Microfinance Reports

Helping or hurting: What role for microfinance in the fight against poverty?

All Party Parliamentary Group (APPG) on Microfinance which is based in the UK has released a report titled Helping or hurting: what role for microfinance in the fight against poverty ? In December, the APPG had launched an inquiry into how the UK Government and Donors should contribute to the microfinance field. The APPG has more than 30 members from both the House of Commons and the House of Lords, representing all of the main political parties of the United Kingdom.

microfinance report united kingdom parliament

Helping or hurting: What role for microfinance in the fight against poverty?

Download the report at the link below : Right click and choose “Save Target As” or “Save Link As”

Report on Microfinance by the Parliamentary Committee-PDF-72-pages-1.5MB

Executive Summary

58% of the poor who borrowed from Grameen are now out of poverty. There are over 100 million people now involved with microcredit schemes. At the rate we’re heading, we’ll halve total poverty by 2015. We’ll create a poverty museum in 2030.” – Professor Muhammad Yunus, speaking to Time Magazine in 2006

“The microfinance movement has been in operation now for some 30 years and in that time it has failed to provide robust evidence that it is meaningfully associated with sustainable poverty reduction and ‘bottom-up’ economic and social development…But even worse, many economists and development specialists are now of the firm opinion that MF actually UNDERMINES the process of sustainable poverty reduction and ‘bottom-up’ economic and social development.” Dr  Milford Bateman, written response to this inquiry, 2011

These two quotes are illustrative of two extremes in the debate over the impact of  microfinance  on  poverty.  Currently  the microfinance sector is undergoing a massive period of upheaval. After 30 years of growth, the sector has diversified to include a wide breadth of different interventions, products and business models. We believe this diversification is probably a good thing, ensuring that there are a variety of different models available to clients – particularly where it has resulted in access to a variety of financial services,  including savings and insurance as well as the traditional  credit.   However,  there  are  clearly  also  big problems : while microfinance models have adapted and grown the environment in which they operate has been left relatively unchanged  and  regulatory   frameworks  have  been slow to develop. Out of this ‘free’ environment where investment is in many  cases  abundant  and regulation  is  sparse  there  have emerged concerning stories of exploitation as well as suggestions of significant progress out of poverty.

The Microcredit Summit Campaign Report is produced every year and is traditionally a place for celebration of the rapid growth of the industry. In 2011, it took a step back and examined the divisions that have come to light, highlighting these through the story of two microcredit clients.

Rita in Ghana received an $80 loan, along with technical education and membership of a solidarity group, which has enabled her to diversify her income, save, pay school fees and get her family through the traditional “hungry season” before the crops ripen. Rita has big dreams for the future: “The biggest thing for me was starting to save. I had never saved before. Now I have savings to tap when it’s time for the school fees and other needs, including more food. My family is better now. We eat better. I want to save more, so I can use my own money for the farm instead of taking out loans. I want to meet people who earn more money, so I can learn from them.”

Zaheera from Andhra Pradesh in India, on the other hand, was caught in a tragedy unfolding across the state. She died in an apparent suicide on September 13th, 2010. At the time of her death, she had loans outstanding from eight different microfinance institutions totalling Rs. 160,000 (US$3,500).1   She had no regular income, just odd jobs in town paying about Rs. 600 ($13) a week. She used most of the loan money for her daughter’s wedding. Zaheera’s husband explained “This is what drove my wife to suicide…she did not have the courage to face the group members, leaders and loan staff without making payments and there was nowhere from which we could repay all the money”.

It is our thesis that the approach to microfinance taken by donors, practitioners and even many critics, has so far been inadequate. In order to ensure that no microfinance client finds themselves in the position that Zaheera did, and that ever larger number of clients are able to use financial tools to help them move out of poverty like Rita, it is absolutely essential that we recognise two facts: firstly, that credit services can cause harm as well as good because they induce debt; and  secondly that the sector is now so diverse that we have to assess individual microfinance  interventions  on  their  own  merits  and  relate  to  them  in  appropriate  ways  rather  than  as  a universally positive social force. We must cut through  the hype and take a reasoned approach to how the UK government and other stakeholders should support the sector. For not-for-profit, socially focused microfinance this  may  mean  continuing  subsidies,  along  with  encouraging  increased  focus  on  the  evaluation  of  social outcomes, but for commercial microfinance it is more likely to involve appropriate,  rigorous, but not overly onerous, regulation.

The strongest message we want to send with this report is that in many (though not all) regions the sector is currently unbalanced. While access to loans has expanded massively, other financial services have lagged. Where the only product available is a loan, customers will take a loan even if it is not the most appropriate solution to their financial needs. Poor people need access to savings, perhaps even more than access to loans, as well as insurance, safe remittances and other services. Until we extend comprehensive financial services to all we cannot truly claim to be ‘democratising financial services’, let alone contributing fully to the fight against poverty. DFID and other donors must play a central part in refocusing the industry. As Mark Napier, the incoming Director of Investment Innovation at CDC stated during an oral evidence session for this inquiry, donors should act as the ‘conscience of the market’.

1 Comment

1 Comment

  1. Tara Kumar

    June 20, 2011 at 9:28 pm

    It is absolutely true that microfinance can help and hurt. I find myself getting caught up in descriptions of microfinance that portray it as the most socially conscious thing out there. It gives people the tools to succeed and doesn’t merely give a donation. It can help bring positive change from the ground up and helps to strengthen communities and families. Although this is all true, it isn’t the entire story. If a client’s loan taking practices isn’t monitored and someone can get a multiple loans quickly, loans can give devastating debts to individuals.

    As an intern with Opportunity International for the summer, I have seen the importance of savings programs. Opportunity stresses the importance of their loans AND savings program, emphasizing the fact that providing an easy method of saving is integral to successful microfinance. I did not understand the importance of savings programs until recently and now I whole heartedly believe in it. With that being said, the microfinance industry focuses mainly on loans. That’s why I believe that more savings programs need to be instituted. This is of course easier said than done. I think that savings is an aspect overlooked by many, and it is important to bring it to the public eye.
    Do the two individual cases discussed in this article correspond to the industry as a whole in these respective countries? In other words, is the microfinance industry in Ghana more savings based than the one in Andra Pradesh, India?

    Are clients who take out loans monitored? DO loan officers periodically check in to make sure clients are working toward paying back loans?

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