Microfinance Misses Its Mark

Despite the hoopla over microfinance, it doesn't cure poverty. But stable jobs do. If societies are serious about helping the poorest of the poor, they should stop investing in microfinance and start supporting large, labor-intensive industries. At the same time, governments must hold up their end of the deal, for market-based solutions will never be enough

Microcredit is the newest silver bullet for alleviating poverty. Wealthy philanthropists such as financier George Soros and eBay co-founder Pierre Omidyar are pledging hundreds of millions of dollars to the microcredit movement. Global commercial banks, such as Citigroup Inc. and Deutsche Bank AG, are establishing microfinance funds. Even people with just a few dollars to spare are going to microcredit Web sites and, with a click of the mouse, lending money to rice farmers in Ecuador and auto mechanics in Togo.

Wealthy philanthropists, banks, and online donors aren’t the only ones fascinated with microcredit. The United Nations designated 2005 as the International Year of Microcredit, explaining on its Web site that microentrepreneurs can use their small loans to “grow thriving business and, in turn, provide for their families, leading to strong and flourishing local economies.” The Nobel Committee awarded the 2006 Nobel Peace Prize to Muhammad Yunus and Grameen Bank, declaring that microcredit is “an ever more important instrument in the fight against poverty.”

All this enthusiasm for microcredit has attracted untold billions of dollars.1 Grameen Bank alone disbursed $4 billion in microloans over the last 10 years, and it now has 7 million borrowers in Bangladesh. In India, about 1,000 microcredit organizations and 300 commercial banks lent $1.3 billion to 17.5 million people in 2006, says Sanjay Sinha, managing director of Micro-Credit Ratings International in India.2 Worldwide, 3,133 microcredit institutions provided loans to 113.3 million clients, finds the State of the Microcredit Summit Campaign Report 2006.3

This fervor suggests that microcredit really must help the poor. And many have made grand claims to this effect, including Yunus, who said, “We will make Bangladesh free from poverty by 2030.”4 Somewhat less ambitiously, the State of the Microcredit Summit Campaign Report 2006 states that “microcredit is one of the most powerful tools to address global poverty.”

Yet my analysis of the macroeconomic data suggests that although microcredit yields some noneconomic benefits, it does not significantly alleviate poverty. Indeed, in some instances microcredit makes life at the bottom of the pyramid worse. Contrary to the hype about microcredit, the best way to eradicate poverty is to create jobs and to increase worker productivity.

To understand why creating jobs, not offering microcredit, is the better solution to alleviating poverty, consider these two alternative scenarios: (1) A microfinancier lends $200 to each of 500 women so that each can buy a sewing machine and set up her own sewing microenterprise, or (2) a traditional financier lends $100,000 to one savvy entrepreneur and helps her set up a garment manufacturing business that employs 500 people. In the first case, the women must make enough money to pay off their usually high-interest loans while competing with each other in exactly the same market niche. Meanwhile the garment manufacturing business can exploit economies of scale and use modern manufacturing processes and organizational techniques to enrich not only its owners, but also its workers.

As these scenarios illustrate, a surer way to ending poverty is to create jobs and to increase worker productivity, rather than investing in microfinance. But before going into detail about why it is better for an underdeveloped country to promote large enterprises, not microenterprises, let’s examine the theory behind microcredit.

Microcredit 101

The microfinance movement addresses a basic yet devastating glitch in the formal banking system: Poor households cannot get capital from traditional banks because they do not have collateral to secure loans, and traditional banks do not want to take on the risks and costs of making small, uncollateralized loans. Without this capital, impoverished people cannot rise above subsistence. For example, a seamstress cannot buy the sewing machine that would allow her to sew more clothes than she could by hand, and thereby pull herself out of poverty.

Microfinanciers use innovative contractual practices and organizational forms to reduce the risks and costs of making loans, such as lending to groups, rather than just to one person. Some microcredit organizations give their clients more than loans, offering education, training, healthcare, and other social services. Typically, these organizations are not-for-profit or are owned by customers or investors who are more concerned about the economic and social development of the poor than they are with profits. The largest of these social purpose microfinanciers include Opportunity International, Finca International, Accion International, Oikocredit, and Grameen Bank.

In contrast to nonprofit organizations, commercial banks that make microloans typically provide only financial services. Indonesia’s Bank Rakyat, Ecuador’s Bank Pichincha, and Brazil’s Unibanco all directly target poor customers. Some large commercial banks, such as the Indian bank ICICI, do not lend directly to individual microcredit clients, but instead work through small microfinance organizations.

Another innovation that many nonprofit microfinance organizations have adopted is targeting women. At Grameen Bank, for example, 97 percent of clients are women because “women have longer vision [and] want to change their lives much more intensively,” says Yunus.5 On the other hand, “men are more callous with money.”6 Evidence indeed suggests that when women retain control of microloans, they spend more on the health, security, and welfare of their families.7

A major selling point of microfinance is its alleged ability to empower women. Research shows that microcredit increases women’s bargaining power within the home, centrality to the community, awareness of social and political issues, and mobility. It also increases their self-esteem and self-worth.8 Yet microcredit alone cannot overcome ingrained patriarchal systems of control. In spite of having access to credit, some female microcredit clients do not have control over the loans contracted or the income generated by the microenterprises.9 Overall, microcredit does empower women, but only in noneconomic ways.

Failures of Microfinance

Despite the hoopla surrounding microcredit, few have studied its impact.10 One of the most comprehensive studies reaches a surprising conclusion: Microloans are more beneficial to borrowers living above the poverty line than to borrowers living below the poverty line.11 This is because clients with more income are willing to take the risks, such as investing in new technologies, that will most likely increase income flows. Poor borrowers, on the other hand, tend to take out conservative loans that protect their subsistence, and rarely invest in new technology, fixed capital, or the hiring of labor.

Microloans sometimes even reduce cash flow to the poorest of the poor, observes Vijay Mahajan, the chief executive of Basix, an Indian rural finance institution. He concludes that microcredit “seems to do more harm than good to the poorest.”12 One reason could be the high interest rates charged by microcredit organizations. Acleda, a Cambodian commercial bank specializing in microcredit, charges interest rates of about 2 percent to 4.5 percent each month. Some other microlenders charge more, pushing most annual rates to between 30 percent and 60 percent.13 Microcredit proponents argue that these rates, although high, are still well below those charged by informal moneylenders. But if poor clients cannot earn a greater return on their investment than the interest they must pay, they will become poorer as a result of microcredit, not wealthier.

