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“Does microlending fight poverty?” – Wrong Question To Ask by sylvng

On this blog I’ve written two previous posts on microfinance (also known as microcredit or microlending) and its effects. Well the debate regarding whether microlending solves poverty still rages on, and this month, the Boston Globe published a fairly extensive article containing much supporting material that concludes microfinance doesn’t actually do much to alleviate poverty. If you’re interested in the subject I would definitely recommend you read the article; while it doesn’t include ideas that are entirely new, it does quote findings from MIT research yet to be published, and offers a good summary into arguments being made on both sides.

So what exactly are some arguments against microlending being effective for alleviating poverty? Well..

  • Studies are showing that microlending doesn’t lift household spending (an indicator that shows financial well-being)
  • Borrowers often do not use the borrowed money for business but instead spend on household items like TVs
  • New research underlies the fact that developing countries will not lift themselves out of poverty through fueling entreprenurship – already developing countries are overindexed on entreprenurs, and what the countries need is large corporations to provide jobs that steadily increase pay annually
  • Economies of scale work, and microlending doesn’t tap that potential; as the article says, “Forty workers at a textile plant are going to be much more productive than 40 microentrepreneur weavers each working by themselves”

Of course, on the flip side, there are also arguments to be made:

  • If nothing else, microlending is allowing borrowers to disengage from high-interest lending that can result in physical punishment if loans are not repaid
  • Studies that have been conducted so far only measure the impact of microcredit on the short term and don’t take into account effects over 2 years long
  • The growth and sustainability of microlending (Grameen Bank, has disbursed more than $8 billion in unsecured loans) suggests that borrowers are finding value in the loans, even if the effects cannot be immediately measured

My take? So yes, maybe microlending won’t solve the world’s poverty problems. But it still may be making lives better, and what method of aid isn’t under attack for lack of effectiveness? I think the question here might not be whether microlending solves poverty or not, but whether it does better at solving poverty (however little impact it may be) than other instruments available to the average donor like me. Straight handouts to the poor certainly aren’t good. In-kind donations probably aren’t good either if they steal away business from local shops.  Short of volunteering in the third world countries, microlending is one way that I can attempt to do good.

Thoughts?

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4 Comments so far
Leave a comment

Fighting poverty with microloans isnt a one hit wonder. To help people out of poverty takes physical, financial, emotional, and relationship help. You have to work with the whole person body, mind and spirit.

Comment by C Hilton dyer

“developing countries are overindexed on entreprenurs, and what the countries need is large corporations to provide jobs that steadily increase pay annually ”
How did you deduce what will work. I read the studies on how overentreprenurship (?) doesn’t help, but that doesn’t mean a large corporation does. What about another option? Just throwing this out there. does anyone know of Larger loans for Co-op companies without a corporate head? Good business models that need a starter loan. With a group of people together it wouldn’t take more per person than a micro-loan… anyways. Nice blog

Comment by Ryan H Mitchell

Ryan, definitely agree about other options – don’t think there’s one answer here. The articles I’ve been reading all cite large corporations as a way to gain economies of scale so I don’t think necessarily that they meant the corporate governance is required so much as collaboration amongst the entrepreneurs.

Comment by sylvng

The latest thinking on this seems to be that the answer to ensuring that microcredits results in lifting people out of poverty may lie in combining micro-finance with micro-franchising. Apparently this hasn’t really been done much til now, but involves lending to a different sort of person at the base of the pyramid – less entrepreneurial and more stable and business oriented. There are a few examples of this now being seen in Africa and an organisation called Ayllu is trying to set up the mechanism to support this in Brazil.

Comment by Rizwan




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