Microfinance is No Silver Bullet for Poverty
The data is starting to come in on microfinance. Steve Beck and Tim Ogden from Geneva Global discuss various aspects of accountability in microfinance in their recently published article in Harvard Business Review entitled "Beware of Bad Microcredit."
Their premise is that "...little evidence exists that micro-credit borrowers, on average, commonly, directly, and quickly escape poverty, as many assume. Poverty, as always, is resistant to silver bullets, no matter how popular and appealing to donors they are." They site a recent evaluation by the MIT Poverty Action Lab that found that "very little of each additional dollar of disposable income is spent on any form of investment, or even on food and shelter." They note that John Hatch, founder of FINCA International , has argued that "90% of micro loans are used to finance current consumption rather than to fuel enterprise." Beck and Ogden go on to argue:
Repayment rates and other commonly reported measures tell us nothing about the impact of a program on poverty. There are a number of promising trends in microcredit, including improvements in outcome measurement and reporting, the influx of capital with rigorous financial and social benefit requirements, and the growth of commercial microfinance organizations with the scale and discipline required to drive down the costs of service delivery. These trends are nascent, however, and expert due diligence around investment in any program is therefore essential.
Is it me, or does this sound exactly like what experts always say about investment bubbles? If this is a bubble, like small caps, dot coms, real estate, emerging markets, and others before it, funders would be well advised to listen closely to Beck and Ogden's advice:
First, insist on a set of clearly defined measures of success -- such as income growth, quality of housing, school enrollment, and nutrition -- for microcredit programs you support, and be willing to pay for the measurement.
Second, invest in improving the effectiveness of microcredit -- for example, by supporting vocational training and financial literacy for borrowers, improving access to technology that lowers the cost of lending and borrowing, or lobbying for regulatory changes that make starting and growing businesses easier.
Third, look for opportunities to support the growth of small and medium-size companies in regions of poverty. Businesses that create stable, productive, nonexploitative jobs and vibrant local economies are the only sustainable program for mass poverty alleviation ever created.
It's not clear how you are going to do all this when you are sending $100 on-line through kiva.org, but hopefully I'm wrong and this is not a bubble. We'd love to hear from others on the topic.