Another problem with microcredit is the businesses it is intended to fund. A microcredit client is an entrepreneur in the literal sense: She raises the capital, manages the business, and takes home the earnings. But the “entrepreneurs” who have become heroes in the developed world are usually visionaries who convert new ideas into successful business models. Although some microcredit clients have created visionary businesses, the vast majority are caught in subsistence activities. They usually have no specialized skills, and so must compete with all the other self-employed poor people in entry-level trades.14 Most have no paid staff, own few assets, and operate at too small a scale to achieve efficiencies, and so make very meager earnings. In other words, most microenterprises are small and many fail – contrary to the United Nations’ hype that microentrepreneurs will grow thriving businesses that lead to flourishing economies.

This should not be too surprising. Most people do not have the skills, vision, creativity, and persistence to be entrepreneurial. Even in developed countries with high levels of education and access to financial services, about 90 percent of the labor force is employees, not entrepreneurs.15

The reality of microcredit is less attractive than the promise.16 Even a stalwart proponent of neoliberal policies like The Economist is beginning to conclude that “the few studies that have been done suggest that small loans are beneficial, but not dramatically so.”17

Jobs, Not Microcredit

Microcredit is certainly a noble idea and a genuine innovation that has provided some positive impact to its clients, particularly to women’s noneconomic empowerment. It also helps the poor during cyclical or unexpected crises, and thus reduces their vulnerability.18 But the critical issue is whether microcredit helps eradicate poverty. And on that front, it falls short.

China, Vietnam, and South Korea have significantly reduced poverty in recent years with little microfinance activity. On the other hand, Bangladesh, Bolivia, and Indonesia haven’t been as successful at reducing poverty despite the influx of microcredit.

The fact is, most microcredit clients are not microentrepreneurs by choice. They would gladly take a factory job at reasonable wages if it were available. We should not romanticize the idea of the “poor as entrepreneurs.” The International Labour Organization (ILO) uses a more appropriate term for these people: “own-account workers.”

Creating opportunities for steady employment at reasonable wages is the best way to take people out of poverty. “Nothing is more fundamental to poverty reduction than employment,” states the ILO. And the United Nations Development Programme agrees: “Employment is a key link between economic growth and poverty reduction. Productive and remunerative employment can help ensure that poor people share in the benefits of economic growth.”

Consider the patterns of poverty and employment over time in China, India, and Africa, whose populations make up about three-quarters of the world’s poor (see graphs on p. 39). Each region has pursued a different path to economic development, and the results so far have been markedly different.

In China, a large and growing percentage of the population is employed in a job. At the same time, the percentage of people living in poverty has declined significantly in recent decades. In Africa, a small and shrinking fraction of the population is employed, and the incidence of poverty has remained unchanged during the same period. India’s performance lies somewhere between the two: The number of people in jobs has grown some, and the number of people in poverty has shrunk a little.

Many people who have jobs in these regions are still stuck below the poverty line – the working poor. Whether an employee is “poor” depends on her wages, the size of her household, and the income of other household members. Increased productivity leads to higher wages, which in turn lead to employees earning enough to rise above poverty. That is why it is not enough to create jobs; regions must also increase labor productivity through the use of new technology, management techniques, specialization, and the like.

When it comes to increasing labor productivity, India’s performance is mediocre and the situation in Africa is dismal. One reason for India’s poor productivity growth is that its enterprises are often too small. The average firm size in India is less than one-tenth the size of comparable firms in other emerging economies.19 The emphasis on microcredit and the creation of microenterprises will only make this problem worse.20

It is possible for an economy to invest in both microenterprises and larger enterprises. But governments need to prioritize development approaches that have a higher payoff. As Amar Bhide and Carl Schramm wrote in The Wall Street Journal: “Governments in fragile states have only so much political capital and capacity. So it is crucial to proceed in a disciplined sequence.”21

The State’s Responsibilities

Poverty alleviation cannot be defined only in economic terms; it is also about addressing a much broader set of needs. Amartya Sen, the Nobel Prize-winning economist, eloquently argues that development can be seen as a “process of expanding the real freedoms that people enjoy.”22 Social, cultural, and political freedoms are desirable in and of themselves, and they also enable individual income growth. Services such as public safety, basic education, public health, and infrastructure nurture these freedoms and increase the productivity and employability of the poor, and thus their income and well-being.

The governments of all developing countries claim to accept responsibility for these functions. Yet they have failed dismally to deliver on their promises. Consider the case of India: The economy is growing rapidly, the stock market is at an all-time high, Indian companies are expanding abroad, and a large middle class is emerging. It is, for many, the best of times.

Contrast this image with that of another India, where 79 percent of the population still lives on less than $2 per day, 39 percent of adults are illiterate, 31 percent of rural households and 9 percent of urban households do not have safe drinking water, 81 percent of rural households and 19 percent of urban households do not have a toilet, 10 percent of boys and 25 percent of girls do not attend primary school, 49 percent of children are underweight, 9 percent of children die in the first five years of their lives, and 400,000 children die of diarrhea every year.

The boom in India’s private sector has been accompanied by an outright failure of the state, and the poor have borne the brunt of this failure. The rich can purchase services from private enterprises, and the middle class are the main beneficiaries of limited public services. But the poor have little or no access to public services and cannot pay the high prices for private services. For instance, children of the rich go to exclusive private schools, children of the middle class use a mix of private and public schools, and children of the poor often do not go to school at all or go to low-quality public schools.

Markets Aren’t Enough

India isn’t the only country whose government is failing to meet its responsibilities. Much of the developing world is likewise missing a vibrant public sector. In response to these shortcomings, a growing number of people believe that markets would do a better job of providing these same services. That is one of the reasons why microcredit has such widespread appeal: It’s a market-based approach to eliminating poverty.23

Even those who advocate a market-based approach to providing basic services don’t argue that the state can totally abdicate its responsibilities. The late economist Milton Friedman, who advocated a school voucher system, did not want the state to withdraw totally from the field of education. The state must provide basic education for the sake of intergenerational equity. The state must also be responsible for providing services when there is a market failure. Free markets do not work well when economies of scale are very large and there is a natural monopoly, as in the case of piped water, and when the commodity is a “common good,” as in the case of public health. In such cases, the market might be a partial complement to the state, but it cannot be a total substitute. For example, if a region has a private water supply, the government must still regulate rates and ensure that the poor have enough purchasing power to buy water.

The business guru C.K. Prahalad says, “If people have no sewage and drinking water, should we also deny them televisions and cell phones?”24 Writing about the slums of Mumbai, he argues that the poor accept that access to running water is not a “realistic option” and therefore spend their income on things that they can get now and that will improve the quality of their lives.25 This opens up a market, and he urges private companies to make significant profits by selling to the “bottom of the pyramid” (BOP).

Yet the BOP proposition glosses over the real issue: Why do poor people accept that they cannot expect running water? Even if they do accept this bleak view, why should we? Instead, we should emphasize the failure of government and attempt to correct it. Giving a voice to the poor is a central aspect of the development process.

