Microfinance is No Silver Bullet for Poverty

The data is starting to come in on microfinance. Steve Beck and Tim Ogden from Geneva Global discuss various aspects of accountability in microfinance in their recently published article in Harvard Business Review entitled "Beware of Bad Microcredit."

Their premise is that "...little evidence exists that micro-credit borrowers, on average, commonly, directly, and quickly escape poverty, as many assume. Poverty, as always, is resistant to silver bullets, no matter how popular and appealing to donors they are." They site a recent evaluation by the MIT Poverty Action Lab that found that "very little of each additional dollar of disposable income is spent on any form of investment, or even on food and shelter." They note that John Hatch, founder of FINCA International , has argued that "90% of micro loans are used to finance current consumption rather than to fuel enterprise." Beck and Ogden go on to argue:

Repayment rates and other commonly reported measures tell us nothing about the impact of a program on poverty. There are a number of promising trends in microcredit, including improvements in outcome measurement and reporting, the influx of capital with rigorous financial and social benefit requirements, and the growth of commercial microfinance organizations with the scale and discipline required to drive down the costs of service delivery. These trends are nascent, however, and expert due diligence around investment in any program is therefore essential.

Is it me, or does this sound exactly like what experts always say about investment bubbles? If this is a bubble, like small caps, dot coms, real estate, emerging markets, and others before it, funders would be well advised to listen closely to Beck and Ogden's advice:

First, insist on a set of clearly defined measures of success -- such as income growth, quality of housing, school enrollment, and nutrition -- for microcredit programs you support, and be willing to pay for the measurement.

Second, invest in improving the effectiveness of microcredit -- for example, by supporting vocational training and financial literacy for borrowers, improving access to technology that lowers the cost of lending and borrowing, or lobbying for regulatory changes that make starting and growing businesses easier.

Third, look for opportunities to support the growth of small and medium-size companies in regions of poverty. Businesses that create stable, productive, nonexploitative jobs and vibrant local economies are the only sustainable program for mass poverty alleviation ever created.

It's not clear how you are going to do all this when you are sending $100 on-line through kiva.org, but hopefully I'm wrong and this is not a bubble. We'd love to hear from others on the topic.

Carla E. Dearing

Comments

Hi Carla, thank you very much! Just wanted to ask where you found the quote from John Hatch about the 90%? Thx in advance

Posted by: Archie

I am the co-author of the piece in question. To answer the prior commentors question, the Hatch statement was made at the 2006 Chicago Microfinance Conference sponsored by the University of Chicago's GSB.

For other experts opinion on this topic, you (and others) may be interested in listening to the excerpts from a recent conference call on microfinance hosted by Geneva Global. The audio can be downloaded from www.beyondphilanthropy.org

The HBR article gives that quote.

Posted by: Carla Dearing

I lead a Miami-based, all-volunteer effort that has 6 years experience providing micro-credit loans to displaced families in Colombia. For us, it is essential to have excellent grassroots partners on site to select, train, mentor and monitor the loan recipients. We currently operate in 4 areas of Colombia.

The Colombia Project has one quantifiable measure which is repayment rate. On our due diligence visits, we learn the real measures of success -- that programs have been replicated by other funders, including local government; that loan recipients have started various types of group banks to provide a safety net in time of need; that loan recipients have found ways to aid those less fortunate and to mentor other small business projects.

It is hard to micro-manage effectively across cultures. We have found that if we choose our partners well and work closely to support them, the small amount of money that we send can make a difference. We are looking for opportunities to grow, without sacrificing the flexibility that allows our partners to address the strengths, weaknesses, opportunities and threats facing their specific community.

In places where education, health care, clean water, sewers, decent housing, all-weather roads and even jobs are out of reach, I certainly agree that micro-credit loans are not going to quickly or irrevocably break the bonds of poverty. Micro-credit is an essential tool in the toolbox to fight poverty, but it is not the only tool and it is not for everyone. To give credit to someone who does not have a viable plan to pay it back simply creates another problem and another failure to burden the poor. But if micro-credit is used strategically, to aid those who can pull themselves up a notch on the ladder out of poverty, those successes not only help those families but serve as examples to others.