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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: 496
Replies to This Discussion
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Permalink Reply by Tom Murphy on -
Glad to be predictable, but you are right that all of these parts must work together!
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Permalink Reply by Sasidhar Thumuluri on -
This subject is indeed never ending. Profits and regulation in microfinance. I think Andhra Pradesh crisis has far too little to do with interest rates, profits or for that matter over-indebtedness. I am not saying none of these exist there. All are rampant but the crisis is not triggered by any of those. It is essentially state created and not market created. Even today after about 3 months when MFIs reduced interest rates (mind you MFI rates in India are already among the lowest in the world) and virtually stopped lending the government seems to have no interest in reviving the sector.
One should be careful in differentiating between multiple lending and over-indebtedness. Having more than one loan is not necessarily a bad thing. So if two or three MFIs are lending to the same borrower it does not automatically mean the borrow is over indebted. A good MFI would evaluate the absorption capacity of a borrower taking into account his/her existing financial obligations before extending a loan, regardless of how many other he/she might have outstanding. A good regulation should encourage MFIs and banks to follow such basic due diligence.
I disagree that MFIs should not compete. Competition is always good for the consumer because if it eventually lowers prices and brings in efficiency. What is not good is predation. MFIs should not push loans through the borrower's throat. Hence a regulatory environment that prohibits reckless disbursal of loans can go a long way in helping build a healthy financial system.
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Permalink Reply by Stefania Zerella on -
I'm a new member of Seep, my name is Stefania, I'm italian.
I'm not an economist, so please, forgive me if my post will no be correct....
I've been in Bangladesh to study microcredit at Grameen bank last summer. I spent a month in Dhaka and around the country, speaking with the people, observing the grameen model, seeing how the microcredit works in the country where it is became so famous.
In my opinion microcredit and microfinance are the best way to help poor people...in theory. In practice there are some problems, one is the interest rate but it is not the most important. Sometimes the system became too much big and it is difficult check and follow every borrower. Many microcredit organisation in all the world loses the point and they care only the numbers. Often the number are not real, 97% of recovery rate is just a number, but if we compare the number and the level of poverty of the borrowers the our 97% is just a number. It says us that 97 person on 100 have returned the loan, it don't say us if the same 97 people are out of the poverty line, and they aren't. Unfortunately many borrowers ask loan to repay another loan, to pay a wedding party, to start a business which is not good, to please the husband or the father. Off course the borrowers have to follow a training but when the customer are thousand, the training is not so accurate and there is not control before, during and after the credit's request. So people became number and in this way the system can colapse and we see situation like that in Andhra Pradesh.
In my opinion the problem is not the interest rate or the profit, but the problem is the relationship between poor and microfinance entrepreuner or NGO or organisation. When people became just a number even the perfect idea became useless because the first interest is not the people but the money...
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Permalink Reply by Stefania Zerella on
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Hi Liza
yes, I think small MFI's are more people-centered, they can work well and they can help more the poor to run a small business. My goal is create a small microcredit reality in Tanzania, if God helps me :-)
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Permalink Reply by Nabe Kanfiegue on
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I like this your perfect statement 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. >> I need your partnership send me your contact.
The President of:
Union Snydicale des Agriculteurs
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Permalink Reply by Fehmeen Khan on -
An interesting question is being asked here and I couldn't help but participate. The thought that small MFIs are more people-centric seems logical because they're closer to their customers in general. However, I think there are good and bad MFIs and I've heard of many small NGOs that aim to help the poor but in that process, help themselves more (mostly because they don't have anyone to report too).
Stefanie, best wishes for your venture. We'd love to hear about it once it's formalized and would also like to profile it on our blog - Microfinance Hub. Keep us posted.
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Permalink Reply by Stefania Zerella on
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You are right, if an NGOs is small but it is without control it can help more themselves than poor...
The problem is why an NGO or organisation, big or small, decides to create a microcredit program. When I studied international cooperation, our teachers told us NGO, often, wrote projects just to survive, to have enought found to pay the workers and the whole organisation. The NGOs should start to the real problems and needs of the people but, sometimes, they have to create projects just to raise found, they have to follow the head line of EU or UN or other big donors and if the politics says that this year, for example, is the year of Latin America, NGOs have to cooperate with Latin America, even if the most problems are in south Asia...so if the head line speaks about microfince they have to run microfinance project. In this way is very difficult helping poor.
I agree with you, there are good and bad NGOs, and there are good and bad MFIs.
I'll inform you about my venture, for now I'm deciding to go in Tanzania for some week to try to understand how tanzanian law says about MFIs...
Thanks for your replay!