The business community, bureaucrats, politicians, and the media are very busy congratulating themselves on the booming private sector in India. Sure, more Indians have cell phones. But what many remember about India is not all the people using cell phones. It’s all the people defecating in public because they do not have toilets. Even in Mumbai, the business capital of India, about 50 percent of the people defecate outside. The current celebration of private sector successes should be met, and perhaps chastened, with anger at the failure of the state to provide basic services.

Overall, governments, businesses, and civil society would be well advised to reallocate their resources and energies away from microfinance and into supporting larger enterprises in labor-intensive industries. This is what is alleviating poverty in China, Korea, Taiwan, and other developing countries. At the same time, they should also provide basic services that improve the employability and productivity of the poor. Otherwise, they will miss the mark of lifting people out of poverty.

1 Tom Easton, “Hidden Wealth of the Poor,” The Economist (Nov. 3, 2005).

2 Claire Cane Miller, “Microcredit: Why India Is Failing,” Forbes (Nov. 10, 2006).

3 Sam Daley-Harris, “State of the Microcredit Summit Campaign Report 2006.” Available at http://www.microcreditsummit.org/pubs/reports/socr/2006.htm.

4 “Bangladesh Will Send Poverty to Museum by 2030: Yunus,” Financial Express (Feb. 18, 2007).

5 George Negus, “Foreign Correspondent – Interview With Prof. Muhammad Yunus,” ABC Online (March 25, 1997).

6 Manfred Ertel and Padma Rao, “Women Are Better With Money,” Spiegel (Dec. 7, 2006).

7 Aminur Rahman, “Micro-credit Initiatives for Equitable and Sustainable Development: Who Pays?” World Development (1999); Naila Kabeer, “Money Can’t Buy Me Love? Re-evaluating Gender, Credit and Empowerment in Rural Bangladesh,” IDS Discussion Paper No. 363 (1998); Mark Pitt and Shahidur Khandker, “Household and Intrahousehold Impact of the Grameen Bank and Similar Credit Targeted Programs in Bangladesh” (Washington, D.C.: World Bank Publications, 1995).

8 Gita Sabharwal, “From the Margin to the Mainstream. Micro-Finance Programmes and Women’s Empowerment: The Bangladesh Experience,” University of Wales, Swansea (2000). Available at http://www.gdrc.org/icm/wind/geeta.pdf.

9 Jennefer Sebstad and Gregory Chen, “Overview of Studies on the Impact of Microenterprise Credit” (Washington, D.C.: USAID, 1996).

10 Aliya Khawari, “Microfinance: Does It Hold Its Promises?” Discussion Paper, Hamburg Institute of International Economics (2004).

11 David Hulme and Paul Mosley, Finance Against Poverty (London: Routledge, 1996).

12 Salil Tripathi, “Microcredit Won’t Make Poverty History,” Guardian Unlimited (Oct. 17, 2006).

13 Daniel Ten Kate and Van Rouen, “The Cycle of Debt – As Microcredit Institutions Grow, Some Question Their Effect on Poverty,” The Cambodia Daily (Feb. 21-22, 2004).

14 Abhijit V. Banerjee and Esther Duflo, “The Economic Lives of the Poor,” Journal of Economic Perspectives (2006).

15 LABORSTA Internet database, available at http://laborsta.ilo.org , International Labour Organization.

16 Thomas W. Dichter, “Hype and Hope: The Worrisome State of the Microcredit Movement” (2006). Available at http://www.microfinancegateway.org/p/site/m//template.rc/1.26.9051.

17 “Macro credit,” The Economist (Oct. 21, 2006).

18 Jonathan Morduch, “Does Microfinance Really Help the Poor? New Evidence From Flagship Programs in Bangladesh,” Harvard Institute for International Development and Hoover Institution, Stanford University (1998). Available at http://www.wws.princeton.edu/~rpds/downloads/morduch_microfinance_poor.pdf.

19 Kalpana Kochhar et al., “India’s Pattern of Development: What Happened, What Follows?” Journal of Monetary Economics (2006).

20 Milford Bateman and David Ellerman, “Micro-Finance: Poverty Reduction Breakthrough or Neoliberal Dead-End?” Paper presented at UNDP Bosnia and Herzegovina and the BiH Economic Policy Planning Unit (EPPU), “Poverty Roundtable: Achieving MDG 1 (sustainable poverty reduction) in BiH” (June 16-17, 2005).

21 Amar Bhide and Carl Schramm, “Phelps’s Prize,” The Wall Street Journal (Jan. 29, 2007).

22 Amartya Sen, Development as Freedom (New York: Anchor Books, 2000).

23 Bateman and Ellerman.

24 “Selling to the Poor,” Time (April 17, 2005).

25 C.K. Prahalad and Allen Hammond, “Serving the World’s Poor Profitably,” Harvard Business Review (2002)

ANEEL KARNANI is an associate professor of strategy at the University of Michigan’s Ross School of Business. Karnani’s research focuses on competitive advantage, strategies for growth, global competition, and emerging economies. He works with several companies to design and deliver executive development programs, and he is also actively involved in consulting to businesses.

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  • Ebstar's avatar

    BY Ebstar

    ON June 4, 2007 03:45 PM

    Interesting thought. Surely both can persist and thrive serving different needs. Microfinance for small businesses and big money for big business - its all part of a larger economic ecosystem. Not everyone everywhere can and does operate on the same scale financially. Technology will enable the basic infrastructure for businesses both large and small. The larger technological revolution should create a higher degree of basic parity between people and businesses, businesses and economies in both a social and economic sense. Mom and pop may never IPO but do they need to?


  • Mona Kachhwaha's avatar

    BY Mona Kachhwaha

    ON June 7, 2007 06:47 AM

    The business of microfinance is to provide to the disenfranchised the opportunity to borrow, save, secure and transfer funds, i.e. the complete set of financial services, so that they cease to be disenfranchised. To single out microcredit and its after-effects as the sole representation of this business is wrong and a one-sided view. Unless and until the impact of other services kick in to the same extent, we have no grounds to doubt the hypothesis that financial inclusion will lead to greater chances of economic development of those who are poor and vulnerable. Its a fact that credit has taken precedence over savings, insurance and remittances. This is a result of the type of organisations that have so far offered these services (small-sized, low capital, mostly non-bank), government regulations (limiting, multi-layered, inappropriate and confused), infrastructure challenges and, above all, the fact that microfinance is practised as a “market-based solution” with a clear commercial sustainability objective. Businesses are bound to go after the lowest hanging fruits. But eventually other services would need to follow to complete the picture - and the same businesses will rush to provide them as and when the other factors listed above get addressed. As people concerned with the lopsided growth of credit in absence of other services, our efforts should be trained more on making way for other services to follow than to pull down the good work being done in the one and only area that seems to be reaching a scale that is material - credit. To say that other conditions like jobs, healthcare, water and sanitation, important as they are, need to be fulfilled first and then alone should financial services follow is to expect too much. Where have we seen government bodies providing these basic services working seamlessly or even remotely closely with businesses or civil society organisations to achieve common goals? I believe each has to do its part and propel the others to action through direct (lobbying) and indirect (demonstration effect) means.

