The Mystical Lure of Microfinance
>> Authored by Hugh Sinclair
Our fascination with microfinance began last century. The love affair began in the mid 2000’s. First the UN declared 2005 as the year of Microcredit – note this was microcredit, not microfinance. Yunus and the Grameen Bank won the Nobel Peace Prize the following year. Very little empirical evidence supporting the effectiveness of microfinance was presented to support either of these landmark events. Subsequently a series of academic papers have severely challenged the effectiveness of microfinance as a poverty alleviation tool. See Duvendack 2011, Roodman 2012, Zinman/Karlan/Banerjee 2015 etc. Yunus’s suggestion that we would have to go to museums to see what the blight of poverty was like seems laughable now, and only the most fanatical supporters maintain the belief of microfinance as a miracle cure. The sector’s reputation has been hammered by a series of negative reports, documentaries, books and academic papers, and it is widely accepted to have “lost its fairy dust”.
And yet the sector keeps growing. Some remain convinced it is a wonderful poverty alleviation tool, despite having little evidence to support this belief. And how did we ever fall in love with the idea of indebting poor people as a means of escaping poverty in the first place? I propose that this was for mythological and idealistic beliefs we hold dear in the West.
Aid was falling out of favour, deemed as inefficient, ineffective, often corrupt and non-scalable. Along came an alternative. Development was synonymous with food hand-outs, and now the development sector was preaching “teach a man to fish”. Microfinance apparently offered a scalable solution – once the banks had reached break-even, they could grow without endless subsidy, and apparently offer a free lunch to all concerned. Investors could make a return, and the poor could escape poverty by their own hard work. We were harnessing the proverbial entrepreneurship at the bottom of the pyramid.
In the meantime, entrepreneurship itself had become the buzz word. Our super-heroes started up businesses in garages in California and grew into the pioneers of Silicon Valley. MBAs desperately jumped onto the bandwagon, and new technology was the next big thing. The internet provided a superb arena for the next generation of entrepreneurs, heralded in the media as the true heroes of Western capitalist thinking. And microfinance extended this possibility to the poor – they too could be micro-entrepreneurs. Jessica Jackley, founder of Kiva, referred to “mini Bill Gates”, directly referencing this phenomenon.
Governments were cash-strapped, international aid was waning, and microfinance seemed to offer a chance to develop countries, but without draining scarce development budgets, which could presumably be used for more useful things such as vaccinations, hospitals and schools. And then we had the gender angle: microfinance targeted women, the vulnerable but hard-working members of society. The benefits of microfinance would spill over to their families and kids, and institutions such as Women’s World Bank popped up, and microfinance institutions boasted of their female participation rates. These micro-entrepreneurs would first provide for the family, and would then grow into the small and medium enterprises that form the basis of economic development. Imagery such as acorns, sprouting trees etc. were abundant. Yunus referred to the poor as Bonsai people. He even claimed microfinance could reduce crime. Then we have the other bundled services: micro-insurance (healthcare), micro-pensions (retirement), micro-savings (financial security). Who could criticise this? Credit is, after all, a human right, apparently.
The fact that microFINANCE was dominated by microDEBT was ignored. The sector was rebranded as financial inclusion. In response to the rather obvious mission drift in the sector, CGAP changed the “P” to poor, rather than poorest. And this broad belief in debt was highly compatible with western capitalist beliefs: banks are the back-bone of our society, the colour of your credit cards reveals your status. Abundant credit meant everyone could have a new house, car, holiday etc. Investment banks were the ultimate employer, beyond even Silicon Valley. The financial crisis, and endless microfinance scandals and collapses demonstrates the effectiveness of this belief.
And microfinance had ambassadors: Queen Rania of Jordan, the Queen of Spain, Princess (now Queen) Maxima of Holland; Oprah Winfrey loved it, Bono thought it was a marvellous idea. But the supreme representative of the sector was Yunus: a beaming, Western-educated economist from a poor and down-trodden country. This was post 9/11, and here was a mild Muslim promoting a version of the Western capitalist model. No sharia law or prohibitions of interest with Yunus. He had a magical charm, was a great public speaker, and had the exact profile required to promote microfinance. The suit-wearing investment bankers could never be the front-men. They lay in the background doing the IPOs, discreetly pocketing the fruits of the combined labour of the so-called micro-entrepreneurs.
Where was the evidence to support this fanaticism? In short, there was none. Evidence was not needed. Of course microfinance works. It touched all the right buttons in our Western psyche. It just felt right. Critics could be dismissed as heretics. When entire countries collapsed, such as Nicaragua, or during the Andhra Pradesh crisis when women begin committing suicide, the sector shrugged this off as a few outliers – the model still stood unchallenged. To this day Kiva refuses to publish the interest rates on the loans it facilitates, and Kiva users don’t care – 10%, 100% – it makes no difference, the poor benefit because it is microfinance and microfinance works. End of story.
Should we be surprised, in 2015, to read well-respected academics concluding “The [microfinance] studies do not find clear evidence, or even much in the way of suggestive evidence, of reductions in poverty or substantial improvements in living standards. Nor is there robust evidence of improvements in social indicators”? How can we arrive at such a mediocre conclusion from such a hyped sector? We allowed our Western ideologies, our own love-affair with finance, our own obsession with entrepreneurship, to cloud our judgement. Common sense took a back seat. Our subjective desires of what we wanted to be true overshadowed any objective criteria. And many benefitted on the back of this mythology. The lucky few earn massive salaries, huge bonuses, and the proceeds of IPOs can be eye-watering. And it should come as little surprise that these are precisely the same people who maintain this fanatical belief in microfinance, who ignore the academic evidence, who promote self-regulation (overseen by themselves) rather than actual regulation. These same people laugh at the idea of interest rate caps, despite living in countries where interest rate caps are common.
Protection of the poor is apparently unnecessary, as the market mechanisms will ensure this, while client protection in Western countries improves each year. We need more microfinance, to drive down interest rates and improve services, supposedly. The fanatics lick their lips at the prospect of handing out credit cards to the remaining billion or so who have not yet got a bank account, and if they can do this via cellphones even better – the profit margins are higher for them.
Microfinance works because we want it to. Not because it does.