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Permalink Reply by James Kwame Yinye on -
I think I do not share Jonathan Lewis view that "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. " Firstly, let us examine the mission of microfinance. Is it poverty alleviation or financial access? If it is poverty alleviation, then microfinance becomes a public good which calls for social investors and Jonathan would be right in his assertion. Even then, we would need to go into theories of poverty to understand poverty better and determine whether giving only money to the poor is a means of allivaiting poverty.
To me, the mission of microfinance is to provide financial access to the financially excluded poor. If this is true, then in delivering the financial services to the poor, the cost involved must be recoverred to make it sustainable. My only concern of the overcommercialisation of microfinance is that it had then to completely exclude the ultra or hardly benefit them compared with the success rate with the moderate poor. Maybe we should be talking about looking beyond the modern day microfinance to find means of providing better access to financial access for the ultra poor
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Permalink Reply by Petro Mattaba on
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There are three objectives for microfinance, sustainability, outreach and impact. Microfinance institutions should lower their operating costs and charge interest rate which cover operating costs so as to be sustainable. Outreach can only be guaranteed when MFIs are sustainable. However, MFI should make sure that their products and services have a positive impact on the target community basing on their mission. The current debate in microfinance industry was raised by Comportamos a microfinance institution in Mexico which make a huge profit by charging interest rate nearly to 100% to the poor. It is for the best interest of MFI to be sustainable, but we have to strike a balance between the need for sustainability and impact other wise there is a trade off. In the need to be sustainable you end making your clients more poor
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Permalink Reply by Esayas Bekele Geleta on
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I strongly agree with you Tom ( although it seems too late to comment on your post). As we all know microfinance is one of the hyped development paradigms, considered as a best development strategy not only to poverty but for women's empowerment. The over statement of microfinance value is not limited to policy circles, but it is disseminated in local regional levels in the most remote and outside main stream communication zones of the world such as in the rural communities of the Amhara region in Ethiopia. Critics of microfinance even in these areas are regarded as cynic, who are sceptical of the poor's capability and willingness to bring their own development. Microfinance goes hand in hand with a number of development conceptions and assumptions, including self-reliance, participation, co-operation, self-help initiative and more importantly entrepreneurship and job creation. This makes it easier for its proponents to dismiss resistances.Despite the fact that it is often assumed that it serves the poor, a number of studies have indicated that it does not serve the poorest of the poor. Even when it serves the relatively better off section of society, it frequently results in making them indebted. The main objective of development is to bring a good change to the livelihood of the poor, and the primary beneficiaries of development should be the poorest of the poor. But microfinance in so many instances intrinsically fails to do that.
However, huge amount of funds (for example, 1.2 billion dollar was allocated by the World Bank for expanding microfinance) are directed towards it and that has a major negative impact on other vital development initiatives and interventions such food security. In particular, in the poorest countries of the world, in countries of food crisis, such as Ethiopia, where poverty is a national adversity, prioritizing microfinance over other indispensable development initiatives is misinformed, misguided practice and brings a long term negative consequences.
In places of unpredictable environmental conditions, even the relatively better of section of society can hardly succeed in running a profitable enterprise and paying interest rates which are a way above commercial rates. Unsubsidised microfinance, as pointed out by Tom, despite its rationalization on the basis of the sustainability discourse, is doing more harm than good to the poor, especially to the poorest of the poor.
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Permalink Reply by ARCIA COLON on
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Estimado amigo.
EStamos interesados en Crear UN ENTE DE FINANZAS ETICAS. ?De que manera puedes tu ayudarnos? Por favor respondeme.
VER parte de nuestro proyecto aqui:
http://crandofinazaseticas.blogspot.com/2012/06/busco-angeles-inver...
Petro Mattaba said:Hay tres objetivos para las microfinanzas, la sostenibilidad, alcance e impacto. Las instituciones de microfinanzas deben reducir sus costos de operación y la tasa de cobro de interés que cubran los costes de operación para que sea sostenible. Alcance sólo puede garantizarse cuando las IMFs sean sostenibles. Sin embargo, las IMF deben asegurarse de que sus productos y servicios tienen un impacto positivo en la comunidad de destino basándose en su misión. El debate actual en la industria de las microfinanzas fue criado por Comportamos una institución de microfinanzas en México que hacen un gran beneficio mediante el cobro de la tasa de interés de casi el 100% de los pobres. Es por el mejor interés de las IFM a ser sostenible, pero tenemos que encontrar un equilibrio entre la necesidad de la sostenibilidad y el impacto de otra forma existe un trade-off. En la necesidad de ser sostenible, que terminan haciendo que sus clientes más pobres
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