Reflection Of Microfinance

Microfinance has promoted the impression that it is good at some things—reducing poverty and empowering women—while actually being good at another: building dynamic industries that deliver inherently useful services to millions of poor people. That duplicity, however unwitting, came home to roost in the last few years. New studies challenged the claim that microcredit reduces poverty. Finance excited by the assumption that microcredit could do no harm inflated bubbles that popped.

On current evidence, the best estimate of the average impact of microcredit on poverty is zero. So microcredit as a whole appears neither to live up to the hype nor justify the harshest attacks against it as modern usury. Microcredit does not appear to be the financial equivalent of cigarettes. The commonsense idea that credit is a useful tool that sometimes helps and sometimes hurts appears close to the truth.

Thus, just as the contribution of mortgages and sovereign borrowing to the global financial crisis does not argue for ending those forms of credit, neither should microfinance be abolished for its faults.

Going forward, social investors public and private should be honest that the true strengths of microfinance lie in development-as-industry-building. Recognizing that, they should take the following steps to help microfinance play to its strengths:

1. Discourage efforts to lend to the poorest, which, far from automatically improving their lot, will add risk to their already risky lives;

2. Support moves into deposit-taking, insurance, and money transfers, which will entail involvement with management training, regulation, policy,and politics;

3. Support the search for ways to exploit communications technologies to deliver safer and more flexible services than are possible with the low-tech microfinance methods developed circa 1980;

4. Stand ready to reduce support for microfinance—microcredit in particular—since ample finance for credit can inflate bubbles, undermine the drive to take savings as an alternative source of money for lending, and thus corrode the true strength of microfinance in enriching the local economic fabric.

The microfinance movement got into trouble by allowing its rhetoric to get ahead of the evidence. Only by critically confronting the evidence and the theories used to interpret it can the movement realize its full potential for helping the poor manage their wealth.