Let’s not idealize this sector
Microfinance, which started hundreds of years ago took off during a post-cold war era in our world’s development where there was a consensus in the West that neo-liberal economics were the most effective in promoting growth, government’s role was diminished, and the poor would best benefit from the trickle down effects of growth rather than elaborate government schemes aimed at redistributing wealth.
One of the great appeals of microfinance is that it could be donor or government driven, but that it was self sustaining and would eventually wean off of subsidies alltogether. The subtext, however, was that it was a fall back, where neoliberal economics failed to produce jobs, the poor could generate their own income in the informal sector and earn their livelihoods. Where governments failed to provide social services for the poor, in order to comply with strict requirements of their foreign creditors, microfinance served as a safety net, supporting very small businesses that provided incomes for the poor and unemployed. With the migration of family members away from rural areas into urban areas, or away from urban slums into developed countries, microbusinesses served to support parents who may otherwise have relied on their children for shelter or medical care. Did microfinance ever generate employment? Did microbusinesses develop into vibrant small businesses? And if so, did loans help them to get there? In the decade of the 1990s, the premise was that it was too costly to measure the effects of microloans, but that poeple were coming back for more loans, it meant that there was some positive impact of microfinance on the poor.
What are the benefits and why aren’t we measuring them more?
With billions of dollars a year going into microfinance institutions and supporting agencies, it is amazing how little research continues to exist on the impact of this sector. It’s as if any investment that is seen as not directly leading to sustainability is villified if it involves microfinance at all. We invest in so many things, why can’t we invest more in understanding whether we are getting the best bang for our buck in supporting microfinance. I would highlight the Financial Access Initiative as one exception to this rule. I am not a complete skeptic, by any means. Any of us who have spoken with clients of microfinance institutions have seen the benefits of small loans (new floors in a home, investments in plumbing, better health care, greater propensity to invest in school, and in some cases even savings) understand that microfinance meets a need for financial products and services, and these services are relevant in helping the poor manage their cash flows, improve their incomes, and cover some of the costs of social services. In a recent household survey that EA Consultants held in Nicaragua, we found that microfinance clients spent more on health services than non-clients. They also used more private services vs. public services (ie. better quality). Anecdotal evidence suggests that clients of microfinance institutions (MFIs) also pay for their chidren’s educations with greater regularity. I wish I had more data on this, and i wish that others could see that if the ultimate goal is a social one, it does not pay to downplay social objectives in this field and claim its all about making it a commercial business (I would argue that Walmart stock is more appealing investment under that premise).
Should we expect microbusinesses to grow into small and medium eterprises?
Anyone who has walked by rows of sellers of candies or cell phone cases in a busy market will agree that while many microbusinesses require tenacity, optmism and good business skills, most are not driving innovation or employment growth in their economies. I fear that over time, Walmart will take over the roles of many of these peole and that we face a great need to train the young ones and protect the elders from the structural shifts in their economies.
The World Bank distinguished poeple who are voluntarily in the informal sector (make a choice) and those who are there involuntarily (are laid off, cannot find employment, lack skills etc). The former are likely to be more successful as entrepreneurs and less likely to take formal employment when it is available. The latter are more suceptible to economic trends. They are more vulnerable to downturns and I would argue, less credit-worthy. When microfinance institutions are lending to both these groups indiscriminantly, they take economic environment “upside risk” (businesses close when individuals find work) and economic environment “downside risk” (businesses fail when individuals lack skills to compete effectively). Should all of these workers have access to loans? Are there more efficient safety nets that would help the latter group? Job training perhaps?
Some microbusinesses grow to become thriving small and even medium sized enterprises, but for the most part, microentrepreneurs are constrained from growing into larger enterprises. There are many constraints and i won’t cite them all. I’ll focus on one: that of willingness. For example, look through the portfolio of any MFI and you will find that either 100% are women or 60% are women. If a woman chooses to work near the home , it is with the hope of balancing their reposnsibilities as a parent and as a provider. Having your own business allows this flexibility (vs. for example cleaning rooms in a hotel, sweeping streets, etc.). You can bring your children to work, often you can work out of your home. You set your own hours and decide how much money to take home daily depending on your needs. All of these are very large benefits. Some of the flaws include not having any paid time off, no insurance or contribution to pension funds, and often longer (albeit more flexible) hours. Should our development goals burden these women with the additional reponsibility of growing their businesses into larger, more formal enterprises? Rather than making larger loans, should we not look at their other constraints and needs and provide, say low-cost day care, or work with their spouses to have them take on a greater share of the family responsibilities? Our survey in Nicaragua, by the way, found microfinance clients to have higher levels of stress than non-clients in the same peer group.
So what of all this?
This is the first of what I hope will be a number of entries that help me [us, we] think thorugh some of the tough issues in microfinance in a free way. I don’t want to take sides. Nothing is black and white and perhaps, that’s the only message I conclude with today. Let’s not write off, microfinance, but let’s better understand the value it provides to help us support the field in a smarter way. The financial crisis we are living today call attention to the fact that microfinance has probably led to some overindebtedness of the poor in some countries, much like mortgage and credit card finance has in the developed world. This is harming more than it is helping. Our goal, therefore, should not just be financial access but a broader access that aims to fill the gaps that differentiate the poor from the rich. Financial access alone cannot eliminate inequalities. Microfinance has become in many countries a de facto replacement for so many services that governments do not provide (unemployment insurance, public health, education subsidies, etc) and as such, it has served the poor well. But it has also provided an excuse to focus less on these other services.