Can microfinance end poverty?

“We believe that poverty does not belong in a civilized human society. It belongs in museums.” This sentence was said by Mohammad Yunus during his speech at the first Microcredit Summit in 1997. He is the founder of the Grameen Bank, the first microfinance institution and started introducing microloans to rural women in Bangladesh in the 80s. Today, more than 30 years later we still see much poverty in our societies. However, what is the result of this former innovative approach of microloans as an instrument to alleviate poverty?

Yunus introduced microcredit programs as a method to facilitate support for low-income households by giving them loans which will be invested in income-generating activities. Thus, these households are given the opportunity which may help them to escape the poverty trap, changing economic and social structures. According to Yunus, it is the lack of small money which is the dilemma of poor people as they cannot accomplish essential investments. This concept however, focuses on self-help and is not based on pity. Furthermore, it became the instrument for world poverty reduction as it seems to need nothing except of small initial investments. These loans will then be paid back by the poor themselves as their growing income-generating businesses will generate profits.

However, the high growth rates of the microcredit sector attracted many actors which are less likely to reduce poverty but instead seek for more profits. Thus, under the guise of development assistance the first microfinance institution (MFI) went public in 2007. This might not seem shocking at first sight. Nevertheless, when we look at India in 2010 we see two very contradicting processes. It started off with the biggest Indian MFI going public in July which was very successful. But then, in September 2010, there have been several suicides by women who could not repay their loans and who could not find any other solution than burning themselves. This happened in the same state in which the MFI went public. Hence, people started asking about the effectiveness of microcredit programs for rural women in order to alleviate poverty. Has the microcredit sector actually gone away from its previous aim? In 2011 Yunus said that, it is a terrible wrong direction in which the microcredit sector is moving. The rather economic goals and financial successes are becoming more important than the original aim to reduce poverty.

In order to find some evidence for the outcomes of microcredit programs, let’s examine some positive aspects first before we look at the negative ones. When Yunus introduced the idea of giving poor people access to financing which will substantially foster poverty reduction, it was seen as an innovative breakthrough as an instrument in development aid which is based on the principle of “aid for self-help”.  Millions of poor household could be served through loans from the Grameen Bank. In the long-run, microloans can increase household’s income as investments in income generating activities are made. In addition, financial assets can be accumulated which leads to a smoother consumption in everyday life. Additionally, consumers’ behavior can change as there is a decrease in consuming “temptation goods” such as spending money for feasts. By contrast, people would rather invest their money in durable goods. Finally, there can be an increase in the educational and health situation as well as a reduction in vulnerability to sickness, droughts and bad harvest. Furthermore, this may also be an instrument which empowers women within communities as it is often the women who belong to the poorest. In literature, the improvement of the economic situation of women is seen as an efficient instrument to fight poverty. Hence, the microcredit idea focuses specifically on women who also tend to have significantly higher repayment rates. Whereas men are rather tempted to use the given loans to buy alcohol or spent them gambling, women are more likely to invest the money in a way that supports the family. Thus, they invest most of their savings in the education and health of their children.

However, one of the most promising ideas is the group-lending method which is based on the assumption of group-liability. The regular meetings of these groups are not only positive for the MFIs which can rely on the self-screening of the people belonging to this group. Instead, it also supports creativity and innovations by fostering discussions for possible market entries. Furthermore, group loans facilitate higher investments while benefiting from good repayment conditions. Finally, group-lending leads to an increase in social capital as regular meetings improve intra-community relations.

Nevertheless, investigations on the outcomes and impacts of microcredit programs have shown that the promising assumptions do not hold in reality. In general, there is a trade-off which hinders microcredit programs to lead to a win-win-situation for poor people and MFIs. On the one hand, the aim of microcredit programs is to reach out to as many poor people as possible who are excluded from the financial sector. On the other hand, however, the MFIs have to be sustainable and thus find a way to be profitable. Thus, there are two dimensions in order to measure MFI’s success: a financial as well as a social value performance. This could also be explained by a conflict of either being a social or an effective actor. Hence, if the main focus is on alleviating poverty, the financial performance of the MFI is rather weak and leads to the outcome that only about 70% of the costs can be covered due to high transaction costs and high systematic risks. However, if concentrating on profits, the social aspects will pale in comparison to economic benefits. This will lead to different behavior at the microcredit market and may in the worst case end in what had happened in India in 2010.

To sum up, the main idea behind microcredit programs may be promising. However, the implementation reached a turning point in their philosophy by aiming profits at the expense of reaching out to the real needy people. In general, microcredit programs should not only give out loans, but foster savings as well as offer seminars and trainings on financing and income generating activities. Only when concentrating on context-specific situations of the poor, microcredit programs may lead to the possibility of alleviating poverty in these specific contexts.



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Yunus, M. (2011): Sacrificing Microcredit for Megaprofits, in: The New York Times, 14th January, 2011, p. 23.

One thought on “Can microfinance end poverty?

  1. It is true that micro-finance was created to alleviate poverty especially in developing countries as it guarantee loans to poor individuals especially farmers and petty traders to buy farming equipments, fertilizers and establish businesses to better improve their living standard. This sole aim of micro-finance devoid it existence free form tax payment. However it is now becoming a social cost rather than social benefits and the corporate aim of minimizing poverty has been transformed into maximizing poverty via increase in debt-servicing. Profit making has become the other of the day. This has led to groups of individuals creating thrift and loans by themselves with little or no interest on loans to better increase their welfare. Some have resorted to rely on family members for loans which most often becomes too long to acquire and over-reliance reduces creativity and promote laziness. The government may thus adopt policies to mitigate the social cost effects of these micro-finance by instituting a fixed lower interest rate and form an supervisory committee to check the activities of these micro-finance. Most often individuals have anti-trust tendencies toward these micro-finance for their savings as a result of bankruptcy and embezzlement. Interest gain on savings are much more lower than that charge on loans due to maximization of profits disregarding their main aim of alleviating poverty. Also most often the length of payment is too short taking in to consideration bad weather occurrences, low demand and sales, poor organization of marketing board to help facilitate sale of goods and fluctuation of prices. This causes hardship and inability to effective meet up with their payments and huge debt-servicing. The government thus needs to create a supervisory committee to act as checks and balances to evaluate the performance of this micro-finance and their role towards poverty alleviation and equally sanction defaulters who breach their conditions of payments.


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