The Economist has a bold claim in its March 17 issue - microfinance has shown it can succeed, philanthropists deserve the credit, they should take it, and move on to the next frontier. This is the kind of claim one would think foundations would love to hear - a major independent media outlet gives them credit for their work. As the magazine puts it, "The pioneering work of donors means there are now some 10,000 microfinance institutions lending an average of $300 to 40m poor borrowers worldwide."
Furthermore, the magazine cites the entry of commercial players into the microfinance market as evidence of the philanthropists success, claiming at least one victory for this route to sustainability.
So, why won't philanthropists love this story? Because the magazine goes on to say:
"...it is a pity that all these lenders are competing to support the same, small group of microfinance institutions that cater to the most creditworthy borrowers. It would be better for the poort if the IFIs (international finance institutions) and donors left the best credit risks to profit-seeking lenders and concentrated instead on those still stuck outside the system." (The Economist, March 17, 2007, p 16)
This is a tough call. Grameen Bank's founder, Muhammed Yunus, has said himself that Grameen's path to sustainability was lengthened because of philanthropic support - it didn't need to find its sustaining strengths as soon as it could have if the donors hadn't been so generous. And some donors are "cutting the apron strings" to those MFIs that can clearly make it on their own. The article puts it this way:
"This trophy lending is harmful....Aid money is better spent where commercial cash fears to tread - such as on the next generation of microfinance institutions."
The article goes on to encourage donors to get involved in mobile banking, or helping MFIs expand to insurance or other financial products. It also calls on these organizations to then pressure their national governments to remove restrictive regulations that further isolate the poor from financial tools.
I agree with the above and I think its problematic. We know from experience that markets will go where there is profit to be made. So hats off to the donors who helped the commercial lenders find these markets. But the very poor - can we really leave their needs to donors? What then is the public sector's responsibility?
Philanthropy, aid agencies, and social investors are few in number, not subject to widespread oversight or election, and usually suffer relatively short attention spans. Its one thing to encourage donors to take on the needs of the poorest. Its quite another to rely on them to do so. The public sector has a role to play here, and it is more than one of restrictive regulator. We must find ways to work with donors and independent agencies to better the conditions of the poor, and we cannot abrogate its responsibility to do so because of a few market and philanthropic successes. All too often we see governments - who must convince taxpayers to fund services - either abandon the poorest because they can't raise the necessary revenue or rewrite rules so that services are targeted to everyone - thereby winning the support of taxpayers but diluting the available revenue.
Yes, markets and donors make key contributions - and microfinance is a success. But public policy, public revenue, and public services are also key - to either ending poverty or further entrenching it.