The limits of microfinance

By Felix Salmon
January 15, 2010
paper -- short, clear, summarized here -- saying that the jury is very much still out on whether or not microfinance helps improve the incomes of the poor. But even if it doesn't help the poor out of poverty, it still does a great deal of good in terms of giving them tools to deal with poverty.

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Richard Rosenberg has a good new paper — short, clear, summarized here — saying that the jury is very much still out on whether or not microfinance helps improve the incomes of the poor. But even if it doesn’t help the poor out of poverty, it still does a great deal of good in terms of giving them tools to deal with poverty.

Although Rosenberg makes a strong case that this is a very valuable service, it does seem to me that it’s a service which both can and should be provided and funded locally, by the likes of Grameen. Right now there’s an enormous amount of time, money, and skilled labor being put into microfinance across a large number of non-profit and for-profit philanthropies in the developed world, and I’m not at all convinced that all those resources couldn’t be put to better use elsewhere.

Microfinance appeals to the kind of rich westerners who used to believe in the power of financial innovation to make the world a better place. Now that we’ve learned that financial innovation is prone to backfiring dramatically, I think it makes sense to approach microfinance more cautiously. Microfinance institutions tend to lend out money at very high interest rates, and it’s easy to show lots of success with that kind of business model when you’re growing fast and making it very easy for your clients to refinance.

Eventually, however, the growth in microfinance is going to slow, and the borrowers are going to find themselves saddled with large debts. If, as Rosenberg says, there’s a good chance that those borrowers will still be in poverty at the time, the consequences might be pretty messy.

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