Twenty years of making microfinance, or whatever you want to call it, work

A farmer collecting coffee beans in the mountainous Nueva Segovia department of Nicaragua.

Today in Seattle, an organization called Global Partnerships celebrates two decades of helping people rise up out of poverty through a variety of initiatives all aimed at empowering the poor – by helping smallholder farmers, improving health, encouraging the use of “green” technologies and through microfinance.

Microfinance? Haven’t the experts and pundits around the world declared microfinance a failure – at least as a scheme for reducing poverty?

Microfinance was once celebrated as the best poverty reduction scheme – lauded as being the most sustainable (because it’s market-based, not charitable) solution to poverty, even to the point of winning its main advocate a Nobel Peace Prize.

But the term has since become unpopular, in part due to skepticism from the expert/punditry class and because of some abusive money-lending practices in which a few micro financiers forgot that the purpose was to fight poverty while making a profit. Some firms focused more on the profit side and not so much on poverty reduction.

It’s a long, complex story. But you can see the impact in a Google trend graph below for the use of the word “microfinance” online:

microfinancetrend“Boy, am I sick of that debate,” said Rick Beckett, executive director of Global Partnerships, which holds its annual conference and luncheon today at the Westin Hotel in Seattle. It’s not very useful, Beckett said, to debate whether or not microfinance works. Sometimes it does and sometimes it doesn’t, he said. Like most things in life.

Rick Beckett, CEO Global Partnerships

Rick Beckett, CEO Global Partnerships

“We all recognize now that it takes more than just giving someone a small loan to make a difference,” Beckett said. “But let’s not throw the baby out with the bathwater here.”

Global Partnerships, formed in 1994 by Seattle philanthropists Bill and Paula Clapp, was one of the earliest adopters of the strategy of microfinance. More accurately, it was initially called just microcredit – giving out small loans to people in poor communities aimed at providing them with enough extra cash to grow their family businesses. The strategy eventually became hugely popular worldwide and was adopted in all sorts of forms, from just offering loans to including savings (hence calling it “microfinance”), for-profit versus non-profit, small-scale and large-scale, helpful or abusive.

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Beckett said he agrees with many of the critics, that the promise of microfinance ending poverty was over-sold and that some lending organizations were (and still are) more interested in making a profit for themselves than in truly helping the poor. But the past hype and bad practices by some should not obscure the powerful future potential to build on what does work.

“We’ve learned, and changed our approach, over time,” Beckett said.

Global Partnerships, having invested more than $132 million in 73 partner institutions (mostly in Latin America), hasn’t given up on microfinance. It has incorporated or combined the loan programs with other initiatives aimed at improving basic health, enhancing rural (mostly farmer) livelihoods and promoting solar energy and other “green” technologies.

This shift to supporting what some today call “impact investing” or “social enterprise” took place at Global Partnerships well before microfinance fell from popular grace, in the media and within the aid and development sector. Beckett also likes to call his organization’s approach the “third way” – finding a new approach that is neither entirely charitable or entirely based on the market. 

“Poor people need more money, but we learned after 10 years that money alone was not sufficient,” he said. “Farmers need money to buy seeds. But if they don’t also get the expertise they need to compete and secure equitable access to the market, they may be taken advantage of by others.”

Without giving poor farming families additional training and support, Beckett said, the loans alone can become a burden. That’s what the critics have pointed out, he noted, but usually without offering a solution. Abandoning microfinance, he said, is not a solution. Combining it with other schemes that empower the poor is the solution.

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“Today, microfinance touches almost a billion people,” Beckett said. Despite the scheme’s limitations and widely publicized problems or even abuses, he said, it is still probably the most successful, scalable and market-driven strategy focused on helping poor people.

“The question then becomes how do we leverage this to make it work even better?” Beckett said. About 10 years ago, well before the scheme fell out of favor, he said Global Partnerships began combining the loan programs – and the community organizing it necessitated – with health initiatives.

Altagrace Domeus in Haiti replaced her kerosene lamps with solar-powered lights through Fonkoze, a local microfinance organization.

Altagrace Domeus in Haiti replaced her kerosene lamps with solar-powered lights through Fonkoze, a local microfinance organization.

Many loan programs were focused mostly on women, because they often have less access to money, and so they combined the meetings on money with providing health information and better access to services for women and children. From the success they saw in combining health and microcredit, Global Partnership moved into combining microcredit with programs aimed at empowering smallholder farmers and even in promoting solar power.

“More than a billion people live off the grid, have no access to reliable power,” Beckett noted. Poor people tend to burn wood or kerosene, which is unhealthy for them and for the environment – and costly in the long run. So Global Partnerships figured it needed to also get into the energy field, combining loan programs with efforts aimed at supporting green technology business development.

“Ten years from now, I predict small-scale solar will be benefiting more people than microfinance,” Beckett said.

Microfinance may have lost its luster and continue to decline as a popular catch-all term.

But that doesn’t matter to Beckett and the gang at Global Partnerships. It’s just a word. What matters to them is to continue to learn, adapt and build on what works. Because it can and does work – whatever we want to call it.

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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.