One argument against Microfinance

Building off a Financial Times article written by Tim Harford last week that criticizes our lack of understanding of how microfinance impacts clients’ livelihoods (which my colleague Sushmita highlighted here), Professor Milford Bateman goes a step further by arguing that heavy investments in microfinance actually hurts local economies.microfinance discussion

Bateman starts by discussing the growing microfinance portfolios of commercial banks in Serbia:
“I have recently been working as a consultant in Serbia. Here the foreign-owned commercial banks since 2001 have massively discovered microfinance. From almost zero in 2001, the commercial banks now channel 22 per cent of their total loan portfolio through highly profitable microfinance (household microloans) programmes amounting to almost 12 per cent of gross domestic product.”

From there, Bateman discusses the negative effects that he feels stem from this growing concentration on microfinance, specifically:
• Shortage of funds for small and medium-sized enterprises (SMEs), which can be
damaging because SMEs are a proven route to sustained growth and development
• Accelerated proliferation of informal-sector microenterprises (e.g., kiosks,
shops, subsistence farms) instead of industrial ventures

Bateman extends this argument to other countries, where he feels similar problems arise from overinvestment in microfinance, to the neglect of SMEs and other engines of sustained growth (e.g., Mexico, Bangladesh).

I don’t agree with all of Bateman’s points, but the idea that there could be over-concentration and investment in microfinance makes sense. As Bateman concludes,
“Economics 101 shows conclusively how critical savings are to development, but only if intermediated into growth- and productivity-enhancing projects. If it all goes into rickshaws, kiosks, 30 chicken farms, traders, and so on, then that country simply will not develop and sustainably reduce poverty.”

Bateman’s full article can be found here. Any good arguments against Bateman’s points?

via indiadevelopmentblog

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