Microcredits have long been seen as an effective and simple tool to help the poor turn their lives around. Yet researchers are increasingly questioning whether microfinance programs are really a solution for everyone.
Give a poor man a fish, and you feed him for a day, the old proverb goes. Teach him how to fish and he can feed himself for a lifetime. In today’s development thinking, the saying might be more along the lines of: give him a small loan and he can build up a small fishing business - and maybe even create a job for his neighbor.
For almost three decades, the idea that a small loan or microcredit can help get people out of poverty has dominated development thinking. The idea is simple and attractive: most poor people are excluded from the financial sector because they lack the collateral needed to take out a loan. But group borrowers can vouch for each other. Repayment rates are high, making it an attractive investment option. In the last couple of years, investment funds and big banks have discovered microfinance as a means of making good money - and have been selling it as such to their clients.
'A complete disaster'
The German government brands itself as a 'microfinance pioneer.' Its development agencies spend some 120 million euros on microfinance projects every year. The plan is to continue to do so. The German development agency has recently published a glowing report on the benefits of microfinance in helping poor people escape poverty, empowering women and combating HIV/AIDS.
Milford Bateman says microfinance has been a 'disaster'
But ask Milford Bateman, a British researcher based in Croatia, about the benefits of microfinance and he bristles. He calls microfinance "a complete disaster" and points to the stories of over-indebted farmers committing suicide in India, microfinance bubbles in India and Bosnia and exorbitant interest rates that are making headlines.
"Instead of having this massive reduction in poverty and real economic development, we've had the complete opposite," Bateman says.
He has spent years researching the negative effects of microfinance, which he believes governments and development agencies chose to ignore.
"The idea was hugely attractive: let people help themselves," he says. Microfinance, Bateman believes, absolves governments from the difficult and complex task of designing and implementing effective development policies.
'Built on foundations of sand'
A study financed by the UK's Department for International Development published in August of this year comes to a similarly damning conclusion. It found that over the last three decades, evaluation studies of the impact of microfinance on poor people have been scant.
According to the authors, it remains unclear under what circumstances "microfinance has been and could be of real, rather than imagined, benefit to poor people." The microfinance phenomenon, the report concludes, was built on a foundation of sand.
Part of the problem is that many of the enterprises supported by microfinance start up and then collapse very quickly, Bateman says. Local economies are unable to absorb too many micro-businesses. If too many people are trying to sell mobile phones or baskets in one small village, they will be unable to find enough customers to survive.
Naming and shaming
Even if the entrepreneurs go bankrupt, they are still forced to continue paying off their loans. Many take up further loans to pay off their debts, Bateman says. Money that could have been funneled into infrastructure, or used to support large- and medium-sized enterprises and education is swallowed up by microfinance, Bateman believes, saddling countries and individuals with debts that will take years to repay.
Gerhard Klas found that solidarity decreased in communities getting microfinance
Only five to ten percent of women who take out microloans are able to escape poverty, according to research by the German journalist Gerhard Klas. For his book on microfinance, published this year, Klas interviewed scores of women in remote villages in Bangladesh. Some forty percent were worse off due to microloans.
Worse still, Klas discovered that microfinance can have a detrimental effect on local communities.
"I found many women that complained that after microfinance entered the villages, the solidarity between neighbors deteriorated," Klas remembers.
In order to receive a loan, women form small groups. As soon as one woman is unable to repay her loan installments, the other women put pressure on her, Klas says, because the whole group has to repay in order to get another loan. One woman he interviewed was too ashamed to leave her house for fear of running into her neighbors.
Many microfinance institutions give loans exclusively to women, the rationale being that they are better able to assess and look after their family’s needs. But Klas believes that this preference for women has a more sinister side to it.
A former manager of the Grameen Bank set up by Muhammad Yunus, who first pioneered microfinance in the 1970s, told Klas it was easier to exert pressure on women to make them repay their loans. Many of the women he interviewed were forced to take their children out of school and send them to work in the fields, so they could repay their loans.
Microfinance pioneers: Muhammad Yunus and German Chancellor Angela Merkel in 2007
Yunus rejects the accusations.
"So far as microfinance is concerned, there's no problem in reaching out to the poorest people," he says. "If some one program is not doing it, it's because of decisions of these programs, not because it cannot be done."
He does admit that there are problems. When things expand very quickly, abuses do occur, he says. His solution is to draw up strict guidelines, and create a kind of microcredit certificate, so borrowers can distinguish between good and bad microfinance institutions.
Author: Naomi Conrad
Editor: Holly Fox