Is this microfinance beneficiary typical of the funds’ experience?

By Mal Warwick

Microfinance has taken quite a beating in recent years, as evidence has accumulated that its impact falls far short of the impressive gains predicted in its heyday after Muhammad Yunus was awarded the Nobel Peace Prize in 2006. A notable contribution to the debunking effort appeared in 2012 with Berrett-Koehler’s publication of Confessions of a Microfinance Heretic by Hugh Sinclair. (My review of the book is here.) 

Recently a post in Grassroots Capital Management offered a lengthy and detailed response to the mounting criticism, citing reasonable returns to investors, favorable impact on the health and lifestyles of borrowers, scaling financial inclusion, and success in “targeting features and causes of poverty.” Eradicating poverty was not cited as one of the field’s accomplishments. 

To put the post in perspective, Grassroots Capital Management (GCM) is a US-based impact investment manager doing business as a B Corporation. According to its website, the firm’s “mission is to help eliminate poverty and strengthen communities through investments in small and micro businesses, affordable housing, sustainable agriculture and affordable education, in both developing countries and the US. Together with its India based partner, Caspian Advisors, GCM and its predecessors have launched five Microfinance funds since 2003.” In other words, the company has a lot of skin in the game. That fact doesn’t necessarily imply anything questionable — it’s just worth noting. 

Having reviewed the evidence on microfinance, I concluded from reading the article that GCM protests too much. The post on its blog justifies continuing investment in microfinance for two broad reasons: microfinance offers a path for investors to receive reasonable ROI while achieving “impact” in bottom-of-the-pyramid communities in diverse ways. I have no argument with those who want to make money from the effort, at least in theory — although I can’t forget the massive enrichment schemes that some MFIs have used to return millions to their insiders, in India, in Mexico, in Nigeria, and in other countries. Also, as Hugh Sinclair has taught me, I find it impossible to overlook the role that for-profit microfinance institutions (MFIs) have played in saddling poor people with unreasonable levels of debt and even causing the collapse of credit markets on a national scale in some countries through overzealous profit-seeking by the funds. However, I don’t think that for-profit microfinance is necessarily a bad thing; MFIs can be operated honestly and with priority given to customers’ needs rather than the institutions’ bottom line. The problem is that too ofter they’re not. 

However, my principal quarrel is with the broadening of “impact.” Muhammad Yunus and his many cheerleaders sold us microfinance as a vehicle to fund BOP enterprises that would help poor people lift themselves out of poverty. For the most part, the industry has continued to promote that erroneous picture of the field. Practically every MFI website features vignettes of poor women who have thrived through businesses built on microloans — yet the evidence is that, in almost all cases, these stories are the exception. Microfinance has utterly failed to eradicate poverty — in part because the overwhelming majority of microloans have financed consumption, not businesses. An article in Harvard Business Review notes, “Many heads of microfinance programs now privately acknowledge what John Hatch, the founder of FINCA International (one of the largest microfinance institutions), has said publicly: 90% of microloans are used to finance current consumption rather than to fuel enterprise.” 

I welcome the news that some have found ways to “target” microfinance to achieve ends such as financial inclusion and healthcare improvements. But those efforts ignore the main question, and the mission originally stated for microcredit: how can we help the poor lift themselves out of poverty — by substantially increasing their income — and narrow the economic inequities that plague world society?


3 Responses to “Is microfinance the answer?”

  1. Burt Hamner

    There is a version of micro-finance that actually may work: Pay-as-you-go PAYG or rent-to-own financing of hardware products like solar lights. In fact any electric device that has a cell phone chip and remote disabling feature can be financed this way. Customer rents it, and if they don’t bring it back or pay the device is disabled remotely. At least 4 companies in Africa are doing this already. So we should encourage focus on this new payment system to finance hardware devices that pay for themselves in savings eg for charging phones or replacing kerosene fuel with LED lamps.

    • Mal Warwick

      Thanks, Burt. This certainly is promising. It will be interesting to note how widely this approach spreads. It’s unfortunate, though, that the technique is limited to devices with microchips embedded.

  2. Burt Hamner

    The PAYG finance might work even without microchips, for devices that use a battery. When the battery dies the user has to go find a charge for it, so could return to vendor and just rent the device.


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