Microfinance: no goose with golden egg

RNW archive

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, the Dutch government decided to cut funding and shift RNW from the ministry of Education, Culture and Science to the ministry of Foreign Affairs. More information about RNW Media’s current activities can be found at https://www.rnw.org/about-rnw-media.

"Microfinance is a poverty trap". At least that's the argument Milford Bateman makes in his book, Why Doesn't Microfinance Work? The Destructive Rise of Local Neoliberalism. RNW's Eric Beauchemin has made a number of videos about microfinance. He reviews the book in light of his own experiences.

For more than three decades, the world has been encouraged to believe that microfinance is the best way to help the poor improve their lives. Bateman recounts the history of microcredit, from its humble origins in Bangladesh in the 1970, to its current status as one of the world's best methods to eliminate poverty. Bateman argues that the original, idealistic notions underpinning microfinance organisations changed in the 1990s as a result of neoliberal policies. "Microfinance organisations", he writes, "had to become conventional profit-maximising private financial businesses, charging market-based interest rates."

Opulent lifestyles
I saw an example of what Bateman calls this "new wave microfinance" when I visited Ghana last year. The Sinapi Aba Trust is one of the country's leading microfinance institutions and is proud to be expanding its customer base. Even though the Trust touts itself as a Christian non-profit organisation, it charges virtually the same interest rates as local banks. When I visited the Trust's luxurious headquarters, I saw a fleet of Mercedes Benzes and other expensive cars in the parking lot. When I questioned the Trust's executive director about this apparent contradiction, he made it clear that Sinapi Aba is a business and "if we don't pay our employees well, they'll go work for private banks."

But this pales in comparison to another microfinance organisation cited by Bateman. Compartamos (We Share) is a Mexican microfinance institution that generated huge profits for investors: return on equity between 2000 and 2006 averaged over 50 percent. The 12 directors and executives of Compartamos were paying themselves handsomely for their efforts: in 2006, they pocketed an average of $200,000 per person! (The average annual income for a Mexican household is around $6,500).

Poverty trap
While the directors of "new wave" microfinance institutions rake in the bucks, writes Bateman, their poor customers remain mired in poverty. "There is no concrete evidence to support the widespread and long-standing claims that microfinance" leads to sustainable economic development and poverty reduction. In fact, he argues that microfinance is perpetuating poverty because it removes funds that could be made available to stimulate small and medium-size enterprises. These companies, he believes, have a much better chance of creating jobs for the poor.

The Sinapi Aba Trust customer that I visited in Ghana certainly has not seen much of an improvement in her life. Comfort Azelima has received six loans for her tie and dye business. She was presented to me by the Trust as a success story, yet she works on the side of the road without a roof over her head. She says the loans she has received are far too small for her business to ever really grow. She says she has much bigger dreams, but she doesn't seem to be doing much herself to realise them.

But I have also seen the benefits of microfinance. In Kenya, for example, I met a woman who used to work as a prostitute in one of the capital's biggest slums. Thanks to microcredit, she now sews clothes and she is the proud owner of a brand new house. Life could be better, she says, but it is infinitely better than it was.

Sometimes irritating
Bateman is long winded in his condemnation of neoliberalism, at times irritatingly so, and of "new wave microfinance". But to his credit, he does offer alternatives. He presents examples of local financial models in a variety of countries, including Venezuela and Vietnam, that have produced positive impacts for the poor and the rest of society. In Venezuela, for instance, the authorities have set up networks of agricultural, marketing and worker cooperatives. Poor people receive loans on condition that their microenterprises can somehow integrate into larger business networks so that all of society will benefit.

Microfinance is not the root of all evil, as one might think at times when reading Bateman's book. But he does make compelling arguments about its drawbacks. They should cause anyone interested in the subject to ask themselves some hard questions. Clearly microfinance isn't the goose that lays the golden egg, as we were all led to believe.