  • Tim Cranston's avatar

    BY Tim Cranston

    ON June 7, 2007 04:15 PM

    Everybody in the microfinance (MF) debate is too one-sided.  The Yunuses (Grameen) of the world lead the cheers while the statists and ILO do their best to pooh-pooh their successes while, as in the case of the author of this piece, state that the opportunity cost is too high and we should go back big company lending to labor intensive industries.  Why not both?

        Interestingly, at the time he was brutally murdered, Daniel Pearl (WSJ) had been in a long running dialogue with Yunus about the bad credit and slow loans that Grameen appeared to be both experiencing and underreporting.  Pearl was in the process of writing a series on the success and failure of MF.  Tragically his life was cut short before he could publish his findings.

        One thing is clear about this SSRI piece:  The author does not appreciate the boon that occurs in the human heart when she or he becomes an owner, a property owner, yes, a capitalist.  I would like to take the author up on the challenge to compare the results over long periods of time of the 500-person company vs the 500 individual seamstresses.  The “fatal conceit” of the ILO-types and the World Bank and the IMF is that they think they know best what to do with other people’s money.  Their dismal results over the last 50 years are well documented.  Indeed, the World Bank was becoming irrelevant as an international provider of capital to 3rd world enterprise even as the latest scandal broke.

        So, two cheers for microfinance.  But I await the rigorous research and performance measurement.
    Best regards,
    Tim Cranston

  • Melonie Brophy, MBA Class 1979's avatar

    BY Melonie Brophy, MBA Class 1979

    ON June 15, 2007 05:33 PM

    Microfinance does make a difference for poor women entrepreneurs and small businesses.  I saw it with my own eyes.

    This April, I had the serendipitous and amazing opportunity to visit and interview women in Peru as part of a microfinance visit with the board of directors of Pro Mujer.  What I found interesting is that when the poorest women receive basic business training (i.e. becoming aware of what they make per hour with their businesses) as well as engage in peer communications (i.e. developing self confidence) within their lending groups, they do become micro-entrepreneurs and are able to make better decisions with their loans as well as save money.  In some cases, there was real talent, the women blossomed as business people, and they grew their businesses into export markets, or focused on products that were differentiators (i.e. money makers in local terms).  They may be the poorest women, but once they have a taste of success… they are empowered and want more, like healthcare and education for their families.

    I agree that there are many women who continue to do the same old thing, and I worry that they will not get out of the vicious cycle of poverty.  In that case, maybe they should go work for the more successful businesses!  Jobs can and should be created from those micro-financed businesses with the most potential for growth—that could be the objectives of the next phase for microfinance.  With just a little encouragement and training, women are making money, saving, and changing the status of the family.  Start with the women, reach the children, send even one kid to college, and eventually it changes life for the entire family and next generations to come.  I heard the poorest women in Peru express their hopes and wishes, and everywhere, the women are working for their children. 

    I don’t know how microfinance will evolve or how effective it will be to eradicate poverty (that seems to be a BIG goal), but I do know that at least one at a time, there are lives that are impacted by microcredit and that it works because “empowered” women want more for themselves and their families.

  • C Rahe's avatar

    BY C Rahe

    ON June 21, 2007 02:27 PM

    I think this article helps illustrate some of the inherent flaws of the neo-liberal (libertarian/objectivist/neo-conservative) worldview.

    While capitalism and “markets” certainly have their place, they aren ‘t the end-all, be-all to every problem. There is a very important role for governments and communities acting for the common good.

    Trusting market forces and all people acting purely out of self-interest to solve our problems is always going to leave us wanting.

  • Peter Greer's avatar

    BY Peter Greer

    ON June 26, 2007 03:37 PM

    What’s “the mark”? 

    Could it be that Mr. Karnani is a victim of the hype of the over-enthusiastic cheerleaders of microfinance?  This may be reflected in his use of wide-ranging terms for defining the “mark” for microfinance.  He uses “alleviating poverty,” “lifting people out of poverty,”  “curing poverty” and even “eradicating” poverty. Even though anecdotal evidence show that it’s possible to make big gains, the studies tend to show that the norm is more modest - alleviation.

    Would, say, a 50% increase in “lift the poor out” of poverty? Probably not.

    Would it “cure” or “eradicate” poverty   Not likely. 

    However, would it “alleviate” poverty?  Would the lives of those people significantly improve?  Most definitely. 

    A 50% increase in income, even if it would be relatively small in absolute terms and tiny to our Western eyes, would likely mean that people eat better, enjoy better health, improve their housing, and/or have greater confidence and hope for the future.  It would also provide a catalytic boost towards additional improvement – perhaps even permanent graduation out of poverty. If this is the “mark,” not rapid, overnight “eradication of poverty,” then we feel that microfinance is indeed hitting it.

    Peter Greer
    HOPE International

  • E Alexander's avatar

    BY E Alexander

    ON June 27, 2007 11:32 PM

    Finally a sensible assessment of micro-credit. The two alternative scenarios painted by the author - woman buying her own sewing machine vs savvy entrepreneur setting up a garment manufacturing business that employs 500 people - illustrates the situation perfectly.
    I have some experience of micro-credit in India. Most of the loans are for buying household goods, financing weddings and repaying loans taken from traditional moneylenders. Very few women used it for business because most of the women did not know how to start one.
    Micro-credit assumes that there is an entrepreneur hiding inside every poor village woman and all it needs is some money to unlock that potential.
    It also puts the burden solely on the woman to takes loans, repay them, educate and feed her family because it’s easier that way.
    Would someone do an objective study of (1) what women actually do with these loans, (2) THEIR OPINION of what they would prefer - a job or a loan, and (3) what real impact these loans have made on their lives.

  • The article neglects to mention that much of microfinance is not intended to create entrepreneurs, but lends money for farmers to increase their output (either crops or animals) and this does lift them out of extreme poverty.

    The article also fails to examine that the main reason China has created jobs has been through massive itnernal migration: over 100 million people are temporary migrants.
    The Chinese government actively also promotes rural to urbal migration as a long-term sustainable poverty reduction and growth solution. Another 300 million residents will move to urban areas in the next 15-20 years which is why there is such an energy crunch and environmental crisis in China… China may have reduced poverty massively but is has come at just a big a cost to its environment.

  • The article fails to analyse that China’s economic growth depended on loans from State-owned banks that were given out without any due-concern.

    Should all developing countries lend out money (in order to create jobs in factories or the construction industry) without expecting to get it back, in the hope that their governments will be be able to bale out their banks at a later date (since the banks have no hope of getting their loans paid back)?

