Next Steps for Microfinance

The evolution of micro-financing over the past 15 years has been evident through the inclusion of micro-insurance, savings options, growing participation by large for profit banks and the sturdy increase in the number of loans being provided to borrowers lacking access. While these strides have increased the scope and scale of micro-financing, it appears there are still significant steps necessary to realize the true benefits of this social enterprise.  Recent skepticism of micro-financing by local governments and key political and social figures are indicators of the challenges that still lie ahead in developing a sustainable structure desirable of the original vision created.

Microfinance at its inception was designed to provide access to loans and savings accounts for small businesses in poverty stricken economies that lacked access through traditional channels.  The goal of opening up channels of access was to reduce the high levels of poverty by providing people with an opportunity to start their own business and create a new source of income.   As microfinancing organizations evolved, the focus shifted more heavily to profit generation and strayed from poverty reduction.  This is evident through the types of loans being made and the still prevalent poverty in areas where microfinancing has focused its efforts. 

The geographies microfinance organizations aim to serve consist of individuals who are not familiar with traditional financial services that have become part of everyday life in developed countries. Simply providing access does not eliminate the challenges faced by developing economies and can lead to more issues than resolution.  This is apparent by the large number of individuals who seem to be generating higher levels of debt through access to loans rather than working their way out of poverty.  The major gap in microfinance services is the training, support and education necessary to allow these individuals to take advantage of the services now available to them.  Their culture and upbringing did not afford them the understanding of how to be financially stable or how to successfully run a small business.  Instead, many have viewed the loans as short term access to financial means that temporarily alleviates their poor living conditions.  While it is not necessarily the responsibility of microfinance institutions to fill this gap it is a key component to their continued success and a factor they should be supporting to enable their cause.  This support, in conjunction with the appropriate infrastructure and governmental regulations, are essential to allow individuals in developing countries to maximize the advantages of microlending.

In addition to the need for training, local governments play a significant role in the success or failure of microlending.  This point is supported in the NY Times article “15 Years in, Microcredit Has Suffered a Black Eye”, in which the prime minister of Bangladesh, activists and politicians in Nicaragua, Pakistan and Bolivia have turned their backs on microlenders encouraging borrowers to default on loans.  Government support and the existence of the necessary regulations and infrastructure to support this type of financial structure are vital to achieving microlenders mission.  Without this, the efforts of these organizations are undermined by political figures who feel insignificant and threatened.  On the contrary, microfinancing organizations should be focusing their efforts on developing the necessary coalitions and communication channels to garner support for their efforts.  If they are able to demonstrate to the government organizations the benefit of microlending to their economy and to their political efforts, social enterprises are more likely to gain the needed support. 

As discussed in the article “Cultivating your Ecosystem” it is important to identify the four environmental conditions affecting social entrepreneur’s efforts and then create the proper structure to enable those efforts in the defined environment.  The microlending industry took into account the geography, economics, markets and social fabric of the environments they entered but failed to fully evaluate the government and administrative structures of the markets they operated in.  While microlending organizations have some work to do they are still a very prevalent part of third world economies and their efforts are instrumental in helping entrepreneurs get their businesses up and running with the goal of reducing poverty.  With a better understanding of the roadblocks, microfinance institutions can better position themselves for success by establishing the appropriate relationships and communication channels.

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One thought on “Next Steps for Microfinance

  1. tlhill2012 November 23, 2012 at 12:31 PM Reply

    XXX-
    Thanks for a careful analysis of the role of institutions – in this case education, politics and culture – in the success of microfinance. Clearly, loans are not enough, and there are many microfinance NGOs that pay at least some attention to providing education, business support, etc in addition to loans. In the EMC, for example, we’ve just completed a project for Oxfam in which the consensus was that farmers need education/technical assistance, help saving, and insurance before they can make the best use of the power (and peril) of loans.

    While some microlending outfits do pay attention to education, culture and the role of government, many, including most of the nonprofits, do not. This, in turn, almost certainly contributes to the expansion of microlending and also increases in perverse outcomes such as increased indebtedness, substituting of one loan for another, etc. In turn, such examples/trends give politicians the opening to become involved – sometimes for noble reasons and sometimes for more venal ones.

    Finally, just as it is a good sign (if also a challenge) that global financial entities are now interested in microfinance, so is it a good (if challenging) sign that governments are interested. Microfinance is coming of age, bringing new challenges. There could be an interesting paper here about he evolution into legitimacy and/or about the bumpy path to social change in which small gains lead to push back, then to more organizing and larger change, more push back – into an uncertain future.

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