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Time to Give Up on Microfinance?
Maybe Not Quite Yet

By Rachel Lin, Northwestern, WCAS 2014

Microfinance has been the darling of global development in the eyes of aid agencies and individuals everywhere for the past 20 odd years. Who wouldn’t fall in love with the idealistic promise that poverty could be eradicated through individual entrepreneurship and monetary access in a matter of decades?

One Nobel peace prize and countless microfinance organizations later, we are faced with the harsh reality that poverty is still ever-present, like the unfortunate piece of gum that has chosen to stick and stay to your shoe, begging the question whether microfinance really works at all.

In the first speaker event of the quarter in CGE’s Development Speaker Series, Milford Bateman, author and freelance developmental economics consultant, shines a harsh light on the global ecosystem of microfinance. He makes the bold assessment of how microfinance–as a result of political and business incentives as well as false economic assumptions–not only bolsters the rich, but also traps the poor in a cycle of loans that they cannot repay, pushing them further into poverty. In attacking microfinance, he goes straight to the source, citing how Muhammad Yunus, the nearly untouchable creator of microfinance, had made some key assumptions in his lending model that contradict evident global realities.

For one, microfinance has been sold to the public as a social enterprise generator, where loans would go towards building small businesses; in reality, those very same loans were instead being utilized for consumption spending rather than business investments, meaning no new jobs or income were created in the process. Likewise, the rapid expansion of microfinance institutions and the transformation of these organizations into businesses with stakeholders and quarterly objectives shifted the focus away from poverty reduction to self-promotion and growth. CEOs of these supposedly humanitarian banks would walk away every year with multimillion-dollar salaries, while their clients were left with failing businesses and an increasing amount of debt. This flawed system, Mr. Bateman argues, has flourished and persisted because of western political incentives that keep microfinance in place because it lauds individual self-support rather than “dangerous,” leftist group consolidation.

Support from organizations such as USAID and the World Bank has promoted the spread of microfinance across the globe even though there has been no clear evidence of its effectiveness on poverty reduction. This confluence of factors has rendered microfinance as a method that is ineffective and in some cases downright harmful to those that it set out to help.

So get rid of it, right? I would say hold up for just one minute.

Despite Mr. Bateman presenting a very convincing argument on the shortcomings of microfinance, I am still unable to so easily discard the hopeful message that is ingrained within microfinance: that individuals can dig themselves out of poverty with a little help and assistance. Clearly, microfinance and its practices need to be reformed to address the issues of rampant business failure, increased debt, and corrupt governance, but I do not believe it has to be thrown out the window completely.

If microfinance organizations can shift from a purely bank model to a NGO-bank hybrid that focuses on increased accountability, smarter lending practices that target high-potential small enterprises, and the creation of a lender support system to ensure the sustainability of these fledgling businesses then the possibility of substantive and widespread economic development is possible.

Maybe this is just my overdeveloped sense of idealism kicking in, but I’m not quite ready to give up on microfinance just yet.

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