Can Microfinance Work?: How to Improve Its Ethical Balance and Effectiveness

Book Preface

My interest in microfinance was first sparked when the UN declared 2005 the “Year of Microcredit” and made microcredit central to its Millennium Development Goals, particularly that of halving extreme world poverty by 2015.

At the time, I was an investment manager running $1 billion in portfolios dedicated to investing in financial stocks for a large fund management firm. I had nearly twenty years’ experience of investing in banks and financial institutions, but, being publicly traded commercial enterprises, very few of them indeed ever reached the poorest in society— and some of those that did had the roughest reputations.

So the idea that a form of banking existed that could lift the poorest out of poverty was something I wanted to know more of. It was not (then) an investable idea, so instead I explored it in a private capacity, as a donor and through sitting on the advisory board of a UK MFI operating in sub-Saharan Africa.

Ten years on, has microcredit helped deliver the Millennium Development Goals? The answer to that, sadly, is no. The proportion of people in extreme poverty in the world has reduced,1 but much of that improvement has come from China’s development, and without the involvement of microcredit. Many of the early studies that trumpeted microcredit’s success have been discredited. The most recent and thorough randomized evaluations, conducted across a wide range of contexts and continents, have failed to find any significant ability of microcredit to change the lives of the poorest.

Does that mean, then, as one commentator2 suggested in jest, that “At this point, it is clear that any responsible policymaker must support the end of public subsidies for microcredit, social entrepreneurs should redirect their energies to some better cause, and this multi-billion dollar industry must wind down. Rigorous impact evaluation has proven that it was all built on a myth”? Well, that might indeed be a more rational response than the reviewer gives it credit for. But there are those who have invested many development-minded dollars, who will want to know more before abandoning the effort. Is microcredit following an intellectually and morally bankrupt model that is beyond repair, or is there anything left that can be done to make it “work”?

For it is not just that microfinance is now understood not to have much impact in reducing poverty. Its original promise had an additional strong ethical message as well— that it could empower the world’s poorest women, as well as enrich them. Yet in practice it has been seen to exploit, coerce, and overindebt, with disastrous results for borrowers at times. We need to know not just if there is anything that can be done to make microfinance “work” in terms of poverty alleviation, but also if there is anything that can be done to ensure that it is practiced ethically. Indeed, we need to know if it is the case that practicing microfinance more ethically is necessary just in order to stand a chance of delivering the hoped-for economic benefit.

This book is primarily addressed to these questions. I hope and believe that interested citizens who wonder where their development tax dollar is going will find it useful; that students of public policy and applied political and moral philosophy will find it an extended working example of how, when the implementers of a development policy lose sight of the moral moorings behind it, they can achieve the opposite of the original intention; and that ethically confused practitioners who struggle with the idea that their efforts to enrich and empower the poor may have ended up exploiting instead, might find some guidelines within on how to restore their purpose.

But this book is most of all addressed to those funders of microfinance who have the opportunity not just to tweak the microfinance model, but to radically change it into one of several rather different forms: subsidized savings vehicles, small- to medium-sized enterprise [SME] funding, and commercialized microfinance more or less as we know it—but regulated. Any of these, I suggest, may stand a better chance of helping to deliver on what will be the Sustainable Development Goals going forward, than microcredit. Some practitioners have already begun to take up this challenge; many more could do so. The non-commercial funders of the microfinance movement—the development agencies in the United States, United Kingdom, and Continental Europe; the World Bank; the great philanthropic donors—can steer them on their way. If this book helps move some to do so, it will have achieved its purpose.