  • I agree with Adam (above) that many other issues are at play and would support E Alexander’s (also above) idea of an objective (and, I would hope, geographically broad) study of microfinance. 

    My comments are these:
    1. Self-employed workers are more likely to take care of themselves—if they notice that fertilizer or pesticide is making them sick, they’ll stop using it. Governments and NGOs are likely to hold large employers accountable for such damage to human health and environment, but that takes a while and, in the meantime, individuals suffer, thinking or knowing they have no choice but to follow directions from management.

    2. Microfinance without education is dangerous. Farmers accepting microloans will buy what—fertilizer to pollute water? chainsaws to clear forests and animal habitat? pesticide and herbicide to poison themselves and their families? And if the pay-off isn’t greater than the interest rate, which is a bit of math that confuses a large number of both bankers and borrowers in the US apparently (cf. US subprime mortgages), then both the borrowers lose (dignity, credit, possibly collateral) and the investors and savings account holders of the MFIs lose (hard-earned money, trust in the financial system).

    3. Farmers also need markets for their increased production.  And preferably not a market that further entrenches dangerous monoculture (that ruins soil, hurts nutrition, and increases susceptibility to pests and volatile global markets) ... though, I was told, if a farmer wants to sell to the World Food Programme, s/he must meet a large minimum amount requirement, all in one species of, say, corn.

    4. The economies of scale that the author touts regarding large employers would seem to me to indicate that fewer people would be employed per unit output, though of course output (and consumption of resources) may increase. Given recent research (http://www.slate.com/id/2171898/) indicating that a diverse economy has better long-term prospects, would one not want to endure a little less efficiency in the short-term to preserve diversity in the marketplace?

    To those of you who are more versed in economics and development than I, I would like to ask:
    1. Is microlending a zero-sum game? If one entrepreneur wins, does that extra profit come out of the pockets of his erstwhile private lender or his non-microborrowing competitors? I imagine the answer depends on the extent of microloans being used to finance exports rather than locally-consumed goods and services—does anyone know the breakdown there?

    2. Is the problem that microloans are meant to solve one of financial liquidity or something else?

  • BY Dave McClure

    ON September 3, 2007 10:53 PM

    interesting piece.  however, seems like the counter-arguments presented are as lacking in empirical data as the proponents of microfinance that he criticizes.  so while the intellectual perspective is thought-provoking, i don’t know that i give it any more weight than 30 years and 50-100 million people involved with microfinance / microcredit.

    that said, i think the perspective of moving up the food chain and providing larger loans to more significant entrepreneurial activity is appealing… except that, this is also a challenging issue of capital access.  even in the US, “small business” can be up to several hundred people & tens of millions of dollars, and still perhaps have limited capital except from debt & cashflow.  what might be more interesting is to provide small business equity markets to help finance entrepreneurial endeavor at all scale & sizes.

    furthermore, i’m not sure the author’s ideals & microfinance are necessarily at odds—you might consider individual access to microcredit the very first step in creating a “microfico” score that over time could be used to gain bigger & bigger loans, where the mature entrepreneur is taking out 6 or 7 figure loans & providing tens or hundreds of jobs.

    overall, i appreciate the food for thought & it’s useful to consider other financial channels & market methods that might help the poor.  that said, i think it’s a little short-sighted to make the case that all microfinance activity is negative in its contributions to society.

    here’s to a bigger tent for a wide variety of financial access & market-based solutions, including both microfinance and microequity.  may a thousand flowers bloom.

    - dave mcclure

    [full disclosure: i serve on the board of Unitus, and i am definitely biased in favor of microfinance.  however, i like to keep an open mind in case i come across a better one wink]

  • It’s a profound start.  Rather than spending your time negatively analyzing microfinance on your G4 ibook, drinking a non-fat soy latte, focus on the good.  Sure this brings to light microfinance’s certain faults, but it doesn’t do much else.  I spent a summer in Nigeria and Kenya documenting the effects of microfinance.  Have you ever interviewed a lady claiming she was going to take her own life until microfinance gave her inspiration to carry on?  Anyone can read a book.

  • Cami Lawong's avatar

    BY Cami Lawong

    ON October 21, 2007 02:40 PM

    Very interesting analysis. The two scenarios need to be revisited. The example of a microfinancier lending $200 to each of 500 women to buy sewing machines and eventually compete among themselves, is simply not realistic to say the least. A microfinancier will generally lend to 500 women, 100 of whom will buy sewing machines, 200 will engage in buy and sell micro businesses, 100 will engage in some form of farming, 100 will set up hairdressing or similar shops which will have apprentices and thus create jobs The 100 women borrowing to buy sewing machines may end up creating a cooperative and rather than compete among themselves negotiate to sell their products at better prices.  Given the right training and capacity building, they will end up doing what the savy entrepreneur will do and even better.

    Lets give micro credit a chance. If we were to vote, I will vote for micro credit because as a promoter of a micro financial institution, I have seen the tremendous good micro credit does if packaged with appropriate training.

    Cami Lawong (MBA)
    General Manager (of a micro financial institution)
    Prima Commercial Fund
    BP 9198 Douala , Cameroon

    email .(JavaScript must be enabled to view this email address)

  • BY Jo Henriksen

    ON October 26, 2007 03:22 PM

    I am manager for a microcapital provider, and I do agree to some extend in your conclusions. The objective is to create jobs, and it the state’s responsibility make up the premises for doing that. When you look at the World Banks report “Doing Business in 2008”, you find out the North Amarica and Europe are the nations on the top of the list, and they are also the countries that receive the investments. Simply because they have the best investment climate. The challenge for many develloping countries is to establish a climate for investors to attract investments. That mean that they must have a legislation that makes it easy to set up an enterprise, register property, protect investors etc. With easy and transparent systems you will also eradict corruption, which is also very stimulatiog for investments. In these environments do we need microcredit? Yes, we do. In addition to big enterprises that employs many people, you need a lot of small busniesses that serve and supply the big industry and support the comunity with services. As long the present financial banks do not serve the poor, microfinance institutions is a necessity.

  • Lem Cacho's avatar

    BY Lem Cacho

    ON December 18, 2007 04:18 AM

    I’m a researcher for a business intelligence firm located here in Manila.  And just like those employed here, I’m underpaid.  I understand and appreciate your attempt to highlight the inadequacies and weaknesses of microcredit.  I also agree that formal employment is important to ensure freedom from a life poverty.  However, I think the issue here is not merely a problem of microfinance or microcredit not delivering its intended results.  I think the problem rests on lack of development (or business?) strategy that is comprehensive and overarching.  Business Support Organizations (BSOs) are needed to compliment microcredit strategies in which start-ups are taught properly how to manage their resources.  It is a “Nanny Management Scheme” that provides guidance to those wanting to run their own businesses.

