Wednesday, September 26, 2007

Microcredit - more on when its less

I posted last week about some of the limits of microfinance. I hope you were able to catch last week's episode of NOW on PBS.

I'm looking at the downsides of microfinance partly because I am busy finishing reading A Billion Bootstraps: Microcredit, Barefoot Banking and the Solution to Ending Poverty, (Phil Smith and Eric Thurman). The book is an easy read and an unbridled exclamation on the power and potential of microcredit. For all its one-sidedness, the authors clearly make the point that microfinance and microcredit work best "where there is no financial services infrastructure." In other words, in poor countries.

The authors have a wonderful way of making economic arcana accessible. This is one of the book's key strengths. They also do a fine job of pointing out just how different a cash society (poor countries) is from those with built financial infrastructure (i.e., rich countries). The point is so obvious it is easily overlooked.

For those of us in the northern and western hemispheres, life is becoming ever more "cashless." We pay with credit cards, bank online, travel with e-tickets, pay bills electronically, swipe our way into and out of parking garages, and use "one-click checkout." Our life is so cash-free that the big advancements in money-technology are new radio-enabled credit cards that you merely wave near a payment machine - I mean, c'mon, who has time to "swipe and sign" anymore?

But poor countries are exactly the opposite - they are almost entirely cash-based. There are no credit cards, no capital market, no debt financing, no "30 day payment plans." Life is cash and carry, or barter.

I'm still reading A Billion Bootstraps. So far I don't buy into its unrelenting insistence that microfinance is the answer to poverty - but I appreciate the authors' presentation of why what works does so.

I have learned some important reasons why it may work in some places and not in others. Some economists (most of whom are less facile with pens than Smith and Thurman) also dig deeply into what works - and doesn't. My latest find in terms of microcredit criticism comes from economist Arneel Karnani at U Michigan, whose article "Employment, not microcredit, is the solution" is worth a read. He points to the smallness of the businesses that microcredit supports, not the structure of microcredit, as reason for its limitations. Microcredit, Karnani reminds us, supports "micro - enterprises," small businesses that are not big enough to lift people out of poverty.

I'll provide a more complete review of "Billion Bootstraps" soon.


Pete said...

Karnani's focus on employment is intriguing. I was on the board member of a micro-lender in Los Angeles in the mid-90s, and we found that, while we were successful in getting loans out to very deserving low income entrepreneurs, who had a very low default rate, the best ultimate outcomes we found were that our borrowers built stronger skills and became better positioned to work for someone else, and also better at running their own households. Very few businesses grew into something that could sustain themselves. We thought those results were well worth the trouble of running the program, but we had to adjust our expectations a bit. It may simply be too expensive to live in a place like LA for micro-credit to be a real economic development strategy, as opposed to being an employment/living wage strategy.

Anonymous said...

There’s no question that microcredit works well in areas with no financial services infrastructure, but it is also a vital resource in countries with developed economies, such as the U.S. The Aspen Institute’s FIELD program estimates that there are approximately 20 million microentrepreneurs in the U.S., whose businesses contribute to 16.6 percent of total non-farm employment in the country. Over half of these entrepreneurs do not have access to bank financing. Microcredit offers them the opportunity to sustain and grow their businesses.

A 2006 survey of ACCION USA clients with repaid microloans showed that gross monthly sales at businesses receiving microloans increased 64 percent, from an average of $5,921 before ACCION loans to $9,711 after ACCION loans. Business assets grew from $18,146 to $24,796.

Microfinance is a proven poverty reduction strategy with the potential to become self-sustaining in the long term as clients pay back their loans, which nearly all do. And that’s as true in Miami as it is in Mali.