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Thursday, August 25, 2005

Is Microfinance Losing Steam?

[via IPS] "The best years of microfinance may be over," wrote Sanjay Suri in a troubling article just yesterday. I've long been a fan of microfinance, but fear now that I have had something of an absurdly "one-size-fits-all" version of the model in mind. Follow the link to read the whole piece, but here is a taste:
The United Nations has declared 2005 the International Year of Microcredit. But the UN push may not be moving donors and lending institutions sufficiently, [said] Kate Bird from the Overseas Development Institute (ODI).

[Bird comments] that ''[t]he development world is full of fashions, and this particular thing is now somehow out of fashion...'' [Microfinance] peaked around 2000, said Bird, who was earlier with the School of Public Policy at Birmingham University. ''I think in the late 90's microfinance seemed very exciting, all the donors were very keen to get into microfinance projects. But the donors and others expected too much from microfinance and then associated it very strongly with poverty reduction...''

''There was a lack of awareness that the poorest individuals do not benefit from microfinance,'' she said. ''You need to have sufficient assets to be able to use the microcredit that you receive. Very poor people present a greater risk, and also if a very poor household gets in arrears with loan repayments and begins to default, that is very bad for them. It means they are now worse off than they were before...'' The donors and others found that the poorest were either self-excluded from the microcredit scheme, and they were not signing up, or they found it a very uncomfortable experience, and did not sign up again. ''So donors found that credit is helping the less poor, people who are still poor but not the very poor.''

The Grameen model pioneered in Bangladesh has remained the most widely replicated, Bird said. This is a model where the loan is given to the group and the group is held responsible for repayment of the individual loan... The Grameen model works well in Bangladesh partly because Bangladesh has a high population density which reduces the cost of delivering credit, Bird said. ''In some sub-Saharan African countries the population densities are lower, and so markets do not function so well. It is also difficult for credit officers from microcredit institutions to visit those areas...''

NGOs have remained at the forefront of providing microfinance, Bird said. ''The private sector is not interested, particularly in providing microfinance in rural areas, so in the absence of the private sector the NGOs are the most appropriate,'' she said. ''Where governments tried to get involved in delivering microfinance there have been big problems with government officials becoming selective in who will get microfinance,'' she said. ''So government is not a good intermediary, the private sector is not commonly interested, which does not leave very much. So NGOs tend to become involved in microfinance.''

See also this brief piece which reports on comments by (hero!) Jeffrey Sachs on microfinance as one of the puzzle-pieces in the larger work of progressive global development.


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Anonymous said...

It will be a great day when microfinance goes out of fashion with the donor community, maybe then we can actually build an industry without distortions from all the mis-allocated tax dollars. "Scale" means providing financials services to the 80% of the world who do not have access. Only a more inclusive financial sector will achieve this, not government programs. For the emerging industry of microfinance investment funds, please see Thank you for covering this important topic. Cordially, David Satterthwaite.