NN39, October 2007
Best Practice in Education and Training: Hype or Hope?
Microfinance as Best Practice for Developing Countries?
By David Ellerman, University of California at Riverside
KeywordsMicrofinance, Developing countries, the poor, Best practice
Summary
This article questions whether microfinance programmes are the sort of assistance that builds self-reliance rather than dependency, or that builds capacity rather than prolongs incapacity. It argues that the rush to do good with pre-packaged and easily-installed microfinance programmes may provide some heart-warming short-term poverty relief but it seems to have little or no developmental impact.
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Is microfinance a best practice to ?help the poor?? Microfinance (MF) programmes are usually in fact lending-led (as opposed to savings-led) programmes that can be ?installed? by development organizations using seemingly off-the-shelf "best-practice" models and external finance. Not only is sustainability an issue, there is an issue as to whether or not that sort of development assistance should be sustained. Is that the sort of assistance that builds self-reliance rather than dependency that builds capacity rather than prolongs incapacity?
While it is a delightful fantasy, there unfortunately seems to be little basis in fact to assume in the developed or developing world that poor people?who (practically by definition) have trouble getting and/or holding a job?have the necessary entrepreneurial knowledge, skills, and opportunities to start businesses if only they had access to external finance. Indeed, it is the micro-version of the much-discredited view of the "development banking community" (e.g., the World Bank and the regional development banks) that external finance is the key to development in poor countries.
In the developing world (and in the depressed parts of the developed world), donor-funded organizations are thick upon the ground to ?help the poor.? Instead of really helping the poor to become the agents or doers of their own development, the poor are seen as the clients and customers of the multitude of externally funded organizations with the ostensible purpose to deliver services?such as microfinance lending services?to the poor.
For example, one might consider a recent survey and prognosis [Rhyne, Elizabeth and Maria Otero 2006. Microfinance through the Next Decade: Visioning the Who, What, Where, When and How. Boston: ACCION International] of the MF field commissioned by the Global Microcredit Summit 2006 and written by two leading practitioners based on comprehensive statistics and dozens of interviews with microfinance leaders. The striking thing about this excellent document is that it is entirely framed in terms of the ?microfinance industry? as ?suppliers of financial services to the poor.? There is no hint that this might have anything to do with the collective agency of poor people?s movements; it is all about better serving the poor as the customers and clientele of the microfinance industry. It is as if one surveyed the labour movement and took it for granted that the purpose of labour unions was to provide various services to workers such as access to finance (credit unions and now credit cards), cheaper group rates for health insurance, better retirement plans, and the like?all without any hint that the labour movement might have (at least historically) something to do with the collective agency of employees to ?change the system.?
In contrast, a savings-based credit cooperative (or ?credit union? as another type of union) is an organizational form by which large numbers of people, each with small savings, can pool their savings together to finance non-trivial business opportunities (in addition to some consumption-oriented lending). There are many ways that donors could subtly help to catalyze and facilitate the development of savings-based credit cooperatives. One way is to foster and partially fund up-stream organizations whose mission is to catalyze and help animators organize savings cooperatives and to help those cooperatives learn on a peer-to-peer basis from each other about propagating the examples and about overcoming the obstacles they face. Another way is to promote partial insurance schemes for small depositors in credit cooperatives so that the fear of losses through organizational or financial collapse will not paralyze individuals from becoming involved in such a collective activity. In any case, the idea is to foster and catalyze the collective agency of poor people to change their own circumstances, not to simply have better services delivered to them as passive customers and clients.
Genuine development assistance, where the helpers do not crowd out and undercut the agency of the doers, is a slow, subtle, and painstaking process. Yet various leaders of development assistance agencies, assorted well-meaning celebrities, and a few publicity-seeking academics are constantly badgering the public, the political leaders, and the donors to ?do more? to help the poor and to ?do it quickly? because things are getting worse. ?Children are dying!? Thus donors and the organizations they fund are ?in a rush to do good??which accounts for much of the ?popularity? and ?success? of installing off-the-shelf loan-led microfinance programmes.
Clear thinking about microfinance also requires getting beyond the carefully selected stylized stories about outlier individuals who are then treated as the norm. The activities of microfinance organizations are described as funding ?entrepreneurship? by the poor when the bulk of loans seem to be better described as consumption smoothing. This includes bulk consumption expenditures on things that cannot otherwise be purchased on commercial credit as well as the various family crises that might otherwise force a family into the embrace of the village money-lender. The point is not that these goals are unworthy but that they bear little relationship to the development-oriented story-line of "funding entrepreneurship by the poor."
In the minority of cases where some business activity is being individually funded, it will often be an activity with little or no barriers to entry; so many micro-borrowers may simply end up in cut-throat competition with each other. For instance, one nanobusiness is to buy a spice or staple in some bulk and then to repackage it in small amounts so that other poor people can afford it. Such microbusinesses are easily imitated, have little if any potential for growth and diversification, and do not address the more fundamental organizational obstacles to the development of small and medium-sized firms.
The rush to do good with pre-packaged and easily-installed microfinance programs may provide some heart-warming short-term poverty relief but it seems to have little or no developmental impact.
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