Insights from Micro-credit Disasters
Last night’s class involved our professor of sorts, M, giving his perplexing insights into his experience with microfinance projects at the World Bank. I say perplexing because none of us students could really come away with a successful example, despite its worthy founding principle. M showed evidence, including DfID’s 2011 report, suggesting that micro-credit has no clear net-positive benefits [read: able to lift people above the poverty line, permanently]:
Despite the apparent success and popularity of microfinance, no clear evidence yet exists that microfinance programmes have positive impacts.
There have been four major reviews examining impacts of microfinance (Sebstad and Chen, 1996; Gaile and Foster 1996, Goldberg 2005, Odell 2010, see also Orso 2011). These reviews concluded that, while anecdotes and other inspiring stories purported to show that microfinance can make a real difference in the lives of those served, rigorous quantitative evidence on the nature, magnitude and balance of microfinance impact is still scarce and inconclusive.
His main advice for microfinance institutions was:
- Growly slowly. Very slowly. –> Do not take on extra clients if they are not financially disciplined (able to save and able to make returns.)
- Do not accept charity. –> Do not accept more donor money than you are capable of lending to disciplined clients.
- Do not act like a charity. –> Do not give out grants, which discourage people from repaying. Do not lower interest rates to the point that you are not sustainable as an institution. (Because then nobody benefits.) (This also means that you should not let the government run the microfinance institutions, because they are often tempted to forgive loans before elections and thus wreck havoc to the system, as happened in India and elsewhere.)
While it was surprising for someone who cares deeply about the poor to say that microfinance institutions should not operate as charities, it was also very telling, coming from someone who has seen the industry both during its inspiring heyday in the early 1990s and its disastrous plunge shortly after. He shared with us a great quote by a microfinance CEO from Sri Lanka:
“We would like the World Bank’s support. But not their money.”
He also stressed a very important, and over-looked point: micro-credit was meant to be used as investment capital–and not for consumption smoothing. In other words, the money is only given to you because you need extra money to start or expand your small business (and therefore, you can make a return from your work, which you can then use to pay for the interest); the money is not meant for you to use if you need food and run out of savings with which to buy it. This is an important, if somewhat obvious, distinction that I, and many others, tend to overlook.