Elisabeth Rhyne

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Five reasons why microfinance is in crisis – and why it matters | 

Flickr, TW Collins

The popular anti-poverty scheme of providing small loans and other financial services to poor people, generally known as microfinance, is in crisis.

“In one sense, you could say it’s a coming of age,” says Alex Counts, CEO at the Grameen Foundation, a leading non-profit microfinance organization with offices in Seattle and Washington D.C.. “Controversy often comes along with growing in size and impact.”

You could also say microfinance is actually suffering from several different crises: An external appearance of a crisis based on a damaged public image; a related, but slightly different, internal “identity crisis” and, at least according to one leading observer, a cash crisis in reverse — too much money.

Here are five reasons for the crisis:

  1. Microfinance has grown rapidly, from a simple anti-poverty program into a major player in the financial industry.
  2. Some now view microfinance primarily as an investment opportunity, with reducing poverty as either a secondary goal or not really the goal at all.
  3. Microfinance is a multi-headed creature with no agreed-upon strategy or approach.
  4. There is no consensus on how to measure “social performance” — for donors to tell the difference between a program focused on poverty reduction from one focused on maximizing profit.
  5. The evidence that microfinance does bring people out of poverty is mixed. Some say it has helped millions of poor people, mostly women. Others say it hasn’t and is, in fact, a debt trap for the poor.

All of these points, and most of the arguments, tend to circle back to the pioneer of microfinance, or microcredit, the Nobel Peace Prize-winning Bangladeshi economist Muhammad Yunus.

Tom Paulson

Muhammad Yunus visits with fans Seattle Town Hall May 2010

Yunus used to be golden, uniformly regarded as almost the patron saint of the anti-poverty movement. He still is seen as such by many of his supporters.

But Yunus is also in a bit of trouble these days, fighting off a push by politicians in Bangladesh to force him out of the Grameen Bank (his pioneering microfinance organization). The push comes after a film-maker’s allegations of corruption and the increasingly popular refrain among critics that these microloans hurt rather than help the poor — even driving some debtors to suicide.

Many in the microfinance industry see the power struggle in Bangladesh as more of a political sideshow, unjustified but more importantly unrelated to the real challenges facing the field. Continue reading