Sunday, 18 March 2012

Microloans - Benefits and Doubts

Sam Storr

A female microcredit collective. Jaimoen Kuriakose/ENAM Microfinance.
Microcredit is the development issue that has most inflamed passions in the last decade, touted by its many advocates as a near-universal ‘weapon’ against poverty and hunger. 2005 was declared the International Year of Microcredit, and the 2006 Nobel Peace Prize was awarded to microloan pioneer Mohammad Yunus for the successes of his Bangladeshi Grameen Bank. Recently though, the hype has met with widespread criticism, and microloans risk being torn from the development handbook.

The Grameen model is to spread risk by having small groups borrow at high interest, assuming that others will compensate if one individual struggles to pay. Their programs are also accompanied by financial awareness-raising. Another approach taken by charities such as Kiva is to introduce citizen lenders to profiles of those in need of cash around the globe, usually boasting high repayment rates, support to female entrepreneurs and again pushing financial advice. The future looks to be in the hands of African initiatives such as M-Pesa, which use the ubiquity of mobile phones to allow transfers. 

The idea that microloans were generally good at reducing poverty, in particular by targeting the women who control household budgets, was initially spread by a few prominent analyses of individual families in Bangladesh. These are now mired in disputes over the construction and interpretation of experimental surveys, or to what extent women do really take control of the money. 

Microcredit charities give names, faces and stories to their entrepreneurs. John Briggs/Kiva.
The growing consensus is that microloans do create positive stories, offering a much-needed financial flexibility for those at the tipping-point of a loss or a transformation of livelihood, but not offering the grand grass-roots led economic development that was first imagined. Those who despair that microloans have failed should first question the underlying assumption that there ever an easy fix to be found.

Overall, it seems microloans are most likely to be used to supplement household budgets. Even when invested, James Surowiecki of New Yorker argues that microloans, being so small, only encourage the one-man enterprises already common to poorer economies, rather than the widespread wage-employment needed for real change. However, the ability to maintain spending through the rough, keeping a child in school or accessing healthcare, has important benefits that should not be overlooked.

It is too easily assumed that, with a little training, microloans will be used rationally to exploit economic opportunities in all contexts. One recent paper by Jamie Olsen and Wendy Morgan argues that, although cow ownership may be pushed by NGOs as an alternative income, cow husbandry is time-intensive and costly. They believe that there are incentives in rural India for lower castes to avoid the stigmatism of manual labour and own livestock like the higher castes, despite their prospects or the high-interest debt involved. In Bangladesh, there are also reports that microloans have greatly inflated dowry prices. 

As with any loan, debt dependency is a real possibility. This was driven home by the spate of defaults and related suicides that led to the demise of the microcredit industry in Andhra Pradesh. The mission of microfinance is also seen as being partially corrupted by commercial exploitation.

The sudden enthusiasm for microloans is partly a response to the failed macro- lending of the 1970s and 1980s. Whilst charity is tainted by the idea that it disempowers people and creates dependency, microloans invoke images of the buzzing, responsible small capitalist that resonate with many policymakers today, and especially with key organisations such as the World Bank. Morgan and Olson see microloans as part of a neoliberal approach that imagines growth as a mere business of connecting different forms of capital, overlooking the complexities of finance at the micro-level. The research suggesting that microcredit specifically targets women also lends the policy great power.

Aid agencies themselves have been criticised for being too powerful and unaccountable, masking inefficiency or even exploitation. As with microloans, the idea of ‘participatory development’ –involving recipients in their own aid – achieved dominance as an imagined panacea. Its popularity continues unabated despite the acknowledgement that participatory approaches could sometimes be no more than a bureaucratic farce, only masking exploitative relationships. Lending money directly to those who need it, at high interest, appears to be a step beyond participation. This image of economic agency overlooks the fact that microcredit organisations are still heavily encouraging prescribed patterns of behaviour, and in some cases creating debt dependency. Accountable reporting on the social impact of microloans remains in its infancy.

Microloans therefore offer a simple, profitable solution that satisfies the preoccupations of both neoliberals and development professionals. The rocky history of microcredit suggests that the search for the new has overshadowed the fear of repeating past mistakes.

