16 July 2007

Microfinance: Does Microfinance Really Miss Its Mark?

"Are people going to be better off sitting all day in a pineapple canning factory?" asks Liam Collins of Green Microfinance, LLC, in response to my questions about Aneel Karnani's article in this summer's Stanford Social Innovation Review, "Microfinance Misses Its Mark."

"Not everyone is," Collins asserts. "And those of us who aren't deserve access to capital in order to pursue our dreams no matter how big or micro they may be."

Karnani, professor of strategy at the University of Michigan, Ross School of Business, examines some of the failures of microfinance to argue that creating jobs not self-employment is the best way to alleviate poverty.

Criticism of microfinance is not new. The debate has been going on for decades within the development community. And no doubt some of the criticisms, especially about charging high interest rates to poor customers and questions about tracking and reporting loan repayment rates, are valid.

But is the question of scale missing the point?

David Bornstein, author of The Price of a Dream: The Story of the Grameen Bank, writes, "The most common criticism aimed at the bank was that its loans were used primarily for small-scale, low-yielding activities that would ultimately lead to diminishing returns for villagers...borrowers were not 'scaling up' their activities."

Karnani suggests that funders should "reallocate their resources and energies away from microfinance and into supporting larger enterprises in labor intensive industries."

"A surer way to end poverty is to create jobs and to increase worker productivity, rather than turning to microfinance," Karnani posits.

Karnani makes some broad claims, but I'm not convinced he's made his argument.

For instance, he claims that the impact of microfinance on women may be overblown. "Overall," Karnani writes, "microcredit does empower women, but only in noneconomic ways."

But, as Bornstein notes in The Price of a Dream self-employment is advantageous because it brings "women into the income stream without the usual sacrifices required under wage-employment situations."

Karnani argues that creating jobs offers a better solution to alleviating poverty, illustrating "two alternative scenarios: (1) A microfinancier lends US$200 to each of 500 women so that each can buy a sewing machine and set up her own sewing microenterprise, or (2) a traditional financier lends $100,000 to one savvy entrepreneur and helps her set up a garment manufacturing business that employees 500 people."

I have concerns about these solutions, however. Is a wage-earner really better off than the independent entrepreneur? What happens when the woman can't show up for work because of a family illness or medical emergency? What happens to her spot on the assembly line when she must stay away from her job to tend to an issue at home? Will she need a union to help her keep her job? What about building equity versus the stability of a job in a factory?

Collins, who has over a decade of experience in development and microfinance in five continents, likens microfinance to the mortgage industry in the United States.

"Wouldn't it be easier for banks to give loans to large corporations to buy houses and then rent them out," Collins offers. "Instead we have an economy that makes getting a loan for a home easy for a large segment of the population."

For Collins, the debate really goes deeper, into economic theory. It's about "keeping things small [and] local, taking advantage of comparative advantage versus large, economies of scale and protecting industry through unfair trade practices."

So, does microfinance miss its mark? The jury is out.

As I was preparing this post over the past few weeks, I sought comments from Nobel Prize winner Muhammad Yunus and others from Grameen. They were preparing their own official response on Karnani's article and were unable to provide comments in a timely fashion. (I may continue this thread in future posts.)

I think it is safe to say that microfinance is a flawed system, but one of many effective, direct responses to help alleviate poverty. And it's too soon to be tolling the death knell for what is more than just an economic movement, but a social one as well.

"It is easier to give larger loans to larger companies to create jobs," Collins notes, asking, "does this mean a better quality of life?"

1 comment:

The Green Skeptic said...

This just in:

Scott, I enjoyed reading your blog. thanks for the references.

Regarding your terrific coverage and the debate on microfinance, here's a letter i wrote that was published in the NY Times in Oct. 2006. It was in response to a John Tierney column after the announcement of the Nobel Prize to the Grameen bank that Wal-Mart should receive a Nobel Prize for poverty alleviation because it created lots of jobs and saved poor people money.

Here's my response. You can find the Tierney column on line. The basic argument was very similar to the one you have on your site.

To the Editor:

There are several fundamental differences between the Grameen Bank and Wal-Mart.

The Grameen Bank is owned and controlled by its borrowers. Wal-Mart is not controlled by Chinese laborers.

The Grameen Bank supports self-employment for the rural poor precisely so they don't have to ''move hundreds of miles for a job'' if they don't want to.

I have spoken with Bangladeshi villagers who were considering relocating to Dhaka to find factory work. They were distressed by the idea of uprooting their families and moving to a slum.

Journalists should not celebrate this option glibly. People make such sacrifices to survive.

But much is lost: social networks are fractured; children lose access to safe and clean places to play; parents cannot be near their children while they work; and employees are often exploited and humiliated on the job. We should try to do better.

The virtue of microcredit is that it goes to the poor person rather than making the poor person come to it. When it works successfully, it offers a measure of self-determination that low-wage employment does not.

It also encourages people to accumulate assets, which stabilizes their lives and makes them more future-oriented.

Wal-Mart creates ''jobs.'' But people are not born simply to sit on assembly lines and eat. The Grameen Bank and thousands of other microcredit lenders around the world are struggling to expand economic options for the poor in line with their full aspirations as human beings.

David Bornstein
New York, Oct. 17, 2006

(from DB email to author 24 October 2007)