This week at the Institute for Faith, Work and Economics, contributor James Clark asked, “Can microfinance really help the poor?” His conclusion: yes microfinance can work, but with certain caveats.
In the last decade, microfinance has become a popular strategy in poverty alleviation, yet many economists and philanthropists often call its effectiveness into question. In his article Clark says that “Christians have embraced microfinance as a solution to poverty that helps the poor help themselves, but we must ensure that our efforts are really helping people rather than simply making us feel good.”
While Clark judges that while microfinance has certainly assisted some, there are many others for which it has done nothing, or even made those who need help worse off. He highlights that lack of control group studies make it difficult to assess microcredits wide spread impact. Clark also looks at studies which have found that most loans have done little to lift the bottom percent of the population from extreme poverty, and most of the investment goes to help the “richest poor.”
In his analysis Clark also warns, “the potential harms that can arise from microcredit are significant.” One unintended consequences is high interest rates that make repayment difficult. In addition, the popular “Group Liability” lending method, where a group of borrowers hold each other accountable for the repayment of the loan, tends to cause community strife. Yet Group Lending shows high rates of repayment. Clark concludes:
My purpose in writing this incomplete treatment of the current state of microfinance is to exhort Christians to remain vigilant in ascertaining the true value of our efforts. Microfinance can still help the poor, but we owe it to “the least of these” to determine as best we can whether our particular strategies for helping them are in fact helpful, even if that means scrutinizing a favored approach.
PovertyCure has also evaluated the potential that microfinance has to help the poor. In their pursuit to ask “what creates wealth,” rather than “what ends poverty,” PovertyCure questions the viability of microfinance in create businesses that really create income. In his recent PovertyCure Blog Post, Jonathan Moody highlights the importance of “the middle” in creating a prosperous economy. SME’s (small and medium size enterprises) are businesses that are in-between the small “mom and pop shops” and the multinational corporations. A robust economy comprised of mostly SME’s; this is the difference between developed and developing nations. Clearly, the small businesses that are most often created by microcredit will not spark powerful economic development. With this in mind it is important to ask how microfinance can help in the formation of SME’s, and thus provide sustainable poverty alleviation.