Discussing
Why microfinance can still work

Kenman Wong

StrngeFruit
July 25, 2011

As with many things, I think the idea of microfinance is great, but it often gets tarnished by human ambition. Kiva founder, Jessica Jackley, makes a great case for microfinance in her recent TED talk that touches on a lot of Christian principles: http://tiny.cc/m801r

Xioc1138
July 25, 2011

As Christians, we are frequently reminded how our debt enslaves us.  If we extend loans to poor people in developing countries, are we really doing those people a favor by enslaving them with debt?

Kenman W.
July 25, 2011

Xioc,
Great question!  There is no doubt that some people who receive loans are not good candidates for credit and will become over burdened (adverse inclusion).  Others, however, can put the funds to good use such as growing a small enterprise or smoothing income.  Poor people already borrow and save (I recommend the book, Portfolios of the Poor, for a sometimes surprising look at the complex financial lives of people in the developing world).  Microfinance usually provides a cheaper and more reliable alternative.  The current attention being given to social impact measurement should help answer questions like the one you raise.  One other point I think is important to emphasize is that microfinance is more than credit.  Many organizations are also involved in faciliating small savings accounts.  Thanks again for raising the question -- microfinance is not a magic bullet -- and you are right that the flip side of credit is debt!

Kenman

Tracey Sheneman
July 26, 2011

I think a biblical perspective is important. Our Christian bibles have quite a bit to say about lending to the poor (Exod. 22:25; Lev. 25:35-36; Prov. 28:8; Psalm 15; Luke 6:31-36), and it is challenging, if not impossible, to reconcile a biblical view of unreserved generosity toward the poor (God's "chosen") with a lending program built around high interest with a demonstrated potential for abuse. Microfinancing schemes run counter to the biblical ethic of Jesus, "It is more blessed to give than to receive." (Acts 20:35)

It is tempting to view microfinance as a sort of economic self-help, a "hand up" vs. a handout approach to addressing poverty. The proof is in the pudding, as they say, and the facts, as near as the studies can tell us, do not support the sometimes fantastic claims of supporters of microfinance as an effective poverty reduction measure. The poor do not need to be sold illusions of success and prosperity; do we who are more affluent need an illusion of charity as a substitute for real obedience to Christ's command to "store up for [our]selves treasures in heaven"?

JCarpenter
July 26, 2011

the reports of financial mismanagement and abuse are disturbing, as they are in our own economy---Yunnus' concept was to have interest on loans be minimal so that the poor would not run up incredible debt, their alternative offered by unscrupulous and predatory.  Microcredit can still work, with safeguards and protection.

Kenman W.
July 26, 2011

Tracey,
Thanks for raising a good question.  I know many people who cannot support microfinance because of biblical injunctions like the ones you cite.  I am actually working on an academic paper on the topic right now.  As you know, applying Biblical passages today requires an understanding of context.  Poor borrowers during Biblical times were likely destitute and had to rely on kin to meet basic needs.  Thus, charging them interest (‘neshek’ in Hebrew) would have the effect of a “bite” (etymologically related to the word for “interest”) that would swell to out of control proportions.  Lending to people in similar (destitute) conditions is still problematic.  However, many microfinance borrowers today can put their loans to productive uses.  Thus, direct application of these Biblical prohibitions is unwarranted (though much care should still be taken and some interest rates may be high enough to be usurious).
As far as the evidence goes, you are right that microfinance has not met the fantastic claims of some of its supporters.  Using a fairer standard of comparison, however, there have been some good outcomes.  This observation comes directly from the authors (including Abhijit Benerjee, Esther Duflo and Dean Karlan) of the much publicized studies themselves, “it (microfinance) has allowed some of the world’s poorest people to develop businesses, insure against bad weather and illness, maintain employment and smooth consumption” (from “Microcredit is not the Enemy,” Financial Times, Dec. 13, 2010).
You are also correct that “it is better to give than to receive.”  But, there are two operative sides to this equation.  Recipients of pure charity are sometimes made far worse off (dependence, ruined local industries) despite good intentions on the part of those who give.  And, to be certain, most microfinance organizations are still at least partially donor dependent.
Microfinance is more about giving people a chance to escape poverty than it is the promotion of “an illusion of prosperity and success,” but I agree with your broader point that “development” as informed by a Christian perspective involves much more than just economic gain alone.

Matt2011
July 28, 2011

Thank you for the article! I´m interested in your opinion of how locally focused NGOs with microfinance services tend to operate versus larger, commercially sustainable microfinance providers. You seem more positive on the social impact and client-protection in areas where ¨microfinance is more of a fledgling effort led by small NGOs and is far from a competitive jungle with multiple lenders¨. How can smaller NGOs, who seem more willing to ¨define “development” as more than economic gain alone¨, survive in a future microfinance sector where price competition dominates?

