Tuesday, June 14, 2011

Can microfinance be a friend to the poor?


A UK parliamentary group report questions how the microfinance sector works and what it is trying to achieve, and asks for more rigorous evidence to be made available

For much of the last 15 years, microfinance has enjoyed an unparalleled reputation as a surefire way to reduce poverty. Through much of that time, there were voices questioning this orthodoxy and pointing out that it wasn't that simple, but they found themselves ignored. Well, their time has finally come.
At an event in the House of Commons on Wednesday to discuss a new report of the all party parliamentary group on microfinance, academic experts declared themselves delighted that finally their criticisms were being heard and that the microfinance sector was being forced to question how it worked and what it was trying to achieve.
The report, Helping or Hurting: what role for microfinance in the fight against poverty?, is a sensible first step in beginning to tackle the many problems that have been so well covered in the media in recent months – ranging from the spate of debtor suicides in Andhra Pradesh, India, and accusations that commercial microfinance institutions are tantamount to loan sharks with habits of predatory lending (I have debated whether microfinance is a development panacea, or an ineffective poverty trap and asked if it is merely a neoliberal fairytale).
The report admits one of the first complaints of the critics: that the evidence of microfinance's impact on poverty is hugely conflicting. That's partly because the sector has developed very rapidly, diversifying into all kinds of different schemes around the world. So one scheme may work in one place but could be disastrous in another. There are countless variables because microfinance is never operating in a vacuum, but in the context of many social and economic circumstances. For example, research in Bangladesh has been relatively positive about poverty reduction, but is this because of microfinance or because the economy has been growing at the rate of 8% a year? The research has simply not been rigorous enough.
The report urges a much better appreciation of how hugely diverse the sector has become: it can encompass small NGOs working with the poorest, right through to commercial banks lending to the relatively well-off. Has its focus shifted from helping the poor to financial inclusion – a subtle but crucial difference? Furthermore, microfinance has developed well beyond credit, branching out into savings, insurance and remittances.
These have vastly different impacts on the poor, and the report maintains this has not been sufficiently understood. For example, Anton Simanowitz, of the Insitute of Development Studies, pointed out that very different regimes for dealing with delayed repayments could make a big difference. In one scheme he saw, borrowers were forced to sell productive assets vital to their businesses, such as sewing machines, to pay off debts. An outcome at odds with any aim of helping the poor to improve their income.
Microfinance has been trading on an undeserved reputation. The report urges an end to the hype and a much more critical, nuanced approach from donors as to whether a particular microfinance scheme actually does what it claims to do and, through social performance evaluation, can prove it. Muhammed Yunus, the inventor of microfinance and founder of the Grameen Bank in Bangladesh, calls this a "branding" problem in which the sector is being tarred by the behaviour of rogue operators, said Julia Modern, one of the report's authors. The key issue is how to tackle this problem through better regulation and accreditation: this is likely to be the area that the parliamentary group on microfinance tackles next.
Significantly, the report did not go as far as arguing for an end to commercial microfinance, which Yunus has suggested may be necessary. Rather it suggested that with 2.7 billion people "unbanked" in the world, commercial organisations need to play a role. Dr Susan Johnson, of Bath University's department of economics and international development, backed up the point, arguing that some NGO schemes had much higher interest rates than commercial ones. She had an example of a self-help microfinance scheme spreading rapidly in Kenya despite prohibitive interest rates. It was too simplistic to argue that the problems of microfinance were all to do with its commercialisation in recent years.
But the "strongest message" the report wanted to send was that the sector is "unbalanced", and that while access to loans has expanded greatly in the last 15 years, other financial services such as savings, insurance and remittances have lagged far behind. The report urged the UK's Department for International Development to play a central role in "refocusing" the sector.
The report also asked for more rigorous evidence. Some microfinance schemes work, but what makes them work needs to be identified. At the moment that evidence, despite plenty of research, doesn't exist – a puzzle that Johnson rightly questioned.
Many of the questions now being asked of microfinance were raised right at the start, added Johnson, back in 1996 when the idea began to develop huge momentum. But they were ignored, and only now are people prepared to listen to the difficult questions. "We said from the start that 'credit was debt as soon as it is handed to a poor person', but were marginalised." She hoped the report was the beginning of microfinance rediscovering its original mission – to help poor people.

1 comment:

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