    In the Philippines, for instance, the poor constitute the informal sector because of lack of available jobs.  Those with formal employment get out of their way to do small business on the side just to augment their income because their salaries are too small to make them get by.  As a result, household enterprises sprout like mushrooms and are fast becoming a trend to an unemployment-stricken country like the Philippines.  The absence of jobs forces people to look for other means just to live decently. Microcredit provides that missing piece that could facilitate the poor’s escape from poverty. 

    But as pointed out by the study, it’s not enough.  Even if borrowers pay their loans 97% of the time does not mean their socio-economic conditions have improved.  In most cases, they borrow from relatives and friends just to pay their loans on time (Mullainathan, 2003).  This gap (adverse selection) is something microcredit providers fail to address but can be monitored and answered by BSOs.  BSOs can provide the needed management and technical assistance that can prevent poor borrowers from falling deeper into poverty.

  • Caitlin Ewing's avatar

    BY Caitlin Ewing

    ON January 29, 2008 11:38 PM

    It seems the author may be the one missing the mark.

    He neglects to recognize that microfinance programs target many citizens who may not have marketable jobs skills, but are fairly adept at running an informal-sector vegetable stand, raising livestock or selling secondhand clothes. These are the people unemployable by the single dynamic entrepreneur in his example, yet all can expand their business with the help of microcredit. Clearly, MFIs are not the “quick-fix” answer to widespread poverty, but isn’t it a good thing that individual lives are improving? Isn’t something better than nothing? Just what would a “significant” alleviation of poverty look like, anyway?

    I would never suggest that medium-size enterprises should be left in the dust in favor of microenterprise, but I think it’s plausible that there is room for everyone in the credit market, and that is exactly what Yunus (and many other MFIs) are working toward. Offering a new credit service doesn’t mean stealing resources from other divisions, but interlinking them all might be the most powerful strategy for poverty alleviation yet.

  • Victoria Smith Downing's avatar

    BY Victoria Smith Downing

    ON February 16, 2008 08:34 PM

    What an incredibly narrow and ignorant “corporate” view of an innovative tool which has begun to change lives everywhere it has been given a chance.  It is this kind of business bigotry that impedes the progress of individuals at these most “hopeless” levels of developing societies.  Mostly unskilled in traditional industry, many microentrepreneurs, both male and female, prove to be quite competent at useful and needed village business. The added value of human dignity seems beyond the understanding of this “analyst.”  Creativity has always met obstinate resistance from those who are gutlessly following a path someone else blazed for them. Rhetoric is cheap. Action demanded.  It is gratifying to see so many thoughtful comments rebutting this trivialization of a great movement.

  • The scenario of loaning $100,000 to one savvy entrepreneur to start a business employing 500 people, versus loaning $200 to 500 individual seamstresses, is interesting, but it’s also pretty simplistic.

    First, it assumes there is a savvy entrepreneur out there capable of setting up a garment factory employing 500 people. This may or may not be the case.

    In fact, it might be that the best pathway of coming up with such an entrepreneur is to loan money to 500 people and provide education. It may be that one of the 500 may employ 2, then 10, then 100 fellows. It may be that several of the seamstresses will band together and form a partnership that continues to grow. In any event, giving somebody $100,000 to form a business employing 500 may turn out to be the riskier proposition—unless that person already has experience in running a business of that size.

    Unfortunately, the people who have such experience are often busy… running businesses of that size.

    You also face the problem that people whose only experience is in running businesses that are already large often are not particularly skilled in starting and growing a business.

    Secondly, as someone else has already pointed out, 500 microentrepreneurs are not likely to all compete directly against each other. In the first place, it just isn’t going to happen. In the second, they won’t all be going into business at the same time. As market conditions shift the seamstress option may become less attractive than the restaurant option.

    Third, as someone else has already pointed out, the microentrepreneur might or might not be able to get a job at the factory.

    And fourth, the author assumes an either/or scenario: either the money is there for microfinance, or it’s there to fund a garment factory, but not both.

    Again, this may or may not be the case. As an individual thinking about taking some of my money and putting it into microfinance (via one of the web-based opportunities that are cropping up for this), I might find it more attractive (and possibly more practical) to loan my money to a microentrepreneur than to the author’s “savvy entrepreneur.”

    That said, there’s some food for thought here. Which is better? I don’t know. I think that most likely we need both.

  • I read this article with interest because I made my first small investment in a microfinance project in February. (Yesterday I received an e-mail that the borrower has made her first payment.)

    I’ve worked for non-profit organizations, volunteered, and donated to charities. My expectation of each is different, in keeping with its stated mission. I choose a charitable organization by how well its goals match mine, and judge it by how well it fulfills those goals. Usually I give with no expectation of being repaid, but the idea of microfinance intrigued me and I decided to give it a try.

    One thing I noticed right off: Some of the borrowers wanted a loan to improve their homes, education their children, etc. Worthy goals all, but not what I think of as microfinance; there are traditional charities that provide that kind of assistance. I chose a borrower who wanted to buy a cow for her farm and sell the milk (funny, because I’m a city girl). After reading this article I am more than ever convinced that was a good decision and I would gladly do it again. But after reading this I think the next time I invest (as I almost certainly will) I will look for a borrower who has at least one employee, or maybe a group that are supporting each other and cross-guaranteeing the loan.

  • I am currently working with Microfinance here in West Africa and your article took the words right out of my mouth.  Thank you for researching and writing this!

    While I agree that Microfinance is a great tool and definitely has its place in development economics, I see women who have taken out 15 or 16 loans over 7 or 8 years and whose life is essentially the same as before she was “empowered” by a micro loan.  I think that the lack of industry and employment opportunity is CRITICAL to development and, in a trickle down sense, to the success of micro-finance initiatives as well.

  • Very interesting article.  Definitely opened up my mind on microloans.


  • Yusuf Sunday's avatar

    BY Yusuf Sunday

    ON April 3, 2008 06:37 AM

    Very interesting piece, its mind opening and attention grasping.While I agreed with all the propositions made by both the aurthor of this piece and other contribuitors, I also like to add that micro credit scheme should be used in conjuction with other developmental tools, e.g.microleasing.Micro credit as a stand alone tool may not be able to alleviate poverty.But when combined with the existing institutional frameworks, great result would be accomplished.Existing commercial banks should focus on lending to large corporations who will create jobs for qualified employees.Microfinance houses should also continue to run to offer micro credits to the peasant entrepreneurs and other micro businesses.However, we must note that poverty will continue to reign in the earth till ‘‘thy kingdom come’‘.For ‘‘the poor shall never cease in the land’’ ,says the Holy scripture.

    while will that be so? Given all oppurtunities, not every one will want to go to school and be educated, not every body will want to work,and there will always one foolish people or the other in government who prefers to embessle and waste funds ment for national development on personal agrandishment,e.g Nigeria.But most importantly,poverty will continue to be an issue, because people failed to obey and to beleive God.

