Does microfinance have the ability to help the very poor?

Originally @ Stanford Progressive (offline)

For many of the 3 billion poor in the world, poverty does not just mean a limited access to financial resources; extreme poverty implies malnutrition and starvation, exposure to disease, an impediment to education, a reduction of rights and privileges, and possibly death. However, microlending can ease the extent of poverty. It is estimated that microlending organizations have helped over 67.6 million poor people. This level of success is what has excited so many to advocate microfinance as a means of reducing poverty: today, it is estimated that over 7,000 unique microfinance institutions exist. Even so, critics of microfinance are very vocal in their attacks on its efficacy and success. Globalisation Institute economist Tom Clougherty writes, “There are a number of criticisms leveled at microfinance and chief among them is that microfinance is just a ‘band-aid’, that it simply covers up the real problems without actually addressing them.”

David Hulme, Professor of Development Studies at the University of Manchester claims, “MFIs [microfinance institutions] virtually never work with the poorest – the mentally and physically disabled, the elderly, street children, the destitute and refugees – and many MFIs […] have high proportions of clients who are non-poor.” Hugh Allen, a faculty member of the Boulder Microfinance Training Program, adds that many smaller MFIs are unable to work with the very poor because “roads are bad, qualified staff may be expensive and hard to find, markets may be scattered, and the legal system dysfunctional.”

Eric Thurman, the president of Protos Fund and former CEO of Geneva Global Inc. is quick to counter critics by pointing out that, “In Indonesia, clients of BRI increased their income 112 per cent. A study of several institutions in Ghana documented borrowers doubling their incomes. A four-year study of BRAC clients in Bangladesh shows family assets also grew by 112 per cent,” and “In India, half of SHARE clients graduated out of poverty.” An independent review of 11 organizations concluded that, “Microenterprise finance institutions can […] achieve strong outreach along all three basic dimensions: depth (reaching the very poor), extent (significant scale), and service quality.”

From this evidence, it is possible to draw the preliminary conclusion that microfinance is in fact able to reach the truly poor in an economy. Case studies that showed that the poorest were not being reached demonstrated three causes responsible: 1) the poor were averse to participating in the program, 2) the program’s focus was not oriented towards the very poor, or 3) the program was not capable of affecting the very poor due to its size. The studies noted above showed that these problems can all be overcome through building confidence in clients, aiming at the very poor, and creating a large-scale program.

However, Allen’s problem of infrastructure still presents a troubling argument against microfinance. Allen’s criticism focused on the observation that, with poor infrastructure such as bad roads, unstructured markets, and inexperienced staff, microfinance does not have the ability to reach the truly poor. The Focus Series, a publication released by the Consultative Group to Assist the Poor (CGAP), addressed this problem, noting that the scale of an MFI determines the level of outreach to the poor; a large microlending program that is economically profitable and sustainable can overcome obstacles such as road conditions, market adjustments, and staff training. However, only such high-performing programs have the capability to overcome infrastructure obstacles. This is problematic because most of the 7,000 or so MFIs in the world are much smaller-scale programs than the ones in the Focus Series’ study. Thus, while it is possible to solve infrastructure problems, only larger organizations are capable of doing so. Though this doesn’t mean that microfinance is incapable of reaching the very poor, it means that microfinance organizations need to focus on achieving a larger scale of operations in order to do so.

This analysis yields a mixed conclusion about microfinance’s ability to reach the very poor: while large MFIs can overcome obstacles of infrastructure, breadth, and depth, they cannot directly impact those without any earning potential. As such, microfinance does have the ability to reach people living in poverty, but not necessarily those who are in the greatest need, who lack the basic infrastructural needs to take part in microfinance programs. In order to find a solution to extreme poverty, not only does microlending have to be deployed on a greater scale, but the institutions that provide microloans must be scaled up to account for the host of difficulties that accompany poverty.

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