The Microfinance Bubble
For the last couple decades there has been a growing excitement in development fields about the promise of microfinance as a key tool in reducing the impacts of extreme poverty in a sustainable manner. As the industry has grown from the pioneering work of Nobel Prize winner Muhammad Yunus’ Grameen Bank and the outstanding results of BRAC in Bangladesh (profiled well by Ian Smillie in Freedom From Want), there has been an increase in the professionalization of the models to the point where for-profit banks are seeing the vast potential of providing financial services to the world’s poor. As with many other stories, this one has produced a mixed bag of outcomes. Greater efficiencies, better training for staff, and higher profile for microlenders have been a boon, as has the expansion into a broader range of financial services to include savings and insurance. The profit motive has also commoditized microfinance. As more traditional corporate banks have entered the field there has been more pressure to increase revenues. Unfortunately, in some places this is contributing to a decline in the basic systems that have made the process so effective. An article in today’s New York Times raises the spectre of possible crisis for microfinance in India. While there is a certain amount of hyperbole, particularly early in the article, the concerns are real. Inadequate controls and a rush to growth have undercut the priority of serving the poor and created a troubling reality. The strength of microfinance is deeply rooted in community. As our friends at Opportunity International Canada have shown us, it is the mutual accountability of the trust group that provides stability, incentive, and reliability of repayment. Effective microfinance goes far beyond the mere provision and collecting of loans. To represent (again) the fundamental perspective of Simon Sinek; too many organizations have forgotten WHY they work in microfinance and along the way stopped doing the things that ultimately remain core to seeing it as one of the most promising strategies in global sustainable development. Four books you should read: A Billion Bootstraps Out of Poverty Unpoverty Portfolios of the Poor Update: Opportunity International has posted a commentary on this issue.