Has India jinxed microfinance?

Indian woman cooking rice

Indian woman cooking rice

The anti-poverty scheme known as microfinance is in crisis, or maybe several crises.

The political sacking of Muhammad Yunus as head of the pioneering Grameen Bank, allegations of loan-shark profiteering by some microfinanciers and suicides of poor people caught in “debt traps” have led to a drumbeat of negative media stories about microfinance.

The drumbeat is loudest in India where the crisis is most intense. But it has reverberated worldwide, including in Seattle.

It wasn’t that long ago that microfinance — or its more fundamental practice known as microcredit — was widely celebrated as the most promising strategy for ending global poverty.

The standard story was, and often still is, even for me, of an impoverished woman who is given a small loan, builds a business and brings her family up out of extreme poverty.

Now, even many former advocates have gone sour on microfinance.

The excessive profit-seeking by some microfinance lenders in India, combined with the stories cited above of loan-sharking and allegations of suicide have led some to say it’s a fraud and an abuse of the poor. Some just say it was hyped and needs repair.

No matter what anyone says, microfinance certainly has gotten huge — as an industry representing tens of billions of dollars annually — and with hugeness comes messiness, as well as the potential for exploitation.

I’ve been writing about the crisis in microfinance frequently, but tonight in Seattle you can learn more about it from some of the most knowledgeable experts and practitioners anywhere.

Global Washington is sponsoring a forum, “The Global Implications of India’s Microcredit Crisis,” at St. Mark’s Cathedral starting at 5 p.m. and featuring some of Seattle’s leading lights in the field of microfinance: Rick Beckett of Global Partnerships, Peter Bladin of the Grameen Technology Center and Chris Wolff of Accion International.

Keynoting will be David Roodman, with the Center for Global Development in Washington, D.C., who is someone I frequently cite as one of the foremost analysts on microfinance.

I talked with Roodman to get a preview of what he intends to say.

Basically, he says, microfinance is not what its most zealous proponents say it is — an entrepreneurial formula for getting out of poverty. But it also isn’t what its most zealous critics say — a useless or even abusive financial exploitation of the poor.

“The strength of microfinance is not in ending poverty but in providing poor people with more financial freedom,” Roodman said.

That may sound a bit odd, since it’s hard to imagine how you can be poor and also enjoy financial freedom, but here’s what he means:

  • Studies have shown little evidence so far that microfinance reduces poverty.
  • Most borrowers do not start businesses but merely pay off debts.
  • The crisis in India was not caused so much by excessive profit-seeking or high interest rates as by the rapid growth of easy credit (and we all know what easy credit can do to you).
  • All the evidence suggests that poverty is not reduced by a bunch of micro-entrepreneurs but by industrialization.

In short, Roodman might on first glance be counted as among those who claim that the promise of microfinance as a way to end poverty is so wrong-headed as to be a fraud or an abuse. But he’s not. Roodman thinks microfinance is probably a good thing, even if it cannot alone end poverty.

Quoting the famed economist (like Yunus, a Nobel Prize winner) Amartya Sen, he notes that the mark of successful development is that it increases individual freedom.

“He says that the essence of development is giving people freedom over their own lives…. Financial freedom is like electricity, water or sanitation in that they are all essential services we take for granted. Finances for the poor are very unpredictable so if microfinance can reduce that unpredictability, it gives them more control over their lives.”

It may not reduce poverty, Roodman says, but that doesn’t mean it’s not helping people.

I look forward to hearing what our local microfinance practitioners have to say as well, about the impact of India’s crisis on microfinance in general and in response to Roodman’s analysis.

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Tom Paulson

Tom Paulson is founder and lead journalist at Humanosphere. Prior to operating this online news site, he reported on science,  medicine, health policy, aid and development for the Seattle Post-Intelligencer. Contact him at tom[at]humanosphere.org or follow him on Twitter @tompaulson.