The Limits of Microfinance
James Surowiecki's commentary in The New Yorker this week offers a sobering reassessment of microfinance. His thesis is not that microloans are a bad thing, just that, if their goal is "to make poor countries richer," currently they aim at the wrong segment of the economy.
Surowiecki observes that often "Microloans are often used to “smooth consumption” — tiding a borrower over in times of crisis." This is much the same role that revolving credit like credit cards play in more mature economies. While this type of bridging consumer credit is tremendously important to the stability of a single household, it is isn't the type of credit that leads to the creation of jobs, something most developing nations are in dire need of.
"In high-income countries," Surowiecki writes, "more than sixty per cent of all jobs [are created by companies] bigger than a fruit stand but smaller than a Fortune 1000 corporation. It is this middle tier of small-to-medium-sized enterprises that a nation must cultivate if it is shooting for long-term economic growth."
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The Other Debate with Microfinance
This post made me think of a recent article on microfinance in the New York Times. It also reminds me of a post of mine.
Another debate regarding microfinance is the emergence of for-profit microfinance institutions like Compartamos in Mexico. The man heralded as the father of micro-finance, Mohammad Yunus, has condemned these businesses as profitting excessively from lending to the poor. Other micro-lending organizations, like Pro-Mujer, traditionally take a large peercentage of profits and reinvest them into the women they serve. Pro-Mujer takes this money to provide health services-- because (surprise, surpise) women without access to credit often don't have access to other things such as health care.
I don't think that profit should be avoided in the micro-lending world. After all, in order to be sustainable profits should be involved. However, the question is how much these institutions should profit from the poor?
Other's thoughts?
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