Part 4 of 5
Welcome to the fourth in a short series of articles written as an introduction to microfinance. In this article, I will briefly discuss my take on some of the ethical arguments that are being discussed in the microfinance field and give an overview of what the field looks like today:
Is microfinance “good” or “bad”?
There is a variety of opinions as to whether or not microfinance is a “good” or a “bad” thing. In recent years, this has been heavily influenced by the sector’s frequent coverage by the media, who often tend to either demonise microfinance or present it in a way that makes its successes seem too good to be true.
Many people tend to align their perception of microfinance with their own economic and moral ideological perspectives. When I started talking with friends about my trip to India, for example, one of them told me that they thought that microfinance was a slap in the face to neoliberal economic policy. Another expressed the exact opposite view – that microfinance represented the spread of neoliberal capitalist ideologies to the developing world. This illustrates what I think is an interesting feature of microfinance: that its socially driven model of promoting capital use forges “a fertile middle ground between rugged capitalism and ragged socialism, between lending to individuals and lending to cooperatives.” (Counts, 2008, 14) To the extent to which most developed economies run a hybrid free market/welfare state economic model, microfinance is a logical hybrid model for developing economies. It charts a middle ground between fostering economic self-reliance and independence, and making use of the real benefits of building collective networks for social and economic support.
Further, saying that microfinance is good or bad is difficult – like saying that “finance” and “economics” themselves are good or bad.
Many different types of organisations provide microfinance services, each with their own guiding ideology and raison d’être. It is therefore important to understand that within the provision of microfinance services there are likely to be good and bad organisations, effective and ineffective models, and self-less and selfish motivations for providing services. In the developed world, some of us prefer to save our money through a credit union and others have retail accounts at major commercial banks. Few, however, would argue against the necessity of having access to banking services of some sort. Thus, the use of microfinance mirrors the use of finance in the developed world in providing a variety of ways for the poor to gain access to useful financial services.
Microfinance as both a for-profit industry and a not-for-profit social movement will continue to grow and mature and its practitioner groups will splinter off in different directions. There will be battles for mandates between the government, NGOs and for-profits and there will be instances in which failures to the people that services are meant to help occur. With such an enormous pool of people with unmet needs in the developing world, it looks like a multiplicity of microfinance organisations in places like India will be able to peacefully coexist for at least the next several decades. Further, instances of the unjust or ineffective provision of microfinance services by actors within the sector will engender debate, which should lead to increasingly more efficacious outcomes for the poor in the long run.
Since the 1980s and especially since the awarding of the 2006 Nobel Peace Prize to Mohammad Yunus, microfinance has garnered an enormous amount of international publicity and thousands of microfinance and microlending programs have sprung up in countries all over the world. Many of these organisations have dramatically different remits, funding sources, service models and profit motives. By one estimate only one quarter of the world’s microfinance institutions are NGOs (Gonzalez and Rosenberg, 2006, 7).
In 2009, the Microfinance Information Exchange (MIX), a leader in the collection and analysis of industry statistics compiled data on 2,015 microfinance institutions (MFIs), servicing a borrower base of 92.2 million persons with over USD $65 billion in loans and $27.1 billion in savings. By some estimates, if all extant MFIs reported to MIX, the number of borrowers would be closer to 200 billion. Meanwhile, the unmet demand for financial services globally may be as high as 1 billion more people, representing an enormous potential market for commercial banks.
Such banks, encouraged by high repayment ratios and outsized rates of return (20-30% being the industry standard), are now beginning to look for investment opportunities that will give them exposure to lending to the poor. Firms such as HSBC, Deutsche Bank, and Standard Chartered, have started to build research teams to study microfinance as a business model in greater detail, although many are waiting for government regulation and more conclusive data on lending model efficacy before initiating greater engagement within the sector.
In my final article, I will discuss some of the challenges that microfinance faces in the twenty-first century.