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RNW’s microfinance debate: Controversy is inevitable

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A way out of poverty or a gold rush for lenders? As microfinancing booms around the globe, international experts meeting in The Hague on Monday will warn about the pitfalls of financing the world’s poorest. The debate, organised by Radio Netherlands Worldwide, will focus on the key challenges facing microfinance institutions (MFIs) amid growing questions over whether they have a real impact in reducing poverty.

Watch our preview video for a taste of RNW's upcoming microfinance reports:

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“The world’s poor deserve the best. That’s why we have to take a sharp look at how best to help them get what they need,” says Klaas Molenaar, the President of the European Microfinance Network, who also advises MFIs around the globe.

Mr Molenaar will be part of an international panel, scheduled after the key speeches given by Princess Máxima of the Netherlands, who is the United Nation’s special advisor on microfinance, and Dutch Development Minister Bert Koenders. The interactive event will hone in on divisions over the sector that is now home to 10,000 institutions and which has extended loans to over 150 million people. Microfinance offers poor people access to basic financial services, such as loans to help them build businesses and assets.

Controversy is inevitable given the huge sweep and complexity of this sector, says Mr Molenaar, who here sets out the four main opposing viewpoints that will be used as the basis for Monday’s debate.

  • Viewpoint 1: It’s neither the borrower nor society who profit from microfinance, but MFIs.

Klaas Molenaar: That’s true insofar as MFIs do benefit, but that’s not because they want to make a lot of money, but because they need to remain sustainable in order to continue reaching out to a large number of people. Society as a whole probably benefits from MFIs too. But it’s a chicken and egg situation, because the client also has to be able to keep going – if he or she cannot repay the loan, then the MFI will not be sustainable either.

  • Viewpoint 2: There is no proof that microfinance is beneficial in the long term.

KM: That depends on how you define ‘beneficial’. For social empowerment, microfinance works, it gets people involved in society. But if you look at the figures, it’s true that only a very limited number of small enterprises have sprung up. Microfinance is not the right tool for innovation and economic development. Small entrepreneurs need other conditions, they need longer loans, other cost structures. And they need account managers that think with them.

But there’s a much bigger question here. A woman in India once told me she wanted to buy a cow. I could look at this very coldly, and argue that this won’t help boost the economy. But she told me: “I need this because I don’t want to remain a coolie for the rest of my life.” That kind of thing stops you in your tracks. Once you talk to clients, you see how they struggle, but also that they have an enormous drive to continue. That’s why we have to do our best to give them the help they deserve. Or else people will lose interest in microfinance.

  • Viewpoint 3: Without financial literacy programmes, the microfinance sector will not survive.

KM: I would agree with this. You need people to tell you what they really need. You have to have outspoken clients so that your products continue to evolve. If your clients just follow you blindly, then you’ll end up selling a product that will not be relevant to them any more and it won’t sell. So if I were a manager of a financial institution, I would work hard to make my clients assertive.

  • Viewpoint 4: In conflict zones, microfinance is not the answer.

KM: Building up an economy in a conflict or post-conflict zone is very hard. Look at what’s happening in Afghanistan, where there are 320,000 MFI borrowers, which is very impressive in just five years. That means that these people have found something to do with that money - in many cases it’s probably helped them to lay down their weapons.

But you have to ask yourself if it’s realistic to expect people in a conflict zone to enter into economic activities that are sustainable, such as buying, selling and operating in a market place – and that’s the goal of microfinance. I personally would never invest in such an area as an entrepreneur, it would be too risky. Others do, they see opportunities. But don’t expect too much from them.

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This article is part of the RNW archive. RNW is the former Radio Netherlands Worldwide or Wereldomroep, which was founded as the Dutch international public broadcaster in 1947. In 2011 Dutch government’s decided to cut funding and shift RNW in 2013 from the ministry of Education, Culture and Science to the ministry of Foreign Affairs. More information about RNW’s current activities can be found at http://www.rnw.org/about-rnw