A recent news article in the Guardian newspaper talked about the "microfinance delusion." In that article, Jason Hickel, an anthropologist of the London School of Economics, argues that microfinance is not as effective as believed by many in reducing the incidence of extreme poverty across the world. In fact, according to him, it can even exacerbate poverty - mainly because (i) those loans are used for consumption, (ii) the businesses opened using the funds may not have sufficient demand, and (iii) the only winners are the lenders.
There are some issues with his arguments. The poor, just like the wealthy, also need access to finance to buy consumer goods, open new business, or protect themselves from negative shocks (like hospital fees, recovery from natural disasters, etc.). Besides providing access to finance to the poor, many microfinance organizations also educate the poor about the laws of the land, their rights, and what services they can access from the government (for example, BRAC). Besides providing microcredit, many microfinance firms also provide services such as savings scheme, insurance, and assistance with asset building. Not all businesses succeed, and so it can be expected that not all businesses opened using microcredit funds will succeed. But the more important thing here is that the poor have an access to finance; they have the ability to get a loan from an organization, instead of depending upon loan sharks.
That leads to the subject of interest rates charged by the microfinance institutions. The rate is much higher than that charged by traditional banks. Advocates of microfinance say that this high rate is justified because the institutions are very labor-intensive, as the businesses opened by the borrowers may require more oversight than normal. This problem can be solved by creating guidelines by national government on how much interest can be charged by these institutions.
However, one thing Dr. Hickel does mention in that article is that "microfinance will never work until we address the background conditions that produce poverty in the first place." This is the only plausible argument that I find in his argument against microfinance. Without proper institutions and knowledge about rights and responsibilities, microfinance, or any other poverty-alleviation interventions, will fail. For example, providing funds to women to open businesses will have little impact if women have societal barriers in conducting business. In that case, is microfinance really at fault? I don't think so. Other social and cultural norms need to change in order to make it effective. Alongside providing microcredit to borrowers, many microfinance institutions also provide education about rights and responsibilities to their borrowers, which can help them conduct their businesses.
There is no one single intervention that can eradicate poverty. Poverty is multidimensional in nature, and there are many factors - monetary, non-monetary, social and cultural norms - that can put a person in a poverty trap. Microfinance is one of the many ways that try to bring people out of extreme poverty, but it cannot solve the problem of extreme poverty just by itself. It provides a much needed access to finance by the poor. Governments should not rely solely on microfinance to eradicate poverty. Health, institutions, education and infrastructure needs to be improved in tandem with providing access to finance to the poor.
I would also like to add that microfinance facilities do help to improve certain intangibles in a person's life. For example, access to finance can allow a person to enhance their self-respect. It can increase the empowerment of those marginalized in society. It can allow people to consume products that they may not be able to under normal circumstances. Microfinance can make the marginalized feel that they are members of the broader community. In these respects, microfinance can help to enhance the quality of life to a certain extent.
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