SSIR Article Debunks Microfinance

The current issue of Stanford Social Innovation Review features a provocative piece by Aneel Kamani which disputes the efficacy of microfinance. It's a drag because so many of us really want to believe that a $20 loan (not even donation!) can lift some scrappy lady in Bangladesh out of poverty. This blog has lauded microfinance so miuch, it's got its own category. But according to Aneel the Party Pooper:

To understand why creating jobs, not microfinance, is the better solution to alleviating poverty, consider these two alternative scenarios: (1) A microfinancier lends $200 to 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.

He also states the obvious, which is that developing countries probably don't have any higher percentage of entrepreneurs than developed countries (in which 90% of the workforce is made up of laborers, not entrepreneurs.) If that weren't enough, he also notes that there is little, real evidence that proves microfinance is an effective strategy for lifting people out of poverty.

This sort of article, which debunks the silver bullet of the year, does far more than question a social change strategy achieving massive investment on both the profit and for-profit side. It also elevates the concept of philanthropic strategy, and the recognition made by discerning donors, that some dollars are spent more effectively than others. I’m not saying great philanthropists always bet on the right horse, but I’d like to believe the very best engage naysayers and rabble-rousers who can help them think outside the box. Unfortunately, that’s really hardto do in the all-too-polite club of American philanthropy.

Susan Herr