Does microfinance really help poor people? | Global Development Professionals Network | The Guardian: "First it was microcredit. Then microfinance. Now financial inclusion. Despite new names, 30 years later there are $100bn (£62bn) in current loans outstanding and the idea of providing financial services to the poor – particularly loans – attracts a cult-like following. Financial inclusion dominates the social investment sector, arguably crowding out other more traditional interventions such as healthcare and education.
I believe that there’s a lack of credible academic evidence proving any poverty-alleviating effects of financial inclusion. “On current evidence, the best estimate of the average impact of microcredit on the poverty of clients is zero”, says mathematician and development economist David Roodman.
Also, in a systematic literature review by the UK’s Department for International Development (DfID), University of East Anglia-based Maren Duvendack concluded the enthusiasm for microfinance had been built upon “foundations of sand”. The microfinance sectors of entire countries have collapsed, a spate of borrower suicides in Andhra Pradesh, India, raised uncomfortable ethical questions, and yet the hype continues. Why?
To clear up some terminology: financial inclusion encompasses a broad range of services, yet in my experience, the focus remains on offering loans (and to a lesser extent remittances), which is where the profit lies. The principal source of revenue for the sector is interest on loans, which is rarely publicised on websites. Rates exceeding 100% per year, even over 200%, are disturbingly common, particularly in Zambia and Mexico. The sector refuses to define what constitutes extortionate rates, or encourage basic requirements for sensible loan use.
Finally, the sector glosses over the fact that much credit is spent on consumption. Over-indebtedness is a chronic problem in some countries, particularly Mexico and Peru , where the problem is not a shortage of credit, but an excess."
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I believe that there’s a lack of credible academic evidence proving any poverty-alleviating effects of financial inclusion. “On current evidence, the best estimate of the average impact of microcredit on the poverty of clients is zero”, says mathematician and development economist David Roodman.
Also, in a systematic literature review by the UK’s Department for International Development (DfID), University of East Anglia-based Maren Duvendack concluded the enthusiasm for microfinance had been built upon “foundations of sand”. The microfinance sectors of entire countries have collapsed, a spate of borrower suicides in Andhra Pradesh, India, raised uncomfortable ethical questions, and yet the hype continues. Why?
To clear up some terminology: financial inclusion encompasses a broad range of services, yet in my experience, the focus remains on offering loans (and to a lesser extent remittances), which is where the profit lies. The principal source of revenue for the sector is interest on loans, which is rarely publicised on websites. Rates exceeding 100% per year, even over 200%, are disturbingly common, particularly in Zambia and Mexico. The sector refuses to define what constitutes extortionate rates, or encourage basic requirements for sensible loan use.
Finally, the sector glosses over the fact that much credit is spent on consumption. Over-indebtedness is a chronic problem in some countries, particularly Mexico and Peru , where the problem is not a shortage of credit, but an excess."
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