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Microfinance Criticism
With a group of people who largely agree microfinance, it becomes all to easy to slip into a routine of accepting the industry as a whole. I came across the piece below and wanted to share it because I think that opposing views are always important to read and understand as they will allow for a better understanding of our own positions.
Please read this and add your comments/responses/rants/criticisms about the piece.
Jonathan Lewis: "Microfinance: Virtuous or Vulgar?"
My blog last week on the deplorable microfinance situation in the Indian state of Andhra Pradesh concluded that -- while hysteria and expediency are precipitating a media and political overreaction -- the microfinance industry needs to take heed.
The mythology of microfinance extols the marketplace as a cure-all for poverty, then resists governmental oversight as counterproductive and simultaneously ignores the industry's bad actors. That is a formula for failure.
Andhra Pradesh brings forth an important question which needs asking, and I was remiss in over-looking it: Why is it indispensable for microfinance programs to achieve financial sustainability?
The most radical and startling economic development driver for microfinance programs is the expectation that they must be profitable or -- in economic development terms -- sustainable. This is not a standard typically used for other public goods and services.
Most anti-poverty programs -- from health clinics to water projects to schools -- are budgeted with long-term external subsidies, donations, grants and in-kind assistance. As public goods, it is expected that the long-term community benefits deserve underwriting by taxpayers or donors.
Neither Silicon Valley companies in California nor destitute truck drivers in Cameroon are expected to capitalize their own roads with private investment repaid from private economic activity. Public sector investments of $1.00 in United States roadways generate $6.00 of economic activity and the indirect return in jobs, taxes and quality of life improvements is deemed sufficient.
In contrast, microfinance funders expect the poor to bootstrap themselves into profitability. If local microfinance programs don't increase microloan interest rates to at least cover costs, development funders and commercial markets soon look away.
Because international aid agencies, governments, foundations and donors do not have unlimited funds and because microfinance competes for scarce global resources with other worthy causes, the microfinance intelligentsia has convinced itself that private capital markets can be a steady cornucopia of cash. In a virtuous circle, social investors invest, microfinance pays profits and poverty is whisked away. "Doing good by doing well" goes the slogan.
As I raised in a recent speech in San Francisco, "Is social entrepreneurship about creating a viable asset class to make money while doing good or about building a social movement for economic justice? Are we advocates for the poor or advisers to the well-off?"
Paradoxically for an anti-poverty movement built on capitalism, a whiff of "microfinance Marxism" hovers in the air. As Marx viewed the human condition principally in terms of economics, some microfinance leaders are attracted exclusively to its economic entrepreneurism. As impoverished women are monetized, the unintended consequence is microfinance fulfills its mission by making women more profitable chattel (or, in the parlance, creating self-help business opportunities). The idiocy often begins by defining the microfinance mission as access to financial services, instead of poverty reduction.
In the absence of any other option, there is still something vulgar about charging the impoverished a penny more than is necessary to make microfinance programs self-sufficient. Our enlightened self-interest and our own humanity should question the wisdom of asking the poorest of the poor to pay dearly for their own futures.
Tags: criticism, impact, jonathan, lewis, microfinance, news
Views: 489
Replies to This Discussion
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Permalink Reply by Sasidhar Thumuluri on -
I disagree with Jonathan Lewis on this. I think microfinance should be totally financially sustainable unless you are dealing with situations such as disaster/post-conflict/vulnerable populations such as HIV victims etc. I think we have a tendency of overselling poverty effects of microfinance. It is just another service that is scarce and MFIs try to fill the gap in financial system.
If we all agree that cell phones are good and make a huge social impact we cannot just say it is about poverty eradication and argue that it can be OK to run a telecom company in losses since poor cannot pay usage charges. There could be some element of cross subsidization until the business stabilizes though but not beyond that. Otherwise we will end up with the same conundrum as other poorly implemented aid driven development programs.
I have posted the same article under a the tile Is microfinance a public good yesterday?. Please read.
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Permalink Reply by Oluka Peter on -
this article says it all. sustainability means transferring all the costs of an MFI to the so called clients (even covering the wasteful nature of the MFI that may be embedded in the MFI's operations. in the end the clients who fall pray to extortionist rates of interest have to sell whatever they may have pledged to reward the mfi's wastefulness. may be it is time to rethink the model.
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Permalink Reply by Tom Murphy on -
Can I ask you to offer some suggestions for what a new model will look like?
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Permalink Reply by Tom Murphy on
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Ha, sorry I missed your post on the topic! Thanks for adding the link.
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Permalink Reply by Sasidhar Thumuluri on
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Peter - I think you are over-reacting. You should know that 80% of MFIs in the world still function as non-profits and majority of those are not yet broken even. This implies that unsustainable MFIs do not rub all their costs on clients which is why they are still not sustainable. I would like to understand what exactly you mean by wasteful expenditure and what alternatives do you suggest to current MFI model.
