Is microfinance a neoliberal fairytale?
Madeleine Bunting, Guardian
The complicated twists and turns in Bangladesh over the position of Muhammed Yunus, the Nobel prize winner, continue. Last week government officials were quoted saying that he had been ousted from his position as managing director of Grameen Bank, and there is clearly a nasty dogfight going on in Bangladesh over the reputation of its most famous citizen. Blame is now flying around in every direction – including the Norwegians for giving him a Nobel prize in the first place.
In the meantime, the film that has played a powerful role in challenging Yunus’s global reputation as a pioneer of microfinance will finally be shown in London on Friday( I wrote about the film on this blog a month ago). After the film, the Danish film-maker Tom Heinemann will be in conversation with Alex Counts of the Grameen Foundation. Given how fiercely contested the whole subject of microfinance and the role of the Grameen Bank in particular has become, Counts deserves credit for taking on the debate publicly.
Inevitably, much of the media coverage has focused on Yunus himself, rather than the much broader questions Heinemann is asking about microfinance as an effective strategy for poverty reduction. After I last blogged on this, I had some very interesting responses, including one from the Cambridge economist Ha-Joon Chang, who directed me to a paper he had written (pdf) with Milford Bateman – one of microfinance’s most vociferous critics and an interviewee in Heinemann film. Their critique of microfinance makes some very convincing arguments that urgently need rebuttal from the many development agencies and foundations around the world that have ploughed huge sums into the expansion of microfinance in the last decade.
Here are some of Chang and Bateman’s top findings:
1 Microfinance is based on an attractive but false premise that poor people can make themselves richer providing they have access to credit. But wealth creation, outside of fairytales, is very rarely the result of individual effort. Rather it is a collective endeavour – requiring skills and knowledge – in institutions such as companies, co-operatives. Microfinance has erroneously put the individual centre stage, reflecting a neoliberal world view.
2 Microfinance has always maintained that it is self financing apart from the initial start-up costs. But what the last few months have revealed is that unless there is a big injection of government or aid funds, microfinance institutions have to charge very high interest rates. Without subsidy, interest rates soar to 50% and even higher. That really cuts into any possibility of small businesses being able to reinvest their profits.
3 Most loans are not used to create small businesses at all; they are used for "consumption smoothing" as the economists describe it, in other words, those items of extraordinary expenditure such as weddings, funerals or education and health fees. That is the kind of scenario which leads to indebtedness.
4 Finally, microfinance is not very successful at creating prosperous small businesses in the long run. Much was made of the "telephone ladies" in the 1990s who took out microloans to buy mobiles and rent them out. Initially they made handsome profits, but as Chang points out their income has dropped dramatically. If a business idea works and is accessible to poor people, everyone will pile in; it’s why you see rows of women sitting patiently selling a few tomatoes in African marketplaces. Overcrowding is a result of very limited options in terms of technology, skills and financial resources: microfinance doesn’t solve any of those problems.
Chang and Bateman cite academics arguing that the claims of microfinance are "in many respects a world of make-believe." These points all seem damaging enough but Chang and Bateman go even further, arguing that microfinance could actually inhibit poverty reduction by diverting attention and resources from the much more important state co-ordinated policy interventions, financial institutions and investment strategies that have been crucial to the success of fast-growing economies such as Vietnam, China and South Korea.
The gist of the argument is that the enthusiasm for microfinance has been rooted in the myth of the heroic individual entrepreneur, the rags to riches fairytales, Dick Whittington style.