I recently had the opportunity to review a soon-to-be-published research project undertaken by Grantmakers Without Borders (GWOB), a terrific association of funding organizations whose focus is beyond the borders of the United States. The purpose of the research was to examine the impact of microlending within poor countries, and whether this highly-touted initiative has really brought about the kind of positive change which its proponents suggest. The paper is a good and balanced piece, and should be required reading for any funding organization contemplating or already conducting microlending practices abroad. Watch for it.
The research finds, perhaps not surprisingly, that microlending is not the perfect tool for eliminating global poverty, despite its many virtues and successes. While it has developed a momentum and a transformational impact where implemented successfully, it has also on occasion created unprecedented indebtedness and divisions within communities and families. Initially, I found myself perplexed at this second type of outcome, not having experienced that phenomenon in our own work.
It turns out that the celebrity status of microlending has captured the attention of not only those who seek to assist impoverished people, but also those who see it purely as a means of access to an untapped credit market. In other words, for some lending groups, microloans are just another way for the coyotes, the sharks, to circle their prey.
Sam Daley-Harris, Director of the Microcredit Summit Campaign, captures the essence of these profiteers perfectly in a recent presentation.
“This should have been warning of what was to come when microfinance institutions began to run more like commercial banks and what that might do to the soul of microfinance….
“I am fortunate to have been one of the leading advocates for microfinance over the last 25 years. We have been so successful in our advocacy that the field is out of control and now the profit-maximizers, those who want to make big money from the poor are rushing in. This leads me from the poverty and purpose part of my talk to the pitfalls and redemption portion.
“What are the problems that have become pitfalls? There are profit maximizers who charge the poor 85% interest, 100% interest, or more. As Prof. Yunus says, we started microcredit to free people from the money-lenders, not to become the new money lenders.
“I now see that the spiritual dimension of microfinance, the redemptive dimension of microfinance is central to my vision for the field. The technical issues are important, but only if they serve the transformational dimension.”
The findings in the GWOB study shouldn’t be a surprise or perplexing at all. The essence of the microlending idea is that it is a tool for helping poor people raise themselves from poverty. It’s not designed as a tool for financial institutions to use in tapping a new market and making a lot of money. That practice will inevitably create real problems for both the borrower and the lender.
It seems to me as though a good share of the research and conclusions (or at least doubts) about the effectiveness of microlending revolves around MFIs that are in the business of lending. These organizations are quite different from the microlending institutions that exist for the purpose of true development. In essence, it is difficult to effectively address the efficacy of microlending conceptually when both types of funders are considered together; a more effective assessment has to look at the two forms separately since they are so fundamentally different. I am not surprised to read about predatory practices on the part of “Financial-System” lenders, but would be surprised and disappointed to learn of such behaviors coming from a “Poverty-Lending” organization.
At the Microcredit Summit several years ago, I could feel the difference in both intention and tone when the people from Barclays Bank talked about entering the microlending arena “to serve a vast, untapped market.” Those words signaled the contamination that would occur within the microfinance community moving forward. It seems as though any good idea can and will eventually become abused in the name of profits….