Think Again: Microfinance

Small loans probably won't lift people out of poverty or empower women. But that doesn't mean they're useless.

BY DAVID ROODMAN | FEBRUARY 1, 2012

 

"Microfinance Is Useless."

No. It would be wrong to overreact to the hype about microloans and dismiss the entire enterprise as a waste of money and effort. Twenty years ago, journalist Helen Todd spent a year following the lives of 62 women in two Bangladeshi villages served by Yunus's famous Grameen Bank. Of the 40 who took microcredit from Grameen, all stated business plans to get the loans: They would buy cows to fatten or rice to husk and resell. A few actually did those things, but most used the money to buy or lease land, repay other loans, stock up on rice for the family, or finance dowries and weddings.

That's probably just fine. As the book Portfolios of the Poor shows, the people said to live on $2 a day actually don't. They live on $3 one day, $1 the next, and $2.50 the day after. Or they are farmers who earn money once a season. But their children need to be fed every day, and husbands don't fall ill on convenient schedules. The need to match an unpredictable income to spending needs with different rhythms generates an intense demand among poor people for financial services that help them set aside money in good times, when they need it less, and draw it down in bad.

All financial services help meet this demand, however imperfectly: loans, savings accounts, insurance, money transfers. A mother can pay the doctor for treating her daughter by getting an emergency loan from a friend, depleting savings, persuading her brother in the city to send money, or even -- if she is very lucky -- using health insurance. That is why the microcredit movement became the microfinance movement and today supports other services along with loans.

Poor people have less money than the rich, but they aren't dumber; in fact they are generally more resourceful out of necessity. If a woman uses a microloan to buy rice or repair a roof instead of starting a business, I hesitate to second-guess her. People in wealthy countries see fit to buy everything from food to houses on credit. Should we expect the poor to differ?

ROBERTO SCHMIDT/AFP/Getty Images

 SUBJECTS:
 

David Roodman is a senior fellow at the Center for Global Development. He is the author of Due Diligence: An Impertinent Inquiry into Microfinance, which he wrote through a blog.

SCOOP

3:35 PM ET

February 1, 2012

Lies, damned lies, and statistics

"But across the 12-18 months (???) over which progress was tracked, the loans did not reduce poverty."

Need to expand the timescale (probably years) before someone could derive anything meaningful. There should be also some relevant (comparable) data for Small Business loans and their impact on communities. And how EXACTLY did they define and measure poverty (Handbook on Poverty and Inequality, by Jonathan Haughton and Shahidur R. Khandker)?

 

HOLLYM

2:04 AM ET

February 2, 2012

Measuring impact

I agree with SCOOP. Even Grameen which is one of the model examples of microcredit says it takes an average of 5 years to lift families out of poverty. So it will be even longer with any of these others with higher interest rates and who do not really focus on the educational component. From what I witnessed after one year you will find people eating a bit more, get access to toilets. Then they starting to improve their housing, and then finally lift out of poverty. I saw a visible difference with the people I was filming after several years. And I also saw them build confidence and status within their families.
The ones that it wasn't working for all had health issues in their families. And the ones that I've only heard about but that exist and are abusing the system by taking from more than one microcredit provider, are just like people here who abuse their credit cards or get mortgages way beyond their means. It is sad when that happens, but the majority are able to use them well, and they should be using them for income generating.
Holly
http://bonsaimovie.com

 

HOLLYM

2:10 AM ET

February 2, 2012

Additional note

I did see certain borrowers dealing with business ideas that failed for some reason, but then I'd see them adapt and try other things that ended up working out. Grameen warns borrowers that everyone will face a natural disaster, a health issue and a business failure in their lifetimes, which is why they also start their borrowers off with savings accounts. There are some good lessons on financial responsibility that can be learned from what they are doing. We used to have a society that valued savings as well and since the birth of credit cards in the 70s, it's been a downward spiral.

 

HOLLYM

1:19 PM ET

February 2, 2012

A few more things

I did want to say that I do applaud David for looking into the problems with microcredit and I do hope that some industry standards get put into place and that some sort of certification or ratings system will come about soon.

But I also did want to add that I did see many of the children of Grameen borrowers actually attending university and really moving forward. Aroti who I followed and who had been with the bank 15+ years had both of her sons in University and getting very good jobs as a result. One was a civil engineer and working in Dhaka when I went on my last visit.

Sorry I have so much to say on this topic, I may keep posting as it comes to mind ;)
Holly

 

LRREED1

8:58 PM ET

February 16, 2012

Not all Microfinance Providers are the Same

What if not all microfinance programs are the same? What if some focus on providing the tools and support needed to help their clients move out of poverty while others focus on reaching maximum scale with a single product?

If that is true, then it would be hard to generalize about whether microfinance is an appropriate tool for the very poor unless you differentiated between the types of programs observed. Unfortunately, while Roodman is very specific about the different types of outcomes microfinance programs can generate, he remains very general about the variety of microfinance programs out there. He uses the data from a few programs on a very short timeline to draw generalizations for all of the wide range of microfinance programs.

Our belief is that the way people do microfinance matters greatly to the very poor. In our experience, those that focus on this client segment often mix credit with other development interventions, such as savings, insurance, health care and education, to help their clients overcome the barriers that have kept them trapped in poverty. We would love to see more analysis and rigor applied to looking at how different combinations of microfinance and other services affect movement out of poverty.

-Larry Reed, Director, Microcredit Summit Campaign
-Jesse Marsden, Research and Operations Manager, Microcredit Summit Campaign

 

KIRBANG

9:53 AM ET

February 2, 2012

microcredit

If a person can feed their family where previously they struggled to do so is this not worthwhile. If a child can go to school where previously they could not is the benefit measured only on a 5 year timeline. Forget lofty ideals and get to basics to see the person to person benefit.

 

COGDISSONANCE

4:04 PM ET

February 2, 2012

Poor Study

Sorry, but you can't judge the effects of micro finance by giving a randomized sample of poor people money. This isn't a medical drug than can be applied (almost) universally, the recipient needs to have the gumption and drive to make something better, and thus the financing helps them achieve their own, personal goal by giving them resources that they didn't/couldn't have access to otherwise.

I expected better analysis in the pages of FP.

 

KORVOSCOP

5:41 PM ET

February 2, 2012

Small loans probably won't

Small loans probably won't lift people out of poverty or empower women. But that doesn't mean they're useless fashion wholesaler. I do hope that some industry standards get put into place and that some sort of certification or ratings system will come about soon.

 

RAY LEVESQUE

1:47 PM ET

February 4, 2012

Money is not the only measure!

When working at these low income levels, there is usually more that just a cash economy operating. Subsistence living including gardening, harvesting and fishing require no cash yet change the poverty equation substantially. This is a glaring omission.

And poverty is also arbitrary and most will never emerge from "poverty", yet many more will eat daily and attend school than before.

Five years is a much better sample base than 12 to 18 months. Sounds like someone wanted study results for an article!

 

H.NICHOLS

8:34 AM ET

February 10, 2012

I tend to agree

You are right; microfinance is not a “silver bullet” for combating poverty. But we need to finally realize that there likely never will be a silver bullet for poverty; one final and definitive solution against it. We are so prone to making these broad pronouncements about what is right and what works. What is really right and what really works, especially when talking about poverty and economic development, will change from place to place and over time. And therein lays the strength of microfinance. It has the ability to adapt to these changes and provide a valuable service to potentially billions of people. Like you said, just because someone lives in a poor third world country doesn’t mean they don’t need access to reliable and functional financial institutions.