Microfinance is lauded by some as a silver bullet which will rescue poor societies by allowing people to pull themselves up by their bootstraps, through providing financial services, training, and small loans to poor entrepreneurs. When microfinance is at its best, this is exactly what it does. It provides the means for people to provide for their families, save money, and improve their living situations. It avoids some of the problems of the traditional aid models, such as relying on corrupt governments, skewing local markets, and building dependence among the poor. Microfinance banks have typically targeted women, which has resulted in more freedom and empowerment for them; loans reduce the vulnerability of the poor during crises like sickness and drought. Repayment rates are typically high, and World Vision has reported increases in health and education, as families with loans are able to afford better living conditions and school fees.
But it comes with problems of its own. One obvious one is that microfinance, like any other tool, can be mishandled. It is not free from problems such as fraud, usury, and human error, just like other banks. Anthony mentions wealth disparity as a problem that might arise; to be frank, the real problem is nearly the opposite of this. The fact is that microfinance does little to help the poorest of the poor. They are usually trapped in subsistence activities, and if their loan does not help them grow their income beyond the interest rates, they will be worse off in the end. Most people in the developing world are not true entrepreneurs who have a visionary idea which can turn into profit and jobs for their community; 90% of these populations would be most benefited by a factory moving to their area and providing jobs. The International Labor Organization says that “nothing is more fundamental to poverty reduction than employment.”
So if a micro-entrepreneur is able to use a loan and develop a business where he can employ 100 people in his community, that will be far better than those 100 people getting their own loans to fund subsistence activities. The factory is able to access economies of scale and increase productivity; 100 women with their own sewing business simply crowd the market.
So to answer your question, in 10-20 years the criticism of microfinance will be that it wasn't able to deliver on the promise of curing poverty. It still is a good idea, and still helps millions of people around the world to provide for their families and defend against crises. But large-scale enterprises intensive in labor, public or private, will go much farther towards pulling societies out of poverty.
Monday, February 28, 2011
Sunday, January 30, 2011
Microfinance, A Downside?
Microfinance in Africa!
Tim, I have a question for ya:
Since 1961 when US AID was started there have been many criticism--it is used for political purposes, through inflated costs most of the reward goes to the contractors supplying the food, the aid is used by the receiving nation as a means of control, and perhaps the most important--it doesn't do much to end poverty. So, while there may be good intention of giving people in refugee camps bags of rice it can become a means of engendering poverty and empowering those who control the aid.
Along comes micro finance and on the surface it avoids many of these faults. But here lies my question; in 10-20 years what will be the criticism of micro-fiance?
How about disparity? While some people receive funding it may be so concentrated and so powerful that those who receive funding become the future business owners and those who don't are left out to dry. So while some people have raised themselves out of poverty it has done little or nothing to decrease the gap between the rich and the poor.
Another idea is that instead of fostering business growth it creates an all powerful microfinance loan operation where the only success in a town flows from those who microloan. The poverty declines, but instead of being at the mercy of colonialism they're at the mercy of banks that become too big to fail. (had to say it)
I'm interested to see what your thoughts are out in the field. Hope you're enjoying the beach in Kenya!
-Anthony
Tim, I have a question for ya:
Since 1961 when US AID was started there have been many criticism--it is used for political purposes, through inflated costs most of the reward goes to the contractors supplying the food, the aid is used by the receiving nation as a means of control, and perhaps the most important--it doesn't do much to end poverty. So, while there may be good intention of giving people in refugee camps bags of rice it can become a means of engendering poverty and empowering those who control the aid.
Along comes micro finance and on the surface it avoids many of these faults. But here lies my question; in 10-20 years what will be the criticism of micro-fiance?
How about disparity? While some people receive funding it may be so concentrated and so powerful that those who receive funding become the future business owners and those who don't are left out to dry. So while some people have raised themselves out of poverty it has done little or nothing to decrease the gap between the rich and the poor.
Another idea is that instead of fostering business growth it creates an all powerful microfinance loan operation where the only success in a town flows from those who microloan. The poverty declines, but instead of being at the mercy of colonialism they're at the mercy of banks that become too big to fail. (had to say it)
I'm interested to see what your thoughts are out in the field. Hope you're enjoying the beach in Kenya!
-Anthony
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