In Defense of Microfinance

As microfinance becomes more and more of a household name, criticism about its impact as a tool for poverty reduction has also increased. I recently read an article entitled "Microcredit, the Dream and the Reality" by David Mandelzys that outlined various critiques of the role of microfinance, and in today's blog entry I lay out my responses to some of his points and describe why microfinance is important for development and why it should be supported.

Argument #1:

Microfinance is a tool for capitalist exploitation that does not alleviate poverty, but in fact, preys on the poor.

First, let's be clear. Microfinance seeks to be but one intervention amongst many to promote poverty reduction and entrepreneurial activity within developing countries. Few people are saying that microfinance is the answer to all of the world's poverty problems. As someone that has studied and worked in microfinance around the world for several years, I can tell you, I'm certainly not saying that. Clearly microfinance is a capitalist tool for poverty reduction. And the last time I checked, we were living under a global capitalist system. Most of us anyway. Why wouldn’t we try to create solutions based on this reality?

Microfinance is based on the premise that access to credit, savings and other financial tools can help people that commercial or formal banks would not otherwise serve. Within informal economies, entrepreneurial activity dominates because of a lack of formalized labor structures, legal frameworks among other reasons. Within those economies, people shunned from the formal financial sector go to loan sharks and pay up to 400% interest. Is this a just alternative? If small business loans were not available by credible microfinance organizations, what financial solutions would one offer to those that can’t walk into a commercial bank because of the color of their skin, their illiteracy, their sex, or the fact that they don’t even own proper shoes to walk in with?

Argument #2:

Microfinance does little to empower women, and in fact has worked against women’s solidarity.

The empowerment of women through microfinance has been documented many times over since the inception of microfinance nearly 30 years ago. Within that time, there has been a plethora of studies that show a direct correlation between microcredit, business skills training for women and increases in income. In fact, technical assistance and skills training is a key component of many microfinance organizations and is the main ingredient in making it sustainable, particularly for women who are often times the main developmental agents in poorer countries. Furthermore, studies have shown that interventions of microfinance and the social programs they integrate, have lead to decreases in domestic violence, the prevalence of HIV/AIDS, and other valuable social contributions.

Argument #3:

Microfinance has moved away from its social value and is now purely a tool to maximize profit.

All things considered, supporting tools that provide loans to low income people is not an exploitative evil, particularly when combined with skills training that can continue to grow and that can’t ever be taken away from them. Do some microfinance organizations abuse interest rates? Yes. Are some microfinance organizations motivated primarily by maximizing returns to their shareholders? Yes. But at the end of the day, it’s a business. A business that provides social value, but a business nonetheless. In the west, we take for granted the ability to walk into a bank and get a loan to start our business—even if we aren’t particularly thrilled about the interest rates or the bureaucratic requirements. Why should the world’s poor be denied this access? One cannot let a few “bad” decisions made by some microfinance organizations taint an industry that seeks to help provide a better life for people, or at the very least, that provides equal access to financial services no willing and capable person should be denied based on where they happen to live.

Microfinance might fail occasionally and it’s certainly not perfect. We can either choose to continuously support the fight against poverty in the abstract, or we can build solutions for change and decide to look into the faces of real women and men that are living slightly more satisfying and dignified lives because of microfinance and support them. I have chosen to do the latter. I hope you’ll join me.

©Alicia Kingue 2009. All rights reserved.