  • Robert Rockwell's avatar

    BY Robert Rockwell

    ON June 10, 2008 10:51 AM

    Greed! Greedy large business owners exploiting workers, greedy, corrupt government officials feeding off the people who elected them or who they promised to help, greedy, large banks charging high interest rates continue to try to control capital and keep the rich growing richer. The movement to balanced investing for social improvement and profits, rather than only looking at the bottom line, is where the new capitalism can do some good. Concerned people, who can afford it, are voteing with their money, which in developed countries, is an effective way to vote. I hope they vote for Microfinance as well as the creation of jobs. Both have a place in the scheme of things.

  • Prabhab Banskota's avatar

    BY Prabhab Banskota

    ON July 23, 2008 05:41 PM

    Great Analysis!!! So what works for people in developing country if microfinance doesn’t? And I do not agree with $200 to each 500 women or a $100k to a savvy entrepreneur example. You should picture in one of the impoverished village of underdeveloped country and ask the same question. Now would you say $200 each to 500 women or a $100K to a savvy entrepreneur? Comon, I have lived in one of the most underdeveloped countries. There are no schools in those villages and therefore there are no savvy businessmen. And I don’t even think $200 to 500 women will work either.

    In my opinion what will work is first building an infrastructure necessary for growth like roads, education, good business environment, sound government policies, better laws etc. Then microfinance institute can work with the state to provide microfinance opportunities. We should understand that microfinance is not going to end poverty by any means. But I believe it is a great start. But what needs to happen is Government to step up and do their part by infrastructure by working with organizations like UN and World Bank. Microfinance is evolving and I believe it will bring good results in time.

  • BY Kevin Gormley

    ON October 8, 2008 08:07 PM

    Poverty is a huge problem and microfinance is only one part of the solution.  Helping women earning less than $1 a day to earn enough to send their children to school is still a victory. 

    An early micro-entrepreneur in Grameen Bank was able to send her daughter to school: she earned a scholarship and eventually became a doctor.  Dr. Yunus remarked that it was wonderful that the daughter was a doctor, but lamented that the bright, industrious mother (a potential doctor) did not have any education as a child and was illiterate.  Yes, this is just an anecdote, but demonstrates that microfinance can increase human capital even if it takes a generation.

    Grameen Foundation, a leader in microfinance, is developing “Progress Out of Poverty” - metrics on microfinance and improvements on quality of life:  See http://progressoutofpoverty.org

    Encouraging small to medium sized businesses (and eventually a chance for visionary companies and business models) is also important and requires different solutions.  Pointing out a critical problem does not require dismissing a solution has been working for a different problem.

  • Muhammad Ali's avatar

    BY Muhammad Ali

    ON November 9, 2008 12:46 AM

    Hi, I am Muhammad Ali from Pakistan and a student of development studies…..Well, I think that there are few cases studies which shows that providing small loans has increased the economic conditions of households and most of the organizations of microfinace’s target are womens….
    As in the case of Pakistan, microfinance has been doing great work in eliminating economic disparities from poor households…..but as Pakistan is one of the developing country and most of the peoples are living in rural areas….The conditions of rural areas are not approriate and peoples are usually uneducated and are strictly engaged with their cultures and norms….they donot want changes in thir social systems….we have seen that if women from poor household gets loan from any micro-credit scheme, that loan is taken from them by their male members as the system or culture is male dominated here….and they male members of the poor rural households have misdrirected pirorites and they dont utilize that loan in the best manner for the betterment of thir houses and women’s are get more depressed as they have to repay the loan in a specified time…..
    Moreover as pointed out earlier by my brothers n sisters that women takes out loan but they also could not utilize that loan in the best possible manner to get the maximum of out it because of less education and misdirected priorities…....
    A major selling point of microfinance is its alleged ability to empower women. Research shows that microcredit increases women’s bargaining power within the home, centrality to the community, awareness of social and political issues, and mobility. It also increases their self-esteem and self-worth. Yet microcredit alone cannot overcome ingrained patriarchal systems of control. In spite of having access to credit, some female microcredit clients do not have control over the loans contracted or the income generated by the microenterprises. Overall, microcredit does empower women, but only in noneconomic ways.


  • All we need is a microfinance institute that gives loans to large firms that operate in poor countries. This MFI can be listed on Kiva where it will receive 0% financing. There doesn’t need to be a major change in infrastructure.

    The reason why big firms don’t normally do business in poor countries is because of added risk, which lowers expected profitability. However, if these firms accept money from social investors who are willing to take on this risk, large firms have nothing to worry about.

  • BY Ryan Calkins

    ON February 7, 2009 02:18 PM

    Although I have come across this article nearly two years after its publication, I still think it’s pertinent to update the comment thread. In particular, there are many more studies available measuring microfinance now, in particular the excellent work from Innovations for Poverty Action (http://poverty-action.org/). I would also suggest that the discussion should distinguish between for profit and non profit microfinance, or at least those with a social mission and those without.
    Ryan Calkins
    Executive Director

  • salman_taufik's avatar

    BY salman_taufik

    ON August 13, 2009 02:03 AM

    I have similar finding in macro level for Indonesian cases.  During last decade after crisis 1988 - 2009, poverty only slightly downed from 21% into 14.15% by 2009, despite controversy over this statistic.  Meanwhile, the credit growth into micro entrepreneurs increase 7 times during 2000-2009, much more higher than overall banking industry which only twice for the same periods.  Contrasting of both figures bring me into question the effectiveness of microfinance to alleviate poverty.  Since some the credit flows into micro entrepreneurs are consumer loans, I suspect that the rapid growth just showed how success capitalism sell their consumer goods into the poor such motor cycle, cellular phone, home appliances, etc, and the poor sell their land and cut illegal tree to pay all those stuffs.  Furthermore, even though micro finance give access for poor people to have capital or liquidity but they have to pay almost twice than corporation.  I just think that there have been money slavery over the poor.  So somehow I agree with you unless they don’t charge the money, let it as working capital to save their lives.

  • Mousumi Mukerji's avatar

    BY Mousumi Mukerji

    ON September 6, 2009 10:13 AM

    I am a midwife in the US studying the problem of the appallingly high rate of births that are not attended by anyone appropriately skilled or trained to handle obstetric complications or emergencies in rural India.  Midwifery is a community-based, female-centered, income generating activity: ah hah!  how we can harness the power of microfinance to reduce maternal mortality?  This is the crux of a project I have been working on now for a few months.  Maybe the communication and training channels with women that MFIs have established in rural communities as well as loans can be used to train midwives and help them set up their local, community-based midwifery practice.  Perhaps microfinance can be used as a tool to start the process of delivering a badly needed common good in poor rural communities, until the government catches on and gets involved.  I sense that the microfinance industry is in need of some image repair, to quelch the notion that they suffer from mission drift (away from social good and towards profit).  My project will give it an opportunity to do just that.

