A village in Nepal, only accessibly by foot, that asked to be provided with remittance services
Microfinance is the provision of basic financial services to people who might not otherwise be able to access these services.
Winner of a Nobel Peace Prize in 2006, microfinance has long been lauded as the ‘silver bullet’ to poverty. But the industry has come under attack for failing to produce outcomes – and in some cases making matters worse – in the case of mass suicides of supposed overly indebted farmers in northern India.
Two recent books have studied the case for microfinance in detail – and have reached much the same conclusion. Portfolios of the Poor and Due Diligence: An Impertinent Inquiry both argue that microfinance allows the poor to better manage their lives – providing a safe place to save, smoothing income, and allowing them to acquire useful ‘lump sums’ of money.
But despite these benefits, both books point to a lack of evidence that microfinance itself reduces poverty. No study has successfully proven that microfinance alone has shifted any community out of poverty. In Portfolios of the Poor, the authors argue that microfinance needs to move from traditional rigid loan products to flexible savings products*. And interestingly, Roodman in Due Diligence argues that the real strength of microfinance is in the creation of a new industry – driving economic growth and creating jobs. Not necessarily lifting people out of poverty.
In my own experience with Good Return’s microfinance partners, I have seen examples of the benefit microfinance provides.
In the Philippines, women use ‘emergency’ loans to rebuild homes after storms and to pay for healthcare costs that might otherwise send a family to ruin. Others told me they only joined the institution to access life insurance that they wouldn’t otherwise be able to buy – “for my family, when I die”, they told me.
In Nepal women asked our partner microfinance institution to come to their village so they could access remittance services. Family members could then send funds home, without the time and security risk associated with carrying the money themselves.
And here in Indonesia, men have grouped together to take out a loan. They use the money to seize a rare opportunity – to buy land and extend their palm oil plantation. Their increased supply increases their bargaining power and means they can ‘erase the middle man’. “Now we get much better prices for our goods”.
Of course it would be easy to leave this argument as a series of anecdotes of the benefits.
And not mention the disgruntled customers who complain about significant interest rates, delinquent group members whose loans they must cover and long meetings which waste their time.
But for me, the point about microfinance is made in the developed world.
Given the choice, who keeps their life savings under a mattress? Given the choice, who doesn’t insure their property against frequent natural disaster? And who doesn’t feel nervous carrying a month’s salary on an overnight bus?
For me, poverty has many faces, many problems that need to be solved. (Lucky that there are so many of us!)
There is never going to be a single, simple answer. And we should be wary of anyone who says that there is.
* As a point of interest – it is much harder for a microfinance institution to get permission to hold savings rather than just give loans. This is in the interests of client protection – for a loan the bank much trust the client. But for savings, a client must be able to trust the bank.