5 Things You Never Knew About Microfinancing
The following is an excerpt from “Confessions of a Microfinance Heretic” by Hugh Sinclair. Please share your comments about microfinancing below for a chance to win a copy of this enlightening book. We will choose 5 commenters at random to receive the book. Good luck!
This did not go down well. I had been introduced to yet another gathering of bright-eyed microfinance experts at yet another microfinance conference, and I had incorrectly assumed that irony and sarcasm were within their grasp. They were not. I attempted to redeem myself.
“Guys, I’m joking … it was a joke. I’m a microfinance consultant, we’re all cool … sorry.”
I had broken the golden rule of microfinance, the unwritten code that bonds its practitioners together. I had criticized microfinance and, perhaps worse, I had implicitly challenged the developmental claims the sector proclaims so vehemently. This is unacceptable from an insider. But none of the experts offered a defense or rebuked my confession.
There is actually surprisingly little evidence supporting microfinance as a practical tool of poverty reduction, but this rather critical detail is ignored within the microfinance sector for one simple reason. Microfinance does not apparently require evidence to prove it works—since, on the face of it, it seems to work. It works because the poor repay loans, and this is all the proof the sector requires. Some 200 million people now receive microfinance loans, most of whom repay the loans. Therefore they miraculously became better off in the process. So the argument goes.
The fact that crippling poverty persists unabated in countries like Bangladesh, India, Nicaragua, Nigeria, and Bolivia is an irrelevant detail. The persistence of poverty means that we need more microfinance. Even when Indian women started poisoning themselves under the burden and shame of chronic over indebtedness, or when the citizens of an entire country refused to repay their microfinance loans claiming unfair treatment. This had nothing to do with those who provided the loans. Apparently.
Microfinance is a $70 billion industry, employing tens of thousands of people, predominantly managed by a closed group of funds based in the USA and Europe acting as gatekeepers of the private capital available, and increasingly some of the public funding as well. The industry is largely unregulated, opaque, and hard to investigate in practice. A tireless PR machine recruits spokespeople, advertises on television, and holds endless promotional events. An almost cult-like aurora surrounds the sector. Insiders are expected to tow the party line. It’s to all of our advantage to belong to such an epistemic community with a common set of broadly held beliefs.
Microfinance touches on the core values of entrepreneurial vision, of teaching a man how to fish rather than handing him a fish on a plate. It appears to be such an excellent idea. It appeals to the positive aspects of capitalism and economic development, and it leverages the positive desire to work hard and provide for one’s family. Everyone’s a winner. So how dare anyone ever criticize it?
To cite a selection of the flaws of the romanticized image of the female microfinance client living in the hut with the sewing machine:
- Such cases are surprisingly hard to find in practice. Men often send their wives to get loans because they know they are more likely to be approved.
- Loans are almost invariably not spent on the productive sewing machine or goat, but on a TV, repaying another loan to a very similar bank, paying other bills, or generally consumed
- Interest rates on loans, when all the various hidden charges are considered, are substantially higher than those stated. Interest rates under 30 percent a year are disappointingly rare, and rates of 100 percent or higher are common.
- The small business is rarely able to generate sufficiently massive returns over prolonged periods to cover these interest payments. When Wal-Mart opens in a town in America, many smaller shops are driven out of business. According to the microfinance sector this phenomenon does not occur in developing countries. We ignore the businesses that fail.
- It is assumed that every poor person is a budding Bill Gates. A quick glance at the overwhelming majority of businesses that receive microloans hardly suggests cutting-edge innovation—most market traders sell precisely the same products as everyone else in the market place. Not everyone in Europe or the USA is a budding entrepreneur, so why would we expect anything different in developing countries?
The average person on the street has been spoon-fed a deliberately naive view of microfinance. Most individuals who have invested in microfinance have little idea how their funds are deployed in reality, and many would presumably be disturbed to find out the truth. They cannot board a flight to Burkina Faso to check whether their $25 investment is being used wisely or not, so they entrust their money to a fund or a website that offers assurances of incredible impact. Little do they know that these institutions are largely unregulated in practice and have a rather different view of microfinance from that presented in their magazines, littered with photos of poor women in action poses, bouncing out of poverty every second of the day thanks to $25 loans.
Meanwhile the poor largely remain poor, even as billions of dollars in interest payments are extracted from their pockets justified by a few isolated but celebrated cases of successful tomato vendors splashed across the promotional materials of the companies leading the sector. An article in Time World summarized it succinctly: “On current evidence, the best estimate of the average impact of microcredit on the poverty of clients is zero.”
Excerpted with permission from Berett-Koehler Publishers, San Francisco CA Copyright Hugh Sinclair 2012.
Check out these launch events for the book:
New York launch event July 9 at Housing Works Bookstore
DC event on July 13 at Politics and Prose Bookstore
SF event on July 24 at Berkeley Arts and Letters
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Top photo: Jon Baldeck nz/flickr; second photo is of the author