NEWS WIRE: Microfinance Effectiveness Examined

Source: Times Online

Original article available here.

UNITED KINGDOM, April 28 – Our correspondent finds doubts raised about the effectiveness of one of the big ideas in the fight against poverty.

The statistics make mightily impressive reading: microfinance is worth a dizzying $6.5 billion; its ten largest funds grew at an equally impressive 32 per cent last year alone. It is, according to a report published yesterday, “unscathed” by the global recession. So why is the apparently well-meaning practice of lending small amounts of money to people in poverty so controversial, so much so that its critics think its time has already passed? In short, does microfinance really work?

According to Aneel Karnani, Associate Professor of Strategy at the Ross School of Business at the University of Michigan, the answer is, in short, no. “The problem with microfinance is that it simply doesn’t do that much to lift the poor out of poverty,” he argues.

“Countries that have lifted people out of poverty have not done it through microfinance. It’s been through the development of larger enterprises which create jobs – for example, in places like China and Vietnam. The question is: ‘Could we not use the resources in a better way?’ – for example, creating garment factories rather than creating individual entrepreneurs by giving them each a loan to buy a sewing machine.” Unfortunately, microfinance will grow and take in more public and private money.

“There is a lot of romanticisation of microfinance: the United Nations and the World Bank is enamoured by it and putting money into it. Even private money is going into it – you see a lot of rich entrepreneurs, like Pierre Omidyar [the founder of eBay], giving money to microfinance because this is what they think is helping the poor. It sounds like a wonderful notion: give someone a $100 loan and they can lift themselves out of poverty. But the evidence suggests otherwise.”

Such criticism, as Professor Karnani says, is not entirely fashionable. Ever since Muhammad Yunus, founder of the Grameen Bank, loaned a Bangladeshi woman $27 to start a business in the mid-Seventies, microfinance has been seen as the saviour of the world’s poor. Dr Yunus has loaned more than $7.6 billion to 7.7 million people in Bangladesh, at interest rates lower than those of local loan sharks, with Grameen a famously not-for-profit organisation. He was awarded the Nobel Peace Prize in 2006 for his work.

But talking microfinance now comes with caveats, qualifications, nuances – not least judging the priority that should be given to alleviating poverty over driving efficient economic growth, be it on a personal or national level.

Vineet Rai, chief executive of Aavishkaar, a micro venture-capital firm in India, says that banks now focus on making finance available as cheaply as possible rather than on poverty reduction: “The desired outcome is that people will come out of poverty – but unfortunately it is not the outcome on which microfinance focuses. Having a microfinance loan does not mean that you will get out of poverty and therefore it does not really matter if the money comes from private equity funds or venture capital funds or government or not-for-profits.”

Xavier Reille is a senior manager at the Consultative Group to Assist the Poor (CGAP), a consortium of agencies trying to expand access to financial services for the poor in developing countries, whose report has high-lighted the recent rise of microfinance. He says that microfinance “provides financial services for the poor and the financially excluded and recognises that the poor need a broad range of financial products” – but adds that things are getting “blurry” as more commercial companies jump on to the microfinance bandwagon.

“Using the term microcredit is so loaded nowadays,” says Helen Alexander, of ProCredit Holding – the top microfinance investment fund, according to the CGAP research. “Dr Yunus’s approach is totally legitimate, but while we give uncollateralised loans and give them to very small enterprises, we would never claim to be lending to the poor. We do not give consumer loans, but entrepreneurs can increase their income using loans from us.

“We’re somewhere in the middle between the Grameen approach and the commercial banking system. We define our social objectives differently. We see our role as deepening the financial sector and strengthening the enterprise sector and the banks in the countries in which we work with a view to having them create the employment and wealth that the countries need.”

Things have moved on a lot since Compartamos, the Mexican microfinance bank, angered Dr Yunus’s followers by going through a stock exchange flotation in 2007. The bank was accused of profiteering from the poor with its 100 per cent APR interest rates. “The rate should be low enough to support income generation for poor people rather than generating income for investors,” Dr Yunus said.

The bank responded that “the challenge of poverty is much larger than microfinance itself”. The Mexicans, some now argue, may have been right.

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