In one of the latest editions of the Danish magazine Development (Udvikling), published by Danida (Danish International Development Agency) you can read a short article about microfinance with the header Reports: No one knows whether microloans work. The two reports mentioned in the article are referred to as ‘a systematic analysis of the biggest amount of data in the field to date’ and one of the researchers, Maren Duvendack from the University of East Anglia, has the following to say about microfinance in general: “I think the enthusiasm for microfinance is built on a foundation of sand – and that we should rather start looking for alternatives.” Let me give you a little reflection on that matter.
Microfinance doesn’t work – work for what?
Firstly, as to whether microfinance works: “Works for what?”, I ask. Works to directly alleviate poverty and create economic growth and development? – I don’t know. And in my belief, no one probably ever will. That’s a discussion of macroeconomic methodology and whether you can isolate one or two factors in a tremendously huge global economic system and set every other aspects equal. I don’t consider that to even be possible since the number of influencing factors are endless. But why even do that, why not keep it more simple, more realistic? My point is, I think many analysts are asking the wrong questions. I would rather like to know whether microfinance works to provide people at the bottom of the pyramid with fair financial products – in their own opinion? Whether it works as a catalyst to promote technology for all people, rather than exclusively for those who can afford a new smart phone? Whether it disseminates private insurance, savings and general financial knowledge and know-how? Whether it has tremendously changed the way we perceive people with a very low income away from being mere passive victims? Whether microfinance works better or worse than other financial sectors both geographically and historically – what else is there really to compare with? Aren’t those more relevant questions to be asking?
What are the alternatives?
Secondly, Duvendack refers to alternatives – that is alternative ways to spend government money previously used to support/subsidize the microfinance sector – but which are these? Supporting the SME sector instead? And what would that lead to? Maybe increased growth, but what about the inequality? I cannot logically comprehend how financial products for all people can be a bad thing. Logically speaking, channeling funds towards those who have the least, I can only see as a means of reducing the economic inequality, and I think that aspect is too often overlooked in favor of GDP growth. But what is GDP growth worth, if it creates an economy with a rich elite and a plethora of poor farmers?
Furthermore, if the criticism is a matter of subsidies, every infant industry throughout history has probably needed a little incentive to get up and running – so I don’t really see this as a valid argument either. Especially given the increasing number of MFIs who are even financially healthier than many European banks! So what’s the logic in Duvendack’s conclusion in this perspective? Consider this: States in the West have used billions to save huge financial institutions from bankruptcy, thereby interfering in the market. But still, experts preach that microfinance institutions should not be – and should never have been – subsidized in their infant stage because that should be left to the Invisible Hand to decide. I find that both contradictory, unrealistic and unsmart.
Microfinance leads to massacre?
Another article which caught my attention lately, Severe debt might have triggered bloody mine strike in South Africa, featured an interview with Milford Bateman – all time microfinance critic. The article was related to the tragic Marikana massacre on August 16 where 36 miners were shot by the police while going on a strike for higher wages. Bateman believes that microloans drove the miners to desperation and hopelessness which contributed to the strike and thereby the tragedy. He writes: “We have, perhaps, just witnessed one of the most appalling microcredit-related disasters of all in South Africa”. But I’m a bit puzzled about the causality and responsibility in all this. Why emphasize microfinance? Why not working hours, salaries and human rights too? Or compare the terms on which these loans were made with other microfinance products?
First, I want to emphasize that I love Bateman’s consistent struggle for more regulation in microfinance, I could not agree more, just as I would like more regulation for conventional banks as well. I do not believe in the self-regulating market and the invisible hand; I don’t believe in exploitative interest rates; I think loans for consumption should never have existed in any part of the world and I think a good, healthy partnership between the state and the private sector is key to a solid financial sector.
Cluster bombs and the hidden real problem
With that said, there is an essential aspect in this article I find… distorting. First, note that the main issue is not the salaries – apparently – which it might as well have been. The issue is micro-credit. Not a certain type or provider of micro-credit is to blame, but the very concept itself. But when a conventional bank does something unethical too, like investing in cluster bombs, do we automatically think that all banks regardless of country, size, regulatory framework and organizational structure, do the same?
I find the discourse distortive because it continuously generalizes a whole sector which is very dynamic, ever-changing and much different across the globe. Microfinance is not inherently bad. The concept is not to blame, exploitative masterminds are. Therefore, in this case, an exploitative employer, poor human rights, and deficient labor organizations are the real problems, microfinance is just the means. Once again, a bad, unregulated, opaque, exploitative example of microfinance is discrediting the whole sector, due to the conclusions drawn. We need to understand what the real problem is.