November 1 2010
Nicole Kurokawa Neily
Without question, microfinance has become the feel-good charity movement du jour. The underlying premise that individuals can lift themselves out of poverty with the proper resources appeals to the philanthropically minded across the political spectrum - from conservatives (entrepreneurship!) to liberal (poverty reduction!)
Because participants in microfinance programs do not have access to the formal banking sector, they also lack access to the capital necessary to start a business or otherwise improve their lot in life. According to the South Asian Microfinance Network, over 60 percent of the adult population -- approximately 1 billion people -- do not use or are excluded from financial services for reasons including lack of identification or collateral, physical distance from lenders, and relatively low returns on investment. The average loan is $195 USD, and the average saving balance amounts to $39 USD. Microfinance loans serve approximately 20 million of the world's poorest people - and 74 percent of these are women.
Broadly referring to the provision of small loans and banking services to under-served populations, microfinance has been around informally for centuries in the form of cooperatives, family members, and neighbors. In the 1970s, Mohammad Yunus formalized this process through his Bangladesh-based Grameen Bank and won the 2006 Nobel Peace Prize for "efforts to create economic and social development from below."
Microfinance has been promoted as a powerful tool to empower women because of the link between gender and poverty. The U.N. State of World Population 2008 report states that three-fifths of the world's billion poorest people are women and girls, and the U.N. Development Program has estimated that women own just one percent of the world's wealth. Accordingly, microfinance services tailored to assist the poor end up benefiting women.
Women's microfinance programs have been particularly successful in Asia. Over 8 million, or 97 percent of Grameen Bank's borrowers, are women -- numbers that are echoed elsewhere. A 2006 World Bank report "Microfinance in South Asia" asserts that "even in a socially conservative country such as Afghanistan, microfinance activity has focused on women, thereby according them more explicit recognition as economic agents, while in India, the SHG movement has become the basis for programs promoting empowerment and overall improvement of the status of women in society." Access to capital offers women the resources to make their own choices, which, in turn, makes them less dependent on family members or lenders. Women can start or expand businesses, improve their homes, or seek an education with small loans; the wealth earned from these endeavors brings increased status, mobility, and opportunity. The microfinance organization Kiva states on its website, "Empirical evidence shows that, among the poor, those participating in microfinance programs who had access to financial services were able to improve their well-being-both at the individual and household level-much more than those who did not have access to financial services."
However, microfinance's impact on women may have a dark side. Professors Susan F. Feiner and Drucilla K. Barker have highlighted the problems with driving vulnerable populations into domestic work, which often has long hours, low pay, and possibly hazardous conditions. Proponents argue that this exploitation is rare, and that microfinance work allows provides women with increased standards of living increase and expanded opportunities to escape situations of oppression and victimization.
Another controversy surrounds the relatively high interest rates used in microfinance. Lending institutions assert that they must charge borrowers above-market rates to offset the added time, distance, and effort needed to maintain these loans, but critics have expressed concern that high rates keep the poor in poverty in perpetuity and would like to see caps implemented. Microfinance proponents argue that such rates are lower than those seen from lenders and may, in fact, be needed, because diverse conditions and low margins mean many organizations lose money for years before breaking even. Many larger institutions have lowered rates over time due to competition. But, if they are forced to keep rates low from the beginning, the effect may end up decreasing the availability of services overall. As the Cato Institute's Swaminathan Aiyar points out, "Retained profits are vital for MFI expansion, but will disappear with caps, which will also bankrupt small, new MFIs. Caps will discourage MFIs from entering remote areas most in need. A cap will benefit the haves (who already receive microcredit) at the expense of have-nots."
Microfinance is not the silver bullet to ending poverty but can be extremely effective for improving the lives of a few. Used in conjunction with property rights reform and expanded education, microfinance can help make significant inroads in the war on global poverty.
A wide variety of lenders have sprung up to serve the needs of a diverse borrowing population -- ranging from small non-profits through to for-profit banks and corporations. These varied models have different pressures -- be it financial viability, or appeal to a donor community -- which have led to deeply differentiated standards of lending and repayment. Microfinance programs have historically been premised on loans, but the wave of the future for organizations may lie in diversifying into additional areas like savings accounts, money transfers, and insurance products. Both the private and the public sector need to emphasize accountability and transparency. In addition, to ensure long-term growth of the microfinance sector, a stable regulatory environment that protects consumers must be created while still encouraging innovation and competition.
Across the continent, the penetration rate remains quite low and is unevenly distributed across the region. Data from the South Asian Microfinance Network indicates that microfinance penetration rates among the poor range from 1.8 percent in Pakistan to 34.9 percent in Bangladesh. Clearly, growth potential remains high. A lingering concern with the practice as a whole is that microfinance may improve conditions for some, but does nothing to change the structural causes of poverty or underlying gender discrimination. Further study is needed of communities that have benefited from microfinance in order to determine if there are long-term effects on poverty reduction.
Nicole Kurokawa is director of research analysis at the Winston Group, a strategy and message design firm. She is also a senior fellow at the Independent Women's Forum and blogs for the Washington Examiner.