Recent Critiques of Microfinance
January 30, 2009 1 CommentBelieving that only truly meritorious ideas can stand up to harsh critique, I have accumulated a number of critiques of microfinance. Here are three recent examples. (The titles link to articles/posts expounding the critiques.)
The group co-guarantor model of microlending relies on shame for success
How many of us, when we first heard about microfinance, found the story of a group of women banding together to take out a loan one of the most appealing parts of the idea? I know I did. 
This post on Racalicious flips the coin of microfinance over, so to speak. While the group lending model enables people, mostly women, who have no collateral to take out a loan, there is a catch. Instead of asset collateral, borrowers put their social capital at risk. Tanglad, the author of this post, highlights a number of anecdotes of women who defaulted within their groups, and the social consequences they suffered in their communities as a result.
Microcredit alone does not improve the lot of the poor
In this email, posted on a listserv used mostly by academic experts in microfinance, Hugh Allen reminds the group that microcredit alone is not sufficient to lift most people out of poverty. Rather, the poor also need other financial tools to stabilize their finances, such as savings accounts and insurance policies to manage risk.
Microfinance exacerbates cultural patriarchies
Finally, this article from a student at Brown makes the argument that microfinance reinforces existing cultural patriarchies.
How would you respond to these critiques? What additional critiques of microfinance do you have?
News and Commentary
The World Bank has a thought-provoking book called, “What’s Wrong with Microfinance.” It supported some of the nagging feelings I had accumulated while starting microloan programs in Africa. Microloans do have an immediate impact on a family’s lifestyle. However, the borrower can be set up in a cycle of debt in order to maintain those lifestyle improvements. I use the analogy of giving a college student a credit card when he/she has no experience with debt. The dorm room gets spruced up, more meals are eaten out, clothes shopping increases. Then you get used to that, and how do you maintain it if you can’t get a higher paying job? You use more credit. It’s the same thing with microloans. If markets aren’t increased, businesses won’t grow and jobs won’t be created. Assets, like the land that many people don’t own, form a platform from which an individual can increase wealth. Illness and death interfere with the intended use of loans and repayments. There’s a huge cycle of influences that keep people in poverty. Microfinance is not the be-all and end-all. It is simply one of the tools that we can use in our effort to alleviate poverty. Obviously, I’ve thought about this a lot. I won’t belabor my point –everyone should read the book. Thanks for your thoughtful posting, Ryan.