Microfinance - The Dark Side?
In the last several weeks, Microfinance has received tremendous exposure in the popular press -- primarily because of the awarding of the Nobel Peace Prize to Muhumamed Yunus (founder of the Grameen Bank).
The vast majority of the press has been glowing. Consider this tidbit from a piece in the Tehran Times.
It is always instructive to seek out differing and/or opposing points of view when evaluating an issue. Critics (or skeptics) of the Microfinance movement exist and have surfaced in recent weeks to let it be known that not everyone believes Microfinance is the panacea that most make it out to be.
As your loyal objective correspondent, I summarize some of the criticisms here:
1) Very few scientifically rigorous studies have been made of Microfinance. More specifically, assertions that more than 90% of the people who receive microcredit are poor, that most of them succeed in businesses started with these loans, and that they repay the loans at 24% annual interest or higher, have not been backed up with quantitative data.
2) Microfinance works much better for the moderately poor than the "very poor."
3) Microfinance serves not to lift people out of poverty, but assists those near or slightly above the poverty line. (A significant number of Microfinance institutions only lend to people with existing businesses.)
4) Microfinance loans are as often as not used for consumption as investment in entrepreneurial business.
5) Microlenders are more or less impossible to run on a sustainable basis if they are to stick to the mission of lending to the poorest.
6) Grameen Bank has been in business for 30 years and Bangladesh is still one of the poorest countries on earth.
7) The interest rates charged by Microfinance institutions are usurious (2% monthly and up) and Microfinance institutions live "off the backs of the poor." It is the intermediaries -- commercial banks and loan facilitators -- that gain the most from the spread between the cost of funds for the intermediaries and the loan interest charged by them.
8) The poor get trapped in a vicious circle of debt because of the progressive nature of Microfinance loans. They often resort to borrowing from local "moneylenders" (loan sharks in Western parlance) to make repayments.
(Micro)food for thought, I guess.
Referenced Articles:
The Guardian
The Indian Catholic
Forbes
Salon
The vast majority of the press has been glowing. Consider this tidbit from a piece in the Tehran Times.
"The Grameen Bank pioneered the concept of microcredit, which has lifted millions of people out of poverty around the world."Pretty strong language. In most cases, it could be argued that the popular press has parrotted facts and figures that have been provided to them by the Grameen Bank "publicity machine" in writing their reverential diatribes.
Tehran Times, October 16, 2006
It is always instructive to seek out differing and/or opposing points of view when evaluating an issue. Critics (or skeptics) of the Microfinance movement exist and have surfaced in recent weeks to let it be known that not everyone believes Microfinance is the panacea that most make it out to be.
As your loyal objective correspondent
1) Very few scientifically rigorous studies have been made of Microfinance. More specifically, assertions that more than 90% of the people who receive microcredit are poor, that most of them succeed in businesses started with these loans, and that they repay the loans at 24% annual interest or higher, have not been backed up with quantitative data.
2) Microfinance works much better for the moderately poor than the "very poor."
3) Microfinance serves not to lift people out of poverty, but assists those near or slightly above the poverty line. (A significant number of Microfinance institutions only lend to people with existing businesses.)
4) Microfinance loans are as often as not used for consumption as investment in entrepreneurial business.
5) Microlenders are more or less impossible to run on a sustainable basis if they are to stick to the mission of lending to the poorest.
6) Grameen Bank has been in business for 30 years and Bangladesh is still one of the poorest countries on earth.
7) The interest rates charged by Microfinance institutions are usurious (2% monthly and up) and Microfinance institutions live "off the backs of the poor." It is the intermediaries -- commercial banks and loan facilitators -- that gain the most from the spread between the cost of funds for the intermediaries and the loan interest charged by them.
8) The poor get trapped in a vicious circle of debt because of the progressive nature of Microfinance loans. They often resort to borrowing from local "moneylenders" (loan sharks in Western parlance) to make repayments.
(Micro)food for thought, I guess.
Referenced Articles:
The Guardian
The Indian Catholic
Forbes
Salon
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2 Comments:
Have you read any papers by Thomas Dichter. He does cast a critical eye on the microfinance industry. His latest paper is something like 'Microfinance - all dressed up and nowhere to go'. It is a good read if you want to distance yourself from the recent 'Yunus and Grameen is the panacea for poverty alleviation' articles.
Yes, indeed Mr. Dichter is infamous for his "critical eye" -- as you call it -- in the Microfinance field.
Thanks for bringing it to my attention.
Readers may want to take a look at this recent article.
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