A recent Times (UK) Online article resurrects two debates about microfinance. The first is whether it really works as a poverty-fighting tool, and the second is whether the increasing commercialization of microfinance should be seen as a challenge or an opportunity.
Aneel Karnani of the University of Michigan weighs in on the first debate as the leading naysayer. Karnani argues that large-scale economic development happens by creating factories that employ many people, not by giving loans to individual entrepreneurs to start businesses that may only employ them. “The problem with microfinance,” he says, “is that it simply doesn’t do that much to lift the poor out of poverty.”
Karnani does something useful by reminding readers that most poor people ideally want steady jobs, not the risks that can accompany self-employment. Then again, don’t hold your breath waiting for a plausible plan to build those factories in the villages of Bangladesh. There is no plan. Microfinance, on the other hand, is here today and continuing to spread.
Karnani misses the bigger point about financial access. The value of microfinance isn’t just as a tool for lifting the poor out of poverty. The evidence so far is mixed on that score. Microfinance is best seen instead as a means to keeping households from slipping deeper into poverty, by giving them ways to smooth consumption and deal with emergencies—and, for some, to seize business opportunities.
Microfinance has become boxed in by its own success, a victim of Muhammad Yunus’ belief that everyone is an entrepreneur. In his way, Karnani serves to reinforce that frame. The fact is that many poor individuals have little interest in starting a business, and instead want to borrow for a range of non-business purposes, like paying for school fees, medical treatments, weddings, funerals, home improvements, or just putting food on the table. Micro-businesses often fail to grow much, and measuring the success or failure of microfinance by poverty exit rates sets the wrong bar.
The Times Online article also highlights the debate around the tensions and opportunities that emerge as microfinance becomes more commercialized. Xavier Reille of CGAP is quoted as admitting that things are getting “blurry” in the microfinance sector as more commercial companies jump on the bandwagon. A new paper by Jonathan Morduch and Robert Cull and Asli Demirguc-Kunt of the World Bank offers some focus.
In Microfinance Meets the Market, the researchers find that commercialization is a powerful trend, but commercial banks like Compartamos and avowedly “social businesses” like Grameen Bank are not substitutes for each other – that it’s not a black and white, either or situation. Different types of institutions are serving different customer bases.
Arguing over a single vision for microfinance – whether a non-profit or commercial approach is best, or whether loans should be for strictly for microenterprise or also for general purposes – misses the over-arching point: microfinance flourishes thanks to innovation and a diversity of strategies.