Banks tried reaching these clients for decades and failed even though their rates seem reasonable than MFIs. It is a myth that MFIs interest rates make people paupers. One should not forget that the services offered are usually at the doorstep. I want to know what kind of costs structures you have in mind for this kind of business that can make it cheap to deliver unsecured credit to the needy.
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Permalink Reply by Sasidhar Thumuluri on
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Tom - I think there is nothing wrong with model. The problem is in rhetoric. Microfinance proponents often oversell the poverty aspect of business and get into these troubles. Study after study proves that Microfinance can only do so much to anybody's livelihood without other essential ingredients. Like I mentioned in my previous comment, there are many other businesses that make difference in lives of the poor, for example cell phones, but telecom companies never pose themselves as saviors of the poor and make awful profits. Most profitable MFIs are known to make 5% margins but cell phone service providers make at least 20% margin in many markets. When you say you are helping the poor on one hand and pocket millions on the other, these kind of criticisms are not surprising. I think it is time one should be honest and transparent. Other issues such as greed, predatory lending and over-indebtedness should be addressed through proper regulation and public education which are state's responsibility. Just like FDA has strict recall policy for spoilt food, a good financial regulator should also impose write-off policy for a loan given by compromising set norms.
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Permalink Reply by Sasidhar Thumuluri on
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Liza - may I ask which investor has ever made MFIs increase interest rates? Social or not, it is in any investor's best interest to reduce rates because it attracts more clients by beating competition. Smart investors gain from growth rates of business and not sheerly from margins business makes. That is why Walmart is not just one of the most profitable corporation in the world, it is also one of the cheapest in terms of cost of goods it sells. Notwithstanding the criticisms it attracts I think the secret of their model is low value high volume which is what any enterprise, social or not, that has huge market potential should adopt as it's policy to be successful.
Social performance in our lexicon to me is not much different than customer service in corporate world's lexicon. If your customers are happy they will keep buying your stuff and you make profits. Similarly in a social enterprise if your clients are happy, healthy and wealthy they will keep seeking the services, and society as a whole will benefit as a result. I think it is just a matter of semantics, any good business must bother about it's client's welfare. Don't you think?
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Permalink Reply by Sasidhar Thumuluri on
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Here is a candid note by Thomas Dichter one of the most eminent critic of development work in general and Microfinance off late.
http://www.networkers.org/userfiles/Microcredit%20All%20Dressed%20U...
I agree with most of his views. I think he is right that microfinance can only have marginal developmental effect on entrepreneurial poor but largely it is a consumption smoothing tool for majority of the poor who run businesses for survival and not because they are good businessmen/women. He makes a compelling argument that no developed country has ever grown on the basis of increased financial access to the poor and there is no strong reason why it should be true for now developing countries. Microfinance is becoming victim of it's own deeds since the rhetoric does not match the reality.
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Permalink Reply by Nita Nehru on -
Great discussion going - glad I'm joining in.
I personally believe that Microfinance DOES need to make a profit because, unfortunately, profits are the only road to sustainability. There are many great non-profits and NGOs that do wonderful work but suddenly, that work comes to an end because their funding dries up. This would be a tragedy for the microfinance sector. So I dont think the issue is being profitable, but rather, how MUCH profit is necessary to stay afloat. The problems inherent in a profit motive, however, are that it is hard to remain dedicated to making only minimal profits if one sees the chance for making much more. Hence, high interest rates charged to borrowers.
But my understanding of the MFI crisis in Andhra Pradesh was that it was not due to high interest loans alone, but also because borrowers were over-indebted to many different institutions, not only one. This leads me to believe that there must be some government regulation / oversight into MFIs to ensure that MFIs cannot take borrowers who already have outstanding loans from other institutions. Correct?? Thoughts??
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Permalink Reply by Oluka Peter on
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nita i agree with you based our own experience in uganda. the issue of profits sustaining mfis does not need debate. what you raise as how much profit is what needs to debated upon. once upon in uganda mfis (then ngos) were charging exploitative rates on their loans and using the groups to mobilize loan repayment without ever rewarding these groups for the wonderful job done to make the mfi report 100% recovery rates. the oversight role of government ought to look in to this too. in uganda the borrowers were in some instances borrowing to repay their loans. and when the road of borrowing to repay eventually closed as expected, some of these clients lost the little they had to the lending mfis.
once again lending rates that go through the roof must be debated by the industry. there is no need exploiting those who have no access to financial services just because they do not have access to financial services.
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Permalink Reply by Tom Murphy on
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I think you are largely right as well. However, it seems that the current set of regulations have gone so far that they threaten MFIs very livelihood. A balance has to be found (Laffer curve type balance) that allows for the greatest possible returns for investors and clients. As it stands, it looks like that point of balance is still a bit elusive. This is why I turn to people here who have experience studying and practicing microfinance.
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Permalink Reply by Tom Murphy on
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Yes, and I would throw in researchers who are using evidenced based data to determine what works and why.
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