A colleague sent me some research on Microfinance last night. I’ve spent most of my career in the sector, moving from pure microfinance in my early twenties to tech-enabled microcredit and savings in my late twenties. The research I’ve read has extended from mostly positive to recently negative papers. This article I read last night sheds light on the ups and downs microfinance has experienced and where it has settled in the public eye, which is in a mostly negative light. The interesting insight here, and one that I agree with, is that the current negative view of microfinance is perhaps misguided and that its time for a review of how we should measure the success of microfinance. To sum it up the author argues that microfinance shouldn’t be viewed as a cure to poverty, but rather a credit card for the poor. The crux of this argument is below.
In practice, microfinance activity more closely resembles the provision of consumption loans than business loans, revealing a different picture of the financial needs — and financial lives — of poor households. The rhetoric around microfinance obscures the reality that borrowers are consumers, too, and what many often seek is simply better ways to spend, not just to invest in business.
Like typical consumer loans — and like credit cards — microfinance loans allow borrowers to make big purchases and repay over time (with interest). Grameen-style microfinance loans require that loans are repaid steadily through weekly installments, a structure that looks more like a typical consumer loan than a business loan. (In contrast, a typical business loan would allow borrowers to invest the funds and only much later, once profit has been generated, repay the loan with the accumulated revenues.)
Recent village studies, especially those using the close observations of financial diaries methods, show that loans are desired and used for many purposes beyond business. Incomes are seldom steady and predictable; needs vary as well: families need to pay for schools, medicines, and food during slow periods. They might need to buy bus tickets to get to the city for a job, upgrade their homes, or simply pay down a more expensive loan. Borrowers repay the loans in small bits using whatever household income is available. Stuart Rutherford’s financial diaries from Bangladesh, included in the book Portfolios of the Poor, reveal many such examples (Collins et al. 2009). Rutherford spent time with a small group of Grameen Bank customers and found that only half of “business” loans were used for business purposes (and under half when weighted by the size of loans).
I think it’s important that we look at microfinance from different views. The view that microfinance could solve poverty, while good for fundraising at the beginning, was generally unhelpful later on as the metrics didn’t stack up. Consumer borrowing is something that I as an American participate heavily in, and that’s totally fine. It’s how I paid for my honeymoon. Consumer lending should be available to all, but more generally, I believe microfinance is good, and that the ability to get credit is incredibly important for people’s livelihoods no matter what they use it for.