•  london
• Friday, June 03, 2011
• Inter Press Service

The microfinance industry is expanding at breakneck pace, with more banks and private equity firms now entering the fray. Yet there is growing unease about the naive assumptions, and evangelical predictions, of its advocates.

In 2009, 128 million people received microfinance loans, according the Microfinance Summit Campaign. Such services are increasingly being used in untested settings, from post-disaster reconstruction in Haiti and entrepreneurship programmes in Iraq to consumption smoothing during seasonal famines in Bangladesh. 'Microfinance has a certain populist appeal,' says Ha-Joon Chang, professor of economics at Cambridge University.

'(But) simply throwing money at people and hoping for the best, without extending complementary inputs to raise productivity, such as warehousing, fertilizer, export marketing, market research support and so on, means you reproduce poverty rather than eliminating it,' he told IPS in an interview.

One issue is market saturation: 'If you lend to one person to buy a phone and rent it out, she might make some money but very quickly many others enter the market, unleashing intense competition. There are a limited range of things that poor people can do in many of these contexts, and limited scope for productivity gains.

'How much more efficient can you get at frying food or raising chickens?' Chang asks. While microcredit modestly raises rates of business creation, it is not clear that such enterprises grow. Professor Abhijit Banerjee from the Massachusetts Institute of Technology (MIT) has conducted a series of randomised controlled trials of microfinance and claims to have found scant evidence of enterprise expansion.

'We see lots of business creation, but little business growth. Of course, there is no solid proof that such growth could not happen, but none of the evidence is pointing in that direction at the moment,' Banerjee points out.

One consequence of business creation without growth, warns Professor Aneel Karnani at the University of Michigan, could be the formation of 'atomised' economies with many small-scale activities, and a 'missing middle' of small to medium-sized enterprises (SMEs).

Karnani told IPS: 'This is a zero sum game, in the sense that resources are limited. Microcredit is attracting a lot of money, human and political capital and energy and enthusiasm from NGOs (nongovernmental organisations) and government officials that could have been channelled into SMEs, the real engine of job creation.'

Karnani also believes the poor overwhelmingly desire access to formal jobs, rather than the opportunity to be entrepreneurs. 'Microcredit is based on a fallacy that people not only want to be entrepreneurs but have the will, ability and preference to do so.

'Most people are not like that. In the U.S. and UK, 90 percent of the workforce chooses to work for a salary rather than be an entrepreneur. If 90 percent of people in rich countries choose not to be entrepreneurs, with all that education and excellent public infrastructure, why do we think people in poor countries want to?'

© Inter Press Service (2011) — All Rights Reserved. Original source: Inter Press Service

Where next?

Advertisement