Challenging the Claim that Microfinance Loans Result in Poverty Reduction

Confessions of a Microfinance Heretic bravely challenges the hype of microfinance loans as a solution to poverty – Published on UTNE, by Hugh Sinclair, May 2013.

“I’m a dodgy moneylender, exploiting the poor with useless, overpriced loans, ideally obliging their children into forced labor in the process.” This did not go down well. I had been introduced to yet another gathering of bright-eyed microfinance experts at yet another microfinance conference, and I had incorrectly assumed that irony and sarcasm were within their grasp. They were not. I attempted to redeem myself. “Guys, I’m joking … it was a joke. I’m a microfinance consultant, we’re all cool … sorry.”  

I had broken the golden rule of microfinance, the unwritten code that bonds its practitioners together. I had criticized microfinance and, perhaps worse, I had implicitly challenged the developmental claims the sector proclaims so vehemently. This is unacceptable from an insider. But none of the experts offered a defense or rebuked my confession. Such comments cut a little too close to the nerve to warrant further conversation. It is usually better to discuss the weather or the palatial décor of the conference rooms instead … //

… The fact that crippling poverty persists in countries like Bangladesh, India, Nicaragua, Nigeria, and Bolivia is seen as an irrelevant detail. The persistence of poverty means that we need more microfinance. When Indian women started poisoning themselves under the burden and shame of chronic overindebtedness, or when the citizens of an entire country refused to repay their microfinance loans claiming unfair treatment, those who provided the loans remained silent or claimed that it all had nothing to do with them.

Many people do rather well out of microfinance, and celebrities from Bono to the Clintons, President Fox of Mexico, and the Queen of Spain have jumped on the bandwagon. The sector is of course extremely proud of its Nobel Peace Prize–winning godfather, Muhammad Yunus.* Yunus had embarked on a courageous mission to rid the world of poverty using fairly priced microloans to entrepreneurs. Alas, those charged with achieving this globally had a slightly different vision. Even Yunus himself has criticized the microfinance sector for the extortionate interest rates some microfinance institutions (MFIs) charged, accusing such institutions of becoming precisely the loan sharks that microfinance had initially sought to replace. Yunus’s flagship institution, Grameen Bank, with whom he shared the Nobel Peace Prize, charges interest rates of about 20 percent—enough to make any mortgage-holder in the developed world weep, but actually very reasonable in the microfinance world. The fact that Grameen Foundation USA had inadvertently supported and invested in at least one bank that charged rates six or seven times higher has been largely ignored.

Microfinance is a $70 billion industry, employing tens of thousands of people, predominantly managed by a closed group of funds based in the U.S. and Europe acting as gatekeepers of the private capital available, and increasingly some of the public funding as well. The industry is largely unregulated, opaque, and hard to investigate in practice. A tireless PR machine recruits spokespeople, advertises on television, and holds endless promotional events. An almost cultlike aura surrounds the sector. Insiders are expected to toe the party line. It’s to all of our advantage to belong to such an epistemic community with a common set of broadly held beliefs … //

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