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February 7, 2009 / compassioninpolitics

Evaluating the Criticism of Microfinance, Microloans, and Microlending

What are the effects of Micro finance, Micro loans, and Micro lending

Is micro finance effective? Does micro credit decrease poverty? Consultive Group to Assist the Poor (or CGAP) points out that empirical evidence documents that micro finance can alleviate poverty, increase education, maternal health, and improve the status of women:

Empirical evidence shows that, among the poor, those participating in microfinance programs who had access to financial services were able to improve their well-being both at the individual and household level much more than those who did not have access to financial services. Specifically they point to statistical evidence of a dramatic positive effect on poverty:

• Bangladesh Rural Advancement Committee (BRAC) clients increased household expenditures by 28% and assets by 112%.
• After more than eight years of borrowing, 57.5% of Grameen borrower households were “no longer poor” as compared to 18% of non-borrower households
• In Lombok, Indonesia, the average income of Bank Rakyat Indonesia (BRI) borrowers increased by 112%, and 90% of households graduated out of poverty.
• In Vietnam, Save the Children clients reduced food deficits from three months to one month.
• At Kafo Jiginew in Mali, clients who has been with program for as little as one year were significantly less likely to have experienced a period of acute food insecurity; and those that had, had experienced a shorter period.

One prominent critique of micro loans and micro finance is lodged by Thomas Dichter of CATO (two links near bottom of post). His critique isn’t hard to answer, however economist Gina Neff’s may be difficult to come to grips with at least for someone without the necessary data, like myself.):

“In Bangladesh, 30 years after Yunus’s invention, poverty statistics are worse than they’ve ever been, so something else is the source of the problem and micro-credit is not helping.” Economics journalist Gina Neff has also written that “after eight years of borrowing, 55 percent of Grameen households still aren’t able to meet their basic nutritional needs – so many women are using their loans to buy food rather than invest in business.”

Although her argument probably says more about the endemic face of poverty than anything. Her argument only makes sense if she can meet cite a more effective alternative model that can scale the say way. Until then, her argument is a means for goal setting and improving existing micro loaning initiatives–not for throwing the baby out with the bath water. For instance, just because AA doesn’t perfectly solve additions (I think it only works in 25-50% of cases) isn’t a reason to cast it aside.

Also, Neff’s claim that Yunus’ Grameem Bank doesn’t lend to the poorest of the poor or those without houses is just an light argument for government intervention or another micro enterprise model to be applied in addition to the Grameen Bank micro finance model.

One problem is criticisms of micro finance fail to take into account is the empirical successes micro finance, which all the grandiose posturing in the world can’t refute. Most criticisms and critiques of micro finance I’ve read don’t take into account that they are only really critiquing one model or geography for micro finance, not the whole enterprise. Its like tasting pizza from the local pizzaria and saying all pizza is terrible. Just like their are different ways of preparing food, similarly there are radically different models of micro lending. Different geographical locales, different cultural contexts, and different management structures. As elementary as it is, I think any positive or negative evaluation of micro enterprises must take the context into account in order to help it scale better.

I’m curious to investigate more to learn if micro franchising, which I guess is the functional Mary Kay-ification of micro enterprises. Does a more standard model of micro enterprise and micro lending help. I even a micro franchising option could still be buffet style (or at least offer choice). In a world in which personalization is increasing radically (Prahalad’s “New Age of Innovation” makes this argument as do a lot of others who are talking about mass customization)

Tangible Metrics for Return on Investment for Micro Finance is the Ultimate Answer
In fact, for those wanting to evaluate the economic and social impact (the appropriately named “double bottom line”) of micro lending CGAP’s whitepaper “Beyond Good Intentions: Measuring the Social Performance of Microfinance Institutions” looks at 10 core standards. As well as looking to several tools which can track and measure the results of micro finance initiatives. They examine several “social performance assessment initiatives”:

CERISE: Social Performance Indicators Initiative
The Social Performance Assessment (SPA) Tool
M-CRIL Social Rating tool
ACCION’s Social

A recent post by the Acumen Fund’s blog on Indian Micro enterpise points to an additional option in the micro lending evaluation and micro finance tracking.

What are your thoughts on tracking/measuring the “double bottom line” or “triple bottom line” of micro lending? How about the criticism or advantages of micro finance?

