That, in a nutshell, was the question posed to a panel of microfinance experts at a Seattle forum earlier this week, sponsored by Global Washington and aimed at examining “The global implications of India’s microcredit crisis.”
The answer: Yes and no. Of course.
It’s actually an important, if impudent sounding, question given that microfinance has long been heralded as the most powerful weapon in the fight against poverty. It’s especially interesting in Seattle because this community is one of the leading international hubs of the anti-poverty scheme.
I think it’s fair to say microfinance is no longer regarded without question as a panacea for poverty. In fact, as I have written ad nauseum, it is in something of a crisis.
This is primarily, but not only, because of alleged abuses and mistakes made by folks in India who got a little too excited about doing microfinance as a fast-return-on-investment business. A story in Tuesday’s New York Times about SKS Microfinance describes the highest-profile collapse — and, arguably, loss of mission focus — in the largest microfinance market in the world, India.
But the problems are not unique to India (see Bangladesh) and not simply because of excessive profit seeking.
David Roodman, a microfinance expert at the Center for Global Development in Washington, D.C. who I frequently cite here on Humanosphere, was flown in to serve as keynote speaker for the event (held Monday evening at St. Mark’s Cathedral). He was joined by three of Seattle’s leading microfinance experts.
Here are their four answers to the question of “Does microfinance work?
- Roodman: It depends upon what you mean by “work.”
- Rick Beckett, Global Partnerships: It depends upon what you mean by “microfinance.”
- Peter Bladin, Grameen Foundation: Yes, for the most part, and it is still one of the best anti-poverty tools we have.
- Chris Wolff, Accion: Yes, but only if we remain focused on what people really need.
Roodman opened the discussion by giving his perspective on the Indian microfinance meltdown, which I summarized earlier. He says the collapse of SKS Microfinance, and its accompanying collateral damage in the Indian state of Andhra Pradesh, was caused by a number of things but primarily by growing too big too fast.
“I don’t think it was profit-seeking, ripping off clients, that was to blame,” Roodman said.
Part of the problem was over-promising on the benefits of microfinance combined with aggressive, if well-intentioned, marketing of the micro-loans to poor people.
Roodman said there is little evidence that microfinance does lift people out of poverty, overall, though he said it likely does give poor people more control over their financial lives.
Rick Beckett, CEO of Global Partnerships, responded to Roodman’s claim that microfinance doesn’t reduce poverty overall by suggesting that analysts stop assessing microfinance as if it is a monolith.
“There are many different kinds of microfinance,” Beckett said.
Some are clearly aimed at achieving a social good while others operate more like an American payday loan.
It’s misleading to say microfinance in general doesn’t reduce poverty, Beckett said, suggesting that analysts like Roodman would provide the field with more valuable assessments if they would evaluate different forms of microfinance for broader social impact.
Wolff said he didn’t think the rapid growth of microfinance is the problem, since so many poor people still lack access to capital and financial services. What’s needed is not to slow growth but to make sure microfinance institutions are clearly serving the needs of the poor — and not just the needs of the lending institution.
Bladin, like Beckett, said for microfinance to remain true to its original mission lenders must always be serving the “double bottom line” — focusing on not just the economics but also the overall social benefit. Such benefits are harder to measure than interest rates and repayment statistics, but Bladin said that’s what makes microfinance different from simply a small loan.
Both Beckett and Bladin seemed to take issue with Roodman’s conclusion (based on his and others’ research) that microfinance has shown no clear evidence it reduces poverty.
“There is no question that microfinance is still one of the best development tools ever devised,” said Bladin.
Moderator Steve Davis asked Wolff to explain what happened at Unitus — the former Seattle-based, for-profit microfinance firm which closed abruptly after collecting a huge financial windfall. Wolff, who was among those laid off when Unitus closed, said his former employer’s still-mysterious closure surprised everyone.
“Many questions were left unanswered, which also left a bad taste in people’s mouths,” Wolff said.
Sammie Rayner, a young woman who recently formed a microfinance organization (Lumana) focused on helping a farming community in Ghana, was among those in the audience. Rayner said she learned a lot from listening to Roodman and the panelists. Microfinance isn’t perfect, she said, but she’s seen it work and had this to say:
“Over the past decade, everyone had a romanticized idea that microfinance could be some kind of silver bullet for poverty alleviation. Although we have now seen the many ways microfinance can go wrong, we should not allow the mistakes of the past to dilute the fact that microfinance is one of the most powerful and effective poverty alleviation tools the world has seen.
Ultimately, our hope is that this will lead to a more client centered approach and serve as a reminder that this is the business of poverty alleviation, not profit seeking.”