Wednesday, 23 November 2011

Can MicroMoney solve MacroProblems? Does Microfinance really provide widespread solutions?

As Fagin's song suggests, we should always review the situation. What is attractive in the beginning may have unforeseen consequences.  Human beings have a tendency to seek universal solutions and answers which in turn leads to one size fits all policies.  We can also be hubristic, pushing forward our solutions without reflection, without pause for review, without recognising the risks and benefits of human interconnectedness with others.

The work of Muhammad Yunus and the Grameen Bank are well documented. In 2006, Yunus and the Grameen Bank were jointly awarded the Nobel Peace Prize. Earlier this year Yunus was ousted from the bank he founded. An appeal was dismissed. Yunus's concept of microfinance has been imitated by others and operates in other countries outside Bangladesh.

Ned Breslin points out in the simple video below how microfinancing is not always the success story that is promoted.

He points out:

I am a big fan of microfinance, having started my first microfinance project for water and sanitation in rural KwaZulu, Natal, South Africa in 1993. But I learned very quickly in this project that there was often a gap between repayment rates and actual impact. The microfinance sector spends a great deal of time focused on repayment rates -- with organizations suggesting that they are successful and impactful because they can show a high repayment rate on the loans that they made. To illustrate, MFIs will often publish statistics like 95% repayment rates on loans and suggest that this means they are great at transforming poverty and changing lives. 

Repayment matters of course, but it does not in any way confirm the impact of the loan. In the case of water and sanitation, a focus on loan repayment as the key (or only) indicator of success is misleading. Repayment of loans simply show that money was used to purchase a latrine and the money was paid back by the family.

But in this example from rural Bolivia I show that the real impact question is about whether the loan actually changed the lives of loan recipients? And as I learned in South Africa and since, the answer is often no. Families take out loans because they want to change their lives with that loan. That is great! 

But if the toilet is poorly constructed, if the system does not work, or if a tap is paid for by a loan but water rarely is available at that tap, then the family took out a loan, repaid that loan and the investment had no impact on their lives. In fact, the loan might have made the family poorer in the end! 

In the example here, the loan scheme was linked to a water project that was never completed. The family in this video took out a loan to get a flush latrine that has never been used because the water project -- started 6 years ago -- was never completed. The toilet is now useless.

Microfinance success should be judged on whether loans transformed lives, 
not on whether loans were repaid.

Further reading:

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