The Hidden Costs of Microfinance

Pardon me while I beat a sacred cow. According to some of my readers and commentors, that’s what I do best anyway. And this is a biggie, one of the charity world’s favorite idols, widely worshiped and highly regarded as one of the most respectable forms of do-gooding. Some may even say untouchable, infallible. Hell, it’s even earned its founder, Muhammed Yunus, a Nobel Peace Prize, so who do I think I am to criticize? Well, if you asked that question, then evidently you don’t know the Green Mango very well. That’s right, today I’m taking a swing at microfinance.

Okay, let me give you a moment to catch your breath for a moment before I explain myself. My issue is not entirely with the concept of microfinance programs itself. For Mr. Yunus and his Grameen Bank, it has famously worked very well. Maybe too well. The problem comes when the rest of the charity world sees just how well it worked for the first guy and then everyone else hurries to try to replicate it themselves and just end up screwing everything up. You see, in the charity world we are all constantly looking for the next big thing, the perfect model to follow. We like to think that helping people can be diminished to some simple formula that we can all apply to our own do-gooding. Very few people in the charity world are really looking to innovate unique solutions to the problems within their specific communities and demographics but they’re just waiting for someone else to make something work somewhere else so that they can try to imitate them. But the fact is they almost always end up doing a pathetic job in their replications. This is why even though I respect the noble idea of microfinance, the majority of such programs that I’ve had personal experience with have been failures at accomplishing their missions, many times unknowingly to those running them. So the problem lies much more in the nonprofits’ addiction to searching for idols to worship and then failing in their imitations but refusing to admit their failure because they are following such a widely accepted perfect model.

Here in Haiti imitation microfinance programs are more popular than high blood pressure at the Iowa State Fair (that’s right, shout out to my home state and deep fried everything!) These dime-a-dozen programs here often times function everyday thinking that they’re bringing positive progress to the lives of their clients without ever seeing the peripheral damage that they’re causing with the expectations that they enforce. They think that they are teaching responsible management skills when really they are just extending the system of dependency and debt out further to a place where its not their problem anymore.

I’ve even recommended to friends and students of mine here that they register for these types of programs in the past when they’ve asked my advice on making money. However, more often then not, these people have come back to me a few months later to ask me to loan them money so that they can pay off their debts to the microfinance program. And its not just my close friends but I’ve heard many people in the community talk about the difficulty they have coming up with the money to pay back their microcredit debt. Its so widespread of an occurrence that I can’t possible blame the individual for not succeeding at their business but its clear that there’s a problem with the inherent structure of these programs that makes failure more likely than success. Yet the structure still enforces procedures that coerce payment that allows the organization to claims success nonetheless.

And if there are that many that have asked me to pay off their loans, how many more out there are asking their neighbors, spouses, or family to help them pay off their loans? Most of these programs are able to tout near 100% repayment rate but I would betcha that the percentage of clients that are actually able to pay off their loans with their own money that they’ve made from their own start up business is depressingly lower. But these groups don’t ever report that. As long as they get their money paid back they don’t measure success by how successful the person’s business is.

But accruing debt to others isn’t the only side effect of these microfinance programs. Often times, the inability to repay their loans goes much farther, causing the client to actually run away from the debt rather than having to repay it somehow. When this happens, the lending organization never realizes that it is to blame. They just assume that the relocation is for some other reason and report that they’ve lost a client, not that they’ve driven them away. But I’ve had students in my adult literacy class move away from the community leaving behind their homes and even family because they’re unable to repay debt to micro credit charities intended to help them. Also this year I had a child in our sponsorship programs uprooted and moved into the capitol city because his mother was unable to pay off her loan to a microfinance program. That boy had two siblings and had never lived outside of this rural community but now because his mother had signed up for a program that she wasn’t able to satisfy the requirements of, now he’s missing out on the chance to even go to school, as I assume are his siblings.

And the organization that provided her that loan based on these sacred microfinance principles has no clue why she moved. They just crossed her off of their list and still get to claim their near perfect “success” rate.

If these programs were managed the way they’re intended to, I wouldn’t have to be approached for loans or charity from their clients, their clients wouldn’t be moving away, and children wouldn’t not be missing out on the chance for an education. I’m not reporting on this as some journalist who has done all sorts of research on the issue, I am simply sharing from my personal experience. And since it has been repetitive negative experiences coming from multiple programs and organizations, I felt it was important to share in an attempt to encourage those who support these kinds of programs and maybe even those who manage these sorts of programs to try to look deeper in their analysis of the programs and to consider other ways to encourage success in their clients beyond just measuring repayment rates. I do think that there are many ways to utilize these proven models for the benefit of those we serve, but it demands that those who are administrating the programs take responsibility to look critically at all of the side effects of their efforts and not just lazily rest on the justification of doing good because the model they use has a Nobel prize behind it. Yunus deserves every ounce of his prize for his work developing the system, but unfortunately so many of the copycat attempts at doing what he did are an insult to his legacy. If you want to win a Nobel prize of your own someday, it’s never going to happen by haphazardly trying to imitate another.

One comment

  1. Interesting post. In fact, the connection between Haiti and Grameen is not so nebulous. Fonkoze is a Grameen Foundation partner. Your observation about the number of people struggling to repay loans is true, but in the case of Fonkoze nearly 1 in 5 clients are in default at 30 days, so I dread to think how many are struggling to make their loan repayments. The bank is unprofitable, despite charging interest rates approaching 40%, and over half its assets are not even the loan portfolio! It’s portfolio is actually shrinking according to the latest MixMarket data, but for some reason they failed to disclose client numbers for the most recent data.

    But, broadening your observation beyond Haiti, microfinance is experiencing a backlash globally. There have been numerous crises, but perhaps most worryingly is the academic evidence emerging, suggesting that the overall impact on poverty alleviation is minimal. David Roodman most succintly estimated it as “zero”. Maren Duvendack reviewed about 2500 academic papers and concluded that the entire excercise had been built on “foundations of sand”. In fact, the only people still maintaining the claim that microfinance is a miracle cure for poverty are the microfinance institutions, their investors, and their quasi-scientific reports (often done in-house). Very few take these too seriously.

    However, it does sound like you are perhaps based in a bad country in terms of microfinance. There are a few isolated cases of good, well-run, effective microfinance institutions. They tend to be low profile, operate in regulated environments, not overtly profitbale, and do not depend on massive publicity based on nebulous claims to raise their funding. Do not throw out the baby with the bathwater – the underlying principle is valid, if only we practiced what we preach. The problem is not that Yunus was wrong – but that the sector ignored Yunus entirely.

    However, the debate over whether microfinance works or not is flawed. What we must do is determine whether it is the best use of funds. For example, the cost per borrower at Fonkoze is about $170. For this, a poor person gets a loan. Great. We must instead ask ourselves whether this $170 could be better spent on something else. That’s a lot of vaccines, mosquito nets, a teacher for a month or two – whatever, it depends on the context, but the great pity to date is that so much money has been pumped into microfinance over the years, and the results are medicore to say the least. Was this a missed opportunity? Could we have done better? Why did microfinance so spectacularly fail to live up to expectations? Can it be salvaged? Those running the sector, many of whom receive nice salaries and generous expense accounts based in Amsterdam, Washington, Geneva or New York, have every incentive to keep the myth alive.

    it seems your personal experience of microfinance is spot-on. Alas. Debt is not always helpful – it is astonishing that this isn’t already painfully obvious to most people.

    Hugh Sinclair
    Consultant, Author

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