Micro finance and Micro Lending Resources

The FRAME tool is hosted by the SEEP Network measures micro finance institution ROI metrics like productivity, growth, and sustainability. The tool was created by Chuck Waterfield.
Micro finance Gateway
Annual Global Composite Ranking of 100 Micro Finance Institutions
Micro finance e-library
Center for Micro finance
Micro credit Summit
Grameen Foundation
• Mohammed Yunus Videos
• Dave Richard’s base of the pyramid and micro enterprise book reviews.
Ending Global Poverty with Micro Franchising

Criticisms of Micro Finance

Effectiveness of Micro finance @ the Electronic Journal of Sociology
Employment Not Micro credit
Grow larger enterprises instead of micro finance
James Surowiek’s critique of micro finance in the New Yorker
A Second Look at Microfinance: The Sequence of Growth and Credit in Economic History by Thomas Dichter
Hype and Hope: The Worrisome State of the Microcredit Movement by Thomas Dichter
• Small Fortunes from PBS Issues in Micro finance (raises great issues to consider and fix)
(Note: I’ve excluded critiques which indict micro-lending for being neo-liberal, as they primarily point to the obvious. Until they have an alternative model of realizing their vision, they are only cursing the wind)


Leave a Comment
  1. compassioninpolitics / Mar 25 2009 6:51 pm

    I just ran across this criticism which seems to ring true in a minority of cases. Apparently 3/4 of women are able to pull themselves up, however 1/4 get into debt problems which leads to a revolving debt cycle, intimidation, and sometimes suicide:

    It is important to note that this is still comparative. However, when the scale of your business is several millions, this 25% failure rate does seem troublesome.

    However, this is uniquely a problem with the Grameen bank–and not necessarily a problem with all of the micro loaning models. I wonder how other MFIs are able to deal with this problem to avoid the underbelly of intimidation.

    What do you think of the critique and criticism of micro finance, micro lending, and micro banking? Does it hold true? Are there other organizations to look at that offer better returns for the borrowers?

  2. compassioninpolitics / Mar 25 2009 6:54 pm

    I just ran across this book which offers criticism, if you are doing research, it may be helpful:

  3. compassioninpolitics / May 11 2009 3:51 am

    Here is a recent whitepaper that looks at microloans from a more holistic perspective:

    The folks over at Next Billion know whats up in the space, so this should be a real resource for those looking to move beyond criticism to practical social change in the micro loans and micro lending space.

    Thoughts? Reviews? Valuable links or resources in the micro lending area?

  4. compassioninpolitics / Nov 17 2010 8:25 pm

    This article from the Economist recently spoke to high suicide rates partially as a result of microfinance (and perhaps as a result of high interest rates)

  5. Joerg Rauh / Nov 24 2010 10:57 am

    I still believe that Yunus’ initiative is a landmark. Because requiring a collateral in order to obtain a loan restricts borrowing money to people that own appropriate possessions.
    More and more people aren’t born rich and all they own is their own lives. This is where Yunus’ initiative comes in and gives people a chance to slowly step out of high interest rates and over time get out of poverty.
    The rules for borrowing money are man made be it low or high interest, with or without collateral.
    Yunus shows that with rules being more people friendly even the poorest can succeed.
    Money lenders could have thought of this independently of Yunus.
    With all the financial disasters we are seeing today don’t we all see that things need to still change to stop debts from using up more and more budgets worldwide?
    I think we are at a point were countries could do with a fair and humanely structured process to get out of their debt traps as Yunus’ did for the poor man. And I’m looking forward to it.

  6. compassioninpolitics / Feb 19 2011 9:30 am

    This is part of a 3 part series in the Atlantic–this first one is 5 myths about micro-credit:

  7. compassioninpolitics / Jun 14 2012 2:58 am

    Dean Karlan points to 2 studies he did in the area:

    It does make sense that those serviced don’t intrinsically move out of poverty and assuming they do may obscure the effectiveness of micro-finance organizations. What are they moving on to?

    * Its key to note that this may not be descriptive of the whole industry. For instance, BRAC and Gramean Bank and other may have more effective success rates. Borrowing on studies about the results (perhaps both quantitative and qualitative may be helpful). Or the quantitiative data you look at should look at multiple dimensions.

    This may also help uncover if there are real tradeoffs.

    To me however, there are 2 parts–is the business they are associated with helpful (ie get them out of poverty) and does borrowing create a debt cycle. Also, compared to what? They may already have loans at 18%, and lowering those loans may still be an effective service–but may still not get them out of poverty.


  1. Problems of micro lending and micro finance « Compassion in Politics: Christian Social Entrepreneurship, Non-Profits, and Base of the Pyramid/BOP Design Solutions

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