Caroline Hartnell

Once upon time, it was impossible to talk about microfinance without something like reverence. The ‘hats off’ period seems to be over as questions about its limitations multiply. The Wall Street Journal recently accused microfinance institutions in India of indiscriminately over-lending as they seek to maximize profits and claimed that some poor neighbourhoods are being ‘carpet-bombed’ with loans. The result is there is an impending credit crisis and repayment revolt, as people are urged not to repay their loans in protest. Vikram Akula of SKS Microfinance described the Journal’s reporting as shoddy, maintaining that an overload of debt among a few individuals in one slum, in one city, in one state of India hardly constitutes a bubble. He pointed out, among other things, that repayment rates in India are generally solid.

Further criticism of microfinance, however, comes from the journal Foreign Policy, which argued in an article on 18 August that Muhammad Yunus’s laurels notwithstanding, his idea has had little ‘real-world impact’. The $17 billion of loans provided by microfinance organizations as of 2004 is nothing like enough to meet the credit needs of the poor and allow them to escape from poverty.

Duncan Green, head of research for Oxfam UK, marshalls more criticism in his blog From Poverty to Power. Recent randomized control tests (RCTs) of microfinance in India and the Philippines both conclude that it does not reduce poverty, he says. He refers also to The Microfinance Illusion, a draft paper written by economists Milford Bateman and Ha-Joon Chang, which argues that economic dynamism often springs from supporting small and medium enterprises (SMEs) and that microfinance diverts credit and support from these to much smaller businesses, often in retail rather than manufacturing. This merely floods the cities with tailors and streetsellers. And, concludes Green, ‘the scepticism has even spread to Bangladesh.’ He talked to the President of the Bangladesh Economic Association, Q K Ahmad, whose survey of 2,500 borrowers concluded that microfinance had been grossly oversold. ‘They take out credit, and give it back. That’s all they do,’ he said.

But Bateman and Chang do have alternative suggestions: financial and credit cooperatives, community and state development banks or subsidized SME loan and credit programmes. ‘They’ve all worked in the past,’ says Green, ‘but they have fallen into disfavour in recent years. Hopefully they can be rehabilitated, now that the market fundamentalism of recent decades is looking so threadbare.’

Source
Thanks to http://www.tacticalphilanthropy.com for links to these articles

Further reading
In his article ‘Looking for the silver lining’, published in the September issue of Alliance, Duncan Green asks if the current crisis holds out any hope of change to benefit the world’s poorest people.