A third reason for the rampant popularity of microloans is what they offer donor publics. As Espen Berg, formerly of the United Youth Development Organization, points out, peer-to-peer lending bridges the gap between those who give and those who receive. Charity is partly a self-gratifying act, and most private charities strive hard to create this sense of direct connection. While there are serious problems with the commoditisation of aid, the general public is jaded by an overload of harrowing images; it would be a positive and very modern development if the story-telling process was taken from the hands of aid agencies. However, Kiva appears to disburse loans before people have even donated, and the homogeneous profiles farmed by sites such as World Vision Microloans suggest that this is partly a marketing illusion. 

Micro-lending is a longstanding reality, and it is generally positive that access to this valuable resource is being spread by largely well-intended organisations.  Yet it seems clear that they cannot supplant the broader range of development policies. At their worst, microloans can sometimes appear no more than a newly-dressed version of old practices, or even uniquely dangerous. As always, donor nations and the public must be more mindful of imposing their own agendas, seeking magic bullets in lieu of more difficult and complex solutions to global inequality. Rather than dismiss microloans as myth, it would be better to examine the mythology itself.


  1. Thanks for this interesting and balanced piece Sam. There are two points we’d like to address:

    1.It is difficult to talk about microcredit’s advocates without assuming that this group of people is homogeneous and by consequence that the way they advocate and implement microcredit is also unvaried. Of course there are ‘good’ institutions and ‘bad’ ones working in microfinance but it should also be remembered that the ‘good’ institutions are complex and heterogeneous and apply complex and varying methods in implementation – something too often overlooked by microcredit’s critics. Milford Bateman for example, one of microfinance’s most vociferous critics, in suggesting an alternative to microfinance (something he claims doesn’t work) instead argues for community based financial institutions such as credit unions and financial cooperatives. Bateman makes a valid point when suggesting financial services should be administered by local institutions that prioritise local and sustainable development, but he reveals his tendency to overgeneralise about microfinance institutions (MFIs) by not recognising that these are exactly the types of vehicles already delivering microfinance services in developing communities around the world. One of our partners for example, Cambodian Community Savings Federation (CCSF) is a credit union, while another, SEEDFINANCE in the Philippines provides funding almost exclusively to financial co-operatives.

    2.And as a UK-based peer-to-peer (P2P) microloan platform ourselves, we think it is important to highlight the financial impact this type of lending can have on the work of local MFIs. As you rightly point out, bridging the gap between those who give and those who receive through P2P platforms is becoming an increasingly popular way of ‘giving’ to charity. However, there is another very important benefit to this type of giving and that is the access to interest free capital it provides. The provision of microfinance often comes at a high cost to the institutions that administer it (which is reflected in the high interest rates they charge on loans) and to keep up with local demand for their services, these institutions may rely on external loans themselves that also come at high interest rates. This financial pressure to meet their own repayments can sometimes mean that MFIs hike up interest rates on the microloans they give. The capital that is provided by a P2P platform like, which transfers capital to partner MFIs interest free, greatly reduces the financial burden placed on MFIs by institutional loans and allows them to expand their services as well as extend operations into more remote and vulnerable communities. Our microfinance advisor, Dr Ajaz Khan, says more about this on our blog:

    We believe that by taking the time, effort and expertise to choose the ‘right’ microfinance institutions with which to partner and by encouraging this continued ‘right’ path by financial and social monitoring helped by the provision of interest free capital, microfinance institutions can and are having a positive impact.

  2. Indeed you are right to say that there are a great range of microloan/microfinance initiatives, and it is unfortunate that I did not take the space to say this more clearly. Of course there are always dangers in dividing between the 'good' and the 'bad'. Even those with the best attentions must remain aware that they are pushing a certain agenda, which isn't guaranteed to do well, as demonstrated by the Morgan and Olsen paper.

    It is the kind of generalisation you mention which goes to the heart of the problem in the microloan movement. Whilst the vagueness of the term 'microloan' at first led to its near-universal acceptance, the broad range of institutions it allowed under its banner has been damaging to those who truly mean and do well.

    Your second point suggests that you don't see microloans as functioning in the imagined fashion unless they are kept firmly within the realm of charity. As a result, it seems that the word microloan is both somewhat of a misnomer and a double-edged sword. Although the media and financial attention given to microloans is helpful, I think it is right to promote the idea of ethical lending, as in your blog, as a means of distinguishing yourselves from the pack.