Can Microfinance End Poverty?

>> Authored by Bob Sample

Before tackling this question, I will look at the big picture, comment on some criticisms of micro­finance, and then offer my perspective on the answer.

Microfinance, in its current forms, burst onto the stage around the world in the late 1970s and early 1980s.   The first major programs started in Bangladesh with the peer lending model that was intro­duced in the early 1980s by the Grameen Bank and BRAC.   Replication programs rapidly spread to India and other Asian countries.  Also in the early 1980s, FINCA and ACCION introduced the village banking model and led the rapid expansion of microfinance programs throughout Latin America.  Micro­finance Institutions are now found in nearly every country on earth and are providing access to credit to over 250 million families throughout the world.

The astonishing growth and outreach of the microfinance field, with its attendant hyped up expecta­tions, has given rise to a veritable cottage industry of critics who claim that microfinance doesn’t work, it doesn’t reduce poverty, and it even harms the poor.  It is beyond the scope of this brief blogpost to answer such claims.  However, I will comment on the increasingly common claim that microfinance is not “transformative”, that families do not find improved income levels or improvement in their social condition.

My first observation is that the United Nations Development Program reported in 2005 that many social indicators in Bangladesh had exceeded comparable indicators in nearby India.  The report cited indicators such as gender parity in schools, fertility rates, under five mortality rates, and numbers of women in elective office.  All of these indicators were better in Bangladesh than in India.  Further­more, after 30 years of microfinance and other interventions (many initiated by microfinance institu­tions), Bangladesh is now on track to be one of the very few low income nations to achieve all eight of the millennium development goals this year.   There is no way to assign direct causality to micro­finance in these results, but the fact that over 20 million Bangladeshi families have had access to micro­finance in Bangladesh (approximately 100 million people) during the past 20 years is a strong indicator of impact.  (Shahid Khandker of the World Bank conducted a series of studies over the same 20 year period that reached the conclusion that microfinance was, in fact, substantially responsible for improving people’s lives and social and financial condition in Bangladesh.)

I am a longtime volunteer “partner” with RESULTS, a grassroots citizens’ lobby working to end hunger and extreme poverty.  In a recent RESULTS national conference call, Nicholas Kristof, of the New York Times, opened his comments with the remark that it now appears that microfinance, while helpful, is not transformative.   He got the term from a recent report published in the American Economic Journal on six recent randomized control trials that purport to demonstrate that micro­finance is not “transformative”.  It is difficult to define what is meant by “transformative”.  Apparently the idea is that borrowers’ lives are not fundamentally transformed out of poverty by microfinance.  What the recent randomized control trials and the media and various academic and other critics seem to miss is that microfinance institutions don’t just do microfinance.   A large number of micro­finance institutions also provide various kinds of education for business management, financial liter­acy, health awareness and hygiene, literacy and writing, jewelry making and other craft skills training, and more.  Furthermore, most microfinance institutions that are dedicated to poverty alleviation also require and promote savings programs of many kinds.  Many are also involved with cell phone dis­semination (one thinks of the Grameen Phone company in Bangladesh), and many types of electronic payment and mobile banking schemes.   Many microfinance institutions are also involved with housing, through home purchase or home improvement loans, or actual housing progams (witness the major housing devel­opment initiated in Kenya by Jamii Bora).  Around the world, many microfinance programs are involved with cookstoves, solar energy, solar lighting, clean water projects, pit latrine projects, and many more.  And a largely unrecognized role of microfinance institutions is that of first responder after major disasters like hurricanes, floods, earthquakes, and wars.   Since many areas of the world where microfinance is common are rural, many different types of loan products have been developed where repayment for agriculture production is made after the harvest.  Finally, and sadly, death or sickness of a child, or spouse, or other family member is very common among poor commu­nities around the world.   It is not widely recognized that microfinance lending groups provide emo­tional support and microfinance institutions provide  financial support through burial insurance or loan repayment insur­ance.    To my knowledge, these comprehensive services provided by microfinance institutions or part­nering organizations have rarely been studied and such services are never mentioned in studies that have shown little or no impact from microlending on borrowers.

So to answer the question posed in the title:  Can Microfinance End Poverty?  If the question assumes that microfinance alone can transform people’s lives so they are no longer in poverty, then the answer is definitely “no” for the average borrower (although there are many exceptions in a group as large as 250 million people).  However, if the ques­tion is asked with the assumption that microfinance, with additional training and support and innova­tive services, and with partnerships in health, education, water, sanitation, telecommunications, and so on, then the answer to the question is a resounding “yes”.

Currently, all indicators are that extreme poverty has been reduced in the last 15 years and will con­tinue to be reduced in the next 15 years. Happily, the Millennium Development Goal #1 (to cut the percentage of absolute or extreme poverty in half by 2015), has already been reached.  The World Bank President, Jim Kim, has called for a move­ment to end extreme poverty by 2030.   Microfinance has played a significant role in the reduction of poverty worldwide so far and it will continue to play an important role in poverty alleviation, in partnership with all of the other players in the global move­ment to end extreme poverty.

 

Bob Sample is an advocate for microfinance as an important part of comprehensive approaches to ending poverty.  For 30 years, Bob has been a volunteer “partner” with RESULTS, a grassroots citizens’ lobbying organization dedicated to ending hunger and severe poverty.  In recent years, Bob has organized retreats at Microcredit Summits and served as a consultant for the Microcredit Summit Campaign (a project of RESULTS).  For the past three years, Bob has been a proud member of the Board of Directors of Fundacion Adelante, a highly effective Grameen-style microfinance institution with 7,000 borrowers in Honduras.  Fundacion Adelante is one of the few microfinance institutions in Central America that focuses on empowering very low income women to achieve economic self-sufficiency through microfinance and other support services.  To contact Bob, send an email to him at bbsample@ix.netcom.com.  Or call (303)320-1955 in Denver, Colorado.

One Response to “Can Microfinance End Poverty?

  • Gordon Crann
    5 years ago

    Thanks, Bob, for a well-written and balanced blog on a very topical issue these days. I agree with your conclusion. I have urged the Rotarian Action Group for Microfinance and Community Development (RAGM) to bring your blog to Rotarians around the world who are interested in microfinance.

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