Microfinance has no shortage of critics. One common concern is that microcredit might provide governments the excuse to eliminate public programs and aid programs, so that microcredit, from a policy standpoint, would privatize anti-poverty programs. This criticism may be of concern, but only if policymakers use microfinance to replace other programs. The next section further addresses the role of the greater development arena. But this section focuses on the more directly applicable criticisms of the internal logic or implementation of microfinance programs.
Probably the most common criticisms of microfinance directly concern the reality that microfinance programs may have to strike a balance between two competing incentives. Not all microfinance programs have the stated goal of reaching the poorest of the poor, but most attempt to reach communities that banks wouldn't otherwise reach. Either way, if these programs are seen as effective mechanisms to alleviate poverty, they must adequately meet the needs of the very poor. But while this may be a part of their stated mission, microfinance organizations cannot simply behave as charities, because they are not charities. In order to survive, they must also charge rates high enough to counter risk, avoid going to communities that require a more labor intensive operation, or avoid high risk altogether. So these organizations must make choices with regard to how they wish to be viable, especially if they wish to be economically self-sufficient (as opposed to relying on outside aid). As such, critics find fault with thriving microfinance institutions, arguing either that their interest rates are too high, or that they are not lending to the poorest people in the community. In short, these institutions are often seen as focusing on being self-sufficient at the expense of battling poverty. (Hughes and Awimbo, 75)
Some have proposed that interest rate ceilings be imposed on microfinance institutions, but this might lead them to avoid lending to poorer people. Otherwise, a rate ceiling might discourage potential investors or put a microfinance institution out of business. (Fernando, 4) A different strategy for microfinance institutions is to target the less risky poor, those people who qualify for programs but also have an established credit history and an established business. For these borrowers, repayment rates will be higher.
In fact, many programs have moved away from group lending in favor of lending to individuals and found that they have improved loan repayment rates. Why would individuals have higher repayment rates than groups? One simple reason is that the set of individuals chosen for the loans constitute a less risky sample of the population. Comparatively wealthier villagers are selecting into programs, and programs are too concerned with avoiding greater risks to change tactics. Field workers face incentives to lend to less-poor, more educated clients. The problem is undoubtedly a reflection of the fact that development intervention is often driven by performance indicators, a direct result of Non-Governmental Organization (NGO) desires to offer positive reports back to their donors, which are often foreign, or perhaps NGO desires to divest themselves of reliance on foreign donors. (Ahmad, 69)
Avoiding the poorest in a community in favor of offering loans to the less-poor appears to be a common strategy for many microfinance institutions, and the finding is a recurring theme in microfinance research. A variety of studies have found the very poorest are systematically excluded from two Filipino programs, two programs in northern Thailand, and four programs in Bangladesh, so there is reason to believe the behavior extends to a great many microfinance institutions. (Ahmad, 71; Coleman 1624; Hemingway, 53; Milgram 220)
The potential problem with this approach is reflected in Yunus's claim:
The inability to reach the poorest of the poor is a problem that plagues most poverty alleviation programs. As Gresham's Law reminds us, if the poor and non-poor are combined within a single program, the non-poor will always drive out the poor. To be effective, the delivery system must be designed and operated exclusively for the poor. (Yunus 1998, 48)
A much different criticism has focused on the matter of empowering women. While many microfinance programs lend solely to women, studies of women borrowers have found evidence in varying degrees that control of the loan often transfers to her husband or other male relative, depending on the program, region, or measurement. Women have been seen redirecting loans to men right in front of their bank officers. Women also have been asked to join by their husbands. So women are often not the end user of the loans. The problem is difficult to measure or enforce, but it is one that the development community needs to be wary of. (Goetz and Gupta, 49)
Of particular concern, of course, is that these women nonetheless bear the liability for repayment of any loans. A more recently published study of an economically sound program in Bolivia found that not only were at least 12 of the 28 women in the study found to be borrowing for their husbands or other family members, the study emphasized another more fundamental problem. It revealed that although women tended to meet the repayment schedules, the high interest rates were a significant deterrent to their economic advancement. The research studied two different programs, with interest rates of 30% (plus a 2% commission fee) and 48%, fees that would be seen as typical of microfinance programs. Both programs also required savings of 10% per loan cycle. What this study showed is that many of the women simply didn't make enough money from their business enterprises to pay off their loans without borrowing money from family members to make payments.
It is far easier for the women to borrow than to repay. The two programs boast remarkable repayment rates, but the women nonetheless faced great competitive pressures (as many women were doing the same thing in the same small area) and repayment schedules. These women worked hard and were enthusiastic, but market forces were unfavorable:
In the face of inadequate income to make payments, three
strategies are utilized. Borrowing from within their social network
and/or selling household goods is the most common (92%) and accessible
that nearly all the women had to resort to, often every payment
cycle. The second strategy is to reduce food quantity and/or quality.
Thirty eight percent said that they had at some point cut back
quantity and/or quality of the food given in order to save the
requisite money for the 'sacred payment.' . . . The final option
available for women chronically short on cash was to obtain work
to make money to pay off loans (21%) (e.g., taking in laundry,
housekeeping, working on a road crew). (Brett,
In short, the women were enthusiastic to get access to seed money, but found themselves saddled with debt. The reality is that microlending is a costly venture, even for microfinance institutions that are both efficient and barely profitable. As a result, interest rates will tend to be high, even if they are comparatively lower than what the informal market would otherwise offer. Consequently, many poor entrepreneurs will struggle to make ends meet. For microcredit to offer a social benefit, borrowers must be able to repay the loans and see other social advancement. Otherwise, clients won't see a benefit from credit, and worse, they risk putting themselves and their families in further debt.
Taken together, these criticisms highlight a primary strategic question for the microfinance movement. There is an emerging model of microfinance that better resembles commercial banking than traditional charity. These programs concentrate on offering loans at market interest rates that both provide services to the poor and to existing small businesses, although the very poorest might be left out. Shareholder and donor expectations will dictate the mission of these organizations and likely push them to operate with an eye toward turning a profit. These firms will raise capital more quickly, be able to expand into more markets at a faster pace, and consequently reach a lot of people. Strictly speaking, this is not the Grameen model, but if the goal of the microfinance movement is to provide financial services to areas not traditionally reached by commercial banks, these profit-minded microfinance institutions do fill that niche.
But if this model predominates in the developing world, it is likely that the very poorest people will be left behind. The Grameen Bank model, which more closely resembles the activities of international programs FINCA and Opportunity International, purports to be very different. All people wishing to join Grameen must prove that they own less than half an acre of land and that their total wealth is less than the value of one acre of medium-quality land. This ceiling, dictating who the bank may offer loans, acts effectively as a means test, which forces the program to focus on the poor rather than on established businesses. Programs like these also tend to offer relatively more lenient repayment terms. Rather than pursue profit, they emphasize the need to be sustainable. Grameen also offers credit at relatively low interest rates, but it required a substantial amount of donor aid before it was able to declare self-sufficiency.
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- Regional Breakdown of Access to Microfinance Services
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