    The article made such a ripple that it got picked up by the New York Times in an article called “Confusion Over Where Money Lent to Kiva Goes.”

The argument goes that Kiva is being dishonest, or, at the very least, non-transparent, in how it markets itself.  This marketing can be seen in the paragraph quoted above.  The counter-argument is that the narrative is true, but is too complex to distill in a short space, and that it is appealing to donors.  If this scenario were true – that a small businessman in the third world who needs a loan to replace the wheels on his fruit cart goes to Kiva and raises money from people around the world – what a triumph of technology!  The world just shrank, bringing two people miles apart face to face.  Thomas Friedman must feel vindicated.  And, to a certain extent, it’s true.  Though, in reality, Mr. Mdema got the money at least a month before a Kiva lender gave his $25, and Mr. Mdema probably has no idea where that money came from.  But this narrative attracts lenders, and makes it easier for Mr. Mdema to get a loan.  So is it worth it?  I think so.

If you are interested in reading more, Timothy Ogden at Philanthropy Action has a nice rundown of the different voices in the debate.

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1 comment for “The Microfinance Narrative in Action

  1. August 14, 2010 at 2:52 pm

    The narrative gets people emotional and in a manner of speaking, it manipulates people into giving their money. However, since they have nothing to loose (typically – as the money comes back after a while), and it only goes on to help people in need, we may think it’s justified. David Roodman pointed out the inherent role of back-filling in the Kiva model, but it’s only practical for MFIs to forward funds asap to their clients, rather than waiting for someone sitting at the far end of the world to read the profile first. However, following the hue and cry over this ‘transparency issue’, Wokai.org (another p2p lending platform, but specifically created for China) has been open about the possibility of back-fills.

    I still wouldn’t blame Kiva for their behavior – after all, most people donate when encountered with a sense of urgency.

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