In response to various articles that have argued that microfinance does not work to alleviate poverty, Lendwithcare has posed a range of challenging questions to our own microfinance advisor, Dr Ajaz Khan. Ajaz’s main concern is that all too often critics of microfinance are actually only talking about microcredit, that is the provision of small loans to the poor, while overlooking the rich variety of other vital services offered to poor people such as microsavings, micro insurance and a range of training and financial literacy programmes that come under the umbrella term ‘microfinance’. Additionally, he argues, microloans are made by a multiplicity of actors across the developing world, ranging from unscrupulous loan sharks to ethical charities whose sole aim is the alleviation of poverty – and it is erroneous to bundle all of these activities together and to try to analyse them as a whole.
Why are people claiming that microfinance doesn’t work?
It used to be the case that microfinance was provided largely by organisations with a strong social development mission which typically revolved around ‘alleviating poverty’ or ‘increasing women’s empowerment’- the provision of microfinance was simply a means to an end, not an end in itself. However, as microfinance became more well-known and mainstream over the last decade or so, organisations with stronger commercial objectives became much more active in its provision. Without doubt most microfinance nowadays is provided by the latter – and their mission is generally not ‘alleviating poverty’ or ‘increasing women’s empowerment’. When considering supporting (or analysing) microfinance, I think it is very important to consider which type of institution is providing the microfinance. Lendwithcare only partners with institutions that prioritise social development.
How do these various organisations differ?
They differ hugely. Organisations who prioritise social development tend to accompany the provision of microfinance with basic training in financial literacy, organising borrowers into groups, training in how to improve agricultural yields, adhere to codes of conduct, etc. As a UK comparison, I would expect the impact on the borrower of loans provided through community managed credit unions to differ from those provided through pay day lenders, although both in fact offer short-term loans.
How is Lendwithcare different?
The MFIs that lendwithcare supports do provide other services as well as microcredit such as savings, insurance, money transfer, and even non-financial services such as basic business training and raising health awareness on malaria and HIV/AIDS. It also worth mentioning also that some MFIs are in fact financial co-operatives in which members, as well as accessing financial services, share the profits. I think the empirical evidence on the impact of savings, insurance and money transfer on improving poor people’s lives is largely positive.
I think the evidence is far more conclusive when it comes to analysing the impact of finance on Small and Medium sized Enterprises (SMEs) on reducing poverty – it has proved to be positive. The growth and development of SMEs tend to create waged employment opportunities for poor people and almost all the MFIs lendwithcare supports (the exception being Pakistan) actually support this category of enterprise as well. I would estimate that about 10% of the respective portfolios are SMEs and we do feature quite a few SMEs on the lendwithcare website as well.
In my opinion it is abundantly worthwhile supporting microfinance, providing it is the right type of microfinance, provided through the right sort of institution. Undoubtedly some of negative impacts of microfinance (such as over-indebtedness, worsening gender relations, etc.) are not necessarily criticisms of microfinance per se but rather the manner in which it has been provided.
What evidence do we have to show that Lendwithcare works to alleviate poverty?
Our regular reports from each of our borrowers tells us that it does. We do not have rigorous, empirical evidence as yet, however we have started collecting data, beginning with Pakistan, which we are providing to an independent academic body for analysis. In 2016 we will begin to present evidence. This will, we hope, complement existing research that already shows that financial inclusion helps poor people to improve their lives: https://www.lendwithcare.org/news/post/100
What proportion of our loans go on ‘consumption’ (basic necessities for survival)?
This is difficult to say – even those people who say they use their loans for ‘productive’ purposes will invariably divert a small amount to meeting immediate consumption needs. It does though emphasise the importance of providing poor people with savings facilities so they can save for emergencies and consumption needs. It is difficult to comment more on the recent figure claiming 94% of microloans in South Africa are spent on basic necessities without knowing more of the environment in South Africa. However, I would say that it is probably an example of ‘lumping everyone together’: I have just returned from Zimbabwe where someone I met from the Reserve Bank of Zimbabwe mentioned that less than 10 of the 152 registered microfinance organisations were ‘development oriented’ - instead more than 90% of the organisations were in fact best described as commercial ‘payday’ lenders providing loans for consumption. They were however categorised as providing microfinance. Clearly it is not appropriate to measure both types of organisation by the same yardstick and try to use the overall results to assess impact. We’re in danger of throwing the baby out with the bathwater.
Doesn’t creating new businesses in a poor community simply displace already existing ones?
It is important not to saturate markets and some MFIs have been guilty of this – too many small-sale entrepreneurs trying to produce and sell the same items may of course simply drive down the market price. However, in all forms of business throughout the world new more efficient enterprises may displace older inefficient ones. If there is a lack of demand for products, then this is a poor investment decision, not a fault of microfinance! The vast majority of lendwithcare loans are for established businesses. It is important also to distinguish that in the area of farming, increasing agricultural production (whether it is rice, beans, milk or chickens) may actually enable the farmer and his/her family to simply eat more, the surplus need not always be sold.
How would you respond to the assertion that microloans are a method of political control of people through keeping them in debt?
I am not sure I know enough about political economy to answer this question. Of course, Islamic finance adopts a different approach. The only loans permitted in Islamic finance are the interest-free loans provided by Akhuwat, all other finance is on the basis of equity finance rather than debt finance. I think not enough microfinance institutions provide equity finance.
Do you think the aid sector is in danger of forsaking issues like structural adjustment, austerity, financial crises, land grabs, tax evasion, climate change, and challenging the concentration of power and wealth in favour of using microfinance as a panacea?
Again I am not sure I know enough about political economy to answer this question, but I will say these things are not mutually exclusive – I am not sure why simply providing better financial services means that we have to forget about land reform, climate change, and the other challenges facing poor people! In fact, good microfinance organisations promote collective mobilisation, make poor people aware of their legal rights, promote better health and are vehicles to address issues such as domestic violence, and are owned and run by their members – I am not sure they make people docile, rather the complete opposite.
Dr Ajaz Ahmed Khan
Senior Microfinance Advisor - Lendwithcare
CARE International.org