Bellabolivia
July 28, 2011

We are involved in a small microfinance program with farmers in the jungle region of Bolivia.  These are people who moved from the highlands to the lowlands who were given 35 to 50 hectares by the government.  The settlers were required to initiate infrastructure by surveying the land and building roads.  We live in one of the communities that was settled about 10 years ago.  When we arrived 6 years ago, the rice prices were depressed.  The farmers had enough money to plant the rice but not enough to purchase the pesticides necessary to control disease and insects.
 
We started a small credit program.  First, all the members were required to attend a workshop given in their native language by a local farmer.  Then they had to form groups and cross-guarantee their loans. We charge a ‘normal’ rate of interest which is high for North America but acceptable here.  One half of the interest is put into a savings account for the community.  Our goals were to make the community financially stable so that the families would be healthier, better educated, as well as grow spiritually.  Money can help the first two, but unfortunately, does not help the spiritual well being.
 
There have been successes and failures. 
 
·         In this area, ‘help’ means ‘give’ so some do not see the need to repay.  We are perceived as having an unending supply of money so we should ‘share’ with them.  The culture to which they are accustomed tells them that the NGOs bring ‘free’ things.
·         Our success rate seems to depend on proximity.  Those who live the closest to us, those we see on a regular basis, pay their loans off on time or early.  Those who live farther away tend to ‘forget’ the loans. 
·         Some have become over indebted.  When we started we were the only lenders.  Since then the government has implemented a program in which they ‘forward’ the money for seed, fertilizers, chemicals and diesel but this money is taken immediately when the crop is sold to the government organization.  Much of the work is done by custom operators and they are expected to do the work on credit until the money is available.  The government organization and the custom operator are paid first and then our loan is repaid – if there is anything left.
·         The cross-guarantee sounds wonderful but in this area the farmers are unwilling to put pressure on their neighbour to repay their loan.  Nor are they willing to pay the guarantee.  This means that no one gets more money. 
 
Those who have used the credit program have benefited.  It is hard to say how much faster they have advanced but we would not consider this area financially poor.  We have more success stories that those that fail.  The families are more prosperous, are healthier, and the children have access to better education.  We are still working on the spiritual aspect.

Kenman W.
July 28, 2011

Bella,
Thanks for this very helpful "on the ground" perspective.  Microfinance programs are not easy to implement, despite all of the good press from the recent past.  Its not uncommon for clients of charitable NGO's to become confused when they are expected to pay back their loans.  Spinning off a seperate entity is typically a good idea in these cases.
Frequent client contact seems to be a key to ensure repayment.  Cross guarantees are tricky as they can cause social strife.  Although they may be necessary with new programs, Grameen actually stopped using them years ago.  Thanks too for affirming the point that economic gain may be harmful without developing other forms of human well being, especially the spiritual.

Kenman W.
July 28, 2011

Matt,

Very insightful question!  Just to clarify, my comment about NGO's was more directed toward readers who have reservations about commercialization.  There are legitimate concerns, but I know a number of microfinance professionals who believe for-profits are the ones who innovate and do the most to drive down interest rates (which indirectly leads to the heart of your question).  Commercialized enterprises may also offer some advantages (ready connection to a country's payment systems, expertise in financial intermediation and legal permission to accept client savings without special status or provisions from governments, etc.).  As of now, there is still lots of room for non-commercially viable NGO's.  Some smaller NGO's may have long standing relationships in communities or serve clients that commercialized institutions don't (i.e., poorer or harder to reach), which is of course a riskier proposition.  Others offer "plus" services like health care screenings, classes on spiritual development or business management training. 

I dont know what the future holds, but I do think there will be room for different types of organizations.  The impact of "platform based solutions" through "mobile banking" technologies (like M-Pesa in Kenya and GCash in the Philippines) on for-profits and non-profits alike will also be interesing to watch.

Sara
August 1, 2011

There's a fascinating book about microfinance by Nick Kristof and Sheryl WuDunn called Half the Sky. I suggest anyone who is interested in microfinance read it.  It focuses on microfinance initiatives for women (like Women for Women and Grameen Bank), and how small loans to women are actually more beneficial than loans to men.  While men often use the resources for personal benefit rather than to engage in enterprise, women are far more likely to use micro lending to better themselves for the sake of their children and families.  It has also drastically improved the position of women in many cultures, resulting in women's status being improved beyond that of chattel property.  It is only logical, for instance, that a man would be hard pressed to beat a wife who is providing not only for him and his children, but also his parents, siblings, and half the village.  Notably, women have a far higher rate of repayment on micro loans, and request much smaller loans; all while enjoying a higher rate of success.

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