  • Let’s take a quick look at the article’s counter-example of employing a single entrepreneur with a $100,000 loan for a large-scale operation in a desperately poor 3rd world country. How would that most likely play out?

    The author contends the single entrepreneur would:
    1) invest in new technology
    2) find economies of scale
    3) yield better results to the community

    I suspect that if instead of 500 micro-entrepreneurs you had a single mega-entrepreneur in a desperately poor part of the 3rd world, you would instead see:
    1) any fancy new technology would be stolen and sold on the black market..remember this is the desperately poor part of the world
    2) instead of finding economies of scale, this powerful entrepreneur holds a monopoly; instead of passing along lower prices, it would yield higher profits to the entrepreneur—using Sherman AntiTrust Act and anti-monopoly policies in the developed world as your “written in blood” rules of the road for what monopolies will do.
    3) the community would most likely pay more for the product, have less choice, and the entrepreneur would have very little, aka no, incentive to innovate or provide better products.

    Having served as a Captain in the USMC, an organization of 180,000 government servants, and as a contractor within the Department of Homeland Security (think reaction to Hurricane Katrina) another 160,000 person govt org, as well as a real entrepreneur who started up a company in my attic and grew it large…I’ve seen what happens with a single organization is given dominance over a less-skilled, less-privileged population. It ain’t pretty. Power corrupts and what they’re proposing is handing all the power to one person—in an ideal world that would be great, but that’s not how it works in the real world, especially not in 3rd world countries. The rule of thumb for dictators in Africa, for example, is not benevolence and advancement of the population at large. It’s self interest, self protection, and indulgence.

    I think the crux of the author’s argument is based on the fallacy that there are highly skilled, well connected, beautifully generous hearted entrepreneurs in these countries just waiting for the $100k loans to go do what’s best for others. There are many types of credit for many different purposes: credit cards, mortgages, car loans, bank LOCs, VCs, and PE, and hedge funds and hundreds more. Each type plays a part. In a vibrant 1st world economy you might see all of these; the fact that one form of credit doesn’t solve ALL problems is in no way an indictment of the efficacy of that credit solution. Does it solve the problem it was INTENDED to solve? Great.

    Jeff Takle

  • What a poor article! The idea of contesting the efficiency of microcredit is a good one, but the poverty of the arguments is impressive. It’s not possible that someone would like us to seriously consider the argument that lending 100.000 dollars for just one guy can create 500 hundred jobs (really? Can you show me the numbers?), but lending 200 dollars to 500 women can create nothing but a suicidal competition.
    I would aprreciate if the author could give us some strong numbers, some good analysis, instead of just being opinionative.

  • Being a Bangladeshi development worker, I really appreciate the author for the thought provoking article on Micro-finance. There is no silver bullet to alleviate poverty. It will require state’s support, functioning market system and innovation to lift people out of poverty. In 1998, 5th longest bridge in south Asia was built in Bangladesh connecting the less developed northern region with the rest of the country. Since then there has been remarkable progress in that region in terms of poverty alleviation thanks to plethora of NGOs and dynamic entrepreneurs especially in agriculture sector.

    Senior Business Consultant

  • why is less positive feedback about this article b's avatar

    BY why is less positive feedback about this article b

    ON February 3, 2011 02:27 PM

    Nuanced posts by Chris Dunford and others have been deleted.  Why is SSIR for deleting posts by knowledgeable people who were presenting a balanced perspective on the role of regulation in microfinance, its current coverage and limitation?

  • Blair Gopeechan's avatar

    BY Blair Gopeechan

    ON May 20, 2011 10:57 AM

    Just reading within the first lines of this article that ” If societies are serious about helping the poorest of the poor, they should stop investing in microfinance and start supporting large, labor-intensive industries” was enought to know that the author could not possibly have a humanistic or informed view on solutions to poverty.

  • I don’t disagree with what David Roodman has to say   but I have a fnudamental disagreement with the notion that people can move out of poverty in two years. Studies of immigrant families have shown that it takes a generation for change to occur: income increases slowly, the children gain education and language skills, blah, blah, blah.  Why would change happen faster for those who stayed behind? Besides, if only 2 or 3 of every US small business survives its first three years, is it realistic to think that all of the world’s poor are cut out to be entrepreneurs? Microcredit succeeds because it is cheaper, but also because microenterprise has become the modern-day version of subsistence agriculture. Alternative means of generating income and sources of financing are both scarce.Microcredit has absolutely oversold its benefits, although to a certain extent, that was almost a necessary pre-condition to raising funds for commercial microfinance. Most microfinance institutions struggle to move beyond short-term working capital loans. Savings and insurance products are even harder to get right at the BOP, and longer term lending often runs into multiple obstacles. Default rates, however you define them, aren’t a widespread problem for well-run MFIs. The real problem is just expecting too darn much from microenterprises.  Unless someone wants to start doing 10-20 year longitudinal studies of microcredit clients, I’d think it would be more constructive to spend grant money on getting non-credit products right.Access to finance is an important enabling condition for economic development, but its one of many elements in addressing the complexity of poverty.  Think of it as an access to life problem. If your kid gets sick and there’s no clinic, it doesn’t matter that your microenterprise gives you a cash income. Likewise, if there is a clinic and you can’t afford to take your ailing child, the existence of a clinic doesn’t help. Both clinic and ability to pay are needed to produce a better outcome (sick kid gets help). So, you’re right in that some microfinance is better than none. I’m hoping that impact investment will help allocate philanthropic dollars across access to life issues (housing, health, education, clean drinking water and sanitation, etc) and not just microfinance!

  • It is important for real estate professionals to speak the language
    of the buyers. An effective property description can determine whether or not you sell the property.
    While you not only get the privilege of private ownership there are many crucial benefits and advantages that private ownership of real estate brings with it.

  • “The late economist Milton Friedman, who advocated a school voucher system, did not want the state to withdraw totally from the field of education”

    This is not true, he says so very clearly in the following talk that the voucher system is a realistic transition from public to private—stressing that realistically we cannot pull the carpet from under dependent people’s feet and expect them to figure out the rest themselves. He did admit certain spheres required public involvement, but education was not one of them.


    Also the idea of “200 seamstresses” is fantastical—microfinance institutions never have 200 people looking for sewing machines at the same time, there is always a natural and varied mix. Further, it’s strange to hear advocating monopolies and power structures as opposed to individual empowerment—there is nothing stopping the receivers of these loans from hiring and growing their business through scale—they have the choice to do what they like. With government or big business running the show, they certainly wouldn’t.

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