Microfinance and the Development of the Less Developed WorldBy Rachel Luehm

What is Microfinance?Microfinance Institutions have been created with

the belief that credit is a basic human right:◦ Current system

Requires collateral Neglects poor

Thus seen as a right only for those who are already wealthyConcept of (MFI) was perfected by Muhammad

Yunus (won the Nobel Prize) in order to answer the issue of poverty in his country of Bangladesh

Small scale lending mostly to the poor in order to make them more financially stable and pull people out of poverty

Grameen BankDevised by Yunus in 1976Means “rural” or “village” in BengliIts goal is to change the system from

“low income, low saving & low investment” to “low income, injection of credit, investment, more income, more savings, more investment, more income”

90% of share holders are borrows ◦the rest is the government of Bangladesh

Found in Banker to the Poor by Yunus

What has the Grameen Done?Has had nearly 9 million

borrowers since it began in 1976Has a 90% loan recovery rateOver $2.5 billion dollars in loansCreated a sense of community

between borrowers http://www.grameen-info.org/

Critiques of the current economic system by Yunus:Sees people as either laborers or

consumers but does not mention the ability to be self-employed

Free-Trade policies have create structures of dependency

CriticsMilford Bateman (University of Juraj

Dobrila Pula, Croatia)◦Economies still can’t compete with 1st world◦ It takes away from other aid

Michael Miller (Acton Institute)◦Dependence on borrowing◦From Abject poverty to poverty

Aneel Karnani (University of Michigan’s Ross Business School)◦Should have more focus on job creation and

worker productivity

Milford Bateman Argument #1Economies still can’t compete with first

world:◦“If poor African, Latin American and South-East

Asian countries seriously wanted to emulate the rich Western economies or the newer East Asian ‘Tiger’ economies, and so also patiently build relatively sophisticated and scaled-up industrial and agricultural sectors from the ‘bottom up’, I remember thinking, the growing emphasis on microfinance as development policy was leading them in completely the wrong direction.”

◦ http://0-site.ebrary.com.woodhous.aquinas.edu/lib/aquinasmi/docDetail.action?docID=10409307

Milford Bateman Critique #1Ethnocentric assumption

◦Who says these countries WANT to emulate these countries?

Milford Bateman Argument #2Microfinance is only diverting

funds and resources from other development programs and poverty solutions

Milford Bateman Critique #2What other development

programs and poverty solutions?◦Those that are in place such as

foreign aid, “free-markets,” and welfare do not seem to be doing the job of ending, or even alleviating poverty

Michael Miller Argument #1“The Grameen Bank prides itself on

its role in empowering women, but perhaps the most insidious effects are the possible unintended consequences for women. In any culture that prizes boy children more than girls, the practical effect of promoting fewer children will be the abortion or abandonment of girls, who are seen as financial burdens.”

http://www.acton.org/pub/commentary/2007/11/28/big-picture-microfinance

Michael Miller Critique #1Why would they be seen as

financial burdens if women are being empowered through microfinance and becoming the bread-winners?

There seems to be no substantial evidence to back up Miller’s claim –are the girl babies still being devalued despite the growing value of women in these societies?

Michael Miller Argument #2Programs like the Grameen Bank

and other microfinance institutions don’t solve poverty, they only take borrowers from abject poverty to poverty

Michael Miller Critique #2Whether this is true or not, I argue that

just that small step can make a big difference in people’s lives◦More income, even if it is only alleviating

poverty and not eliminating it, is still crucial to the survival of the people receiving the loans; they can buy more food and send their children to school Being able to afford these two basic necessities is

instrumental to long-term poverty eradication If these families are able to provide their children with

education because of microfinance, and education is linked to greater income, microfinance may be a tool to begin the upward mobility of the poor, although the affects may not be seen until much later.

Aneel Karnani Argument #1 More focus on job creation and worker productivity: “To understand why creating jobs, not offering microcredit, is

the better solution to alleviating poverty, consider these two alternative scenarios: (1) A microfinancier lends $200 to each of 500 women so that each can buy a sewing machine and set up her own sewing microenterprise, or (2) a traditional financier lends $100,000 to one savvy entrepreneur and helps her set up a garment manufacturing business that employs 500 people. In the first case, the women must make enough money to pay off their usually high-interest loans while competing with each other in exactly the same market niche. Meanwhile the garment manufacturing business can exploit economies of scale and use modern manufacturing processes and organizational techniques to enrich not only its owners, but also its workers.” -http://www.ssireview.org/articles/entry/microfinance_misses_its_mark

Aneel Karnani Critique #1 (a) The women (and men) who are receiving the loans do

not receive it in order to solely “buy a sewing machine and set up her own sewing microenterprise” rather those who are receiving microfinance loans find a wide array of business ventures.◦ Therefore, they are most likely not “competing with each other

in exactly the same market niche” because one woman in the group may sell milk, another tortillas, yet another clothing. It seems a little insulting to infer that all those receiving the loans

would be foolish enough to attempt entering the exact same market niche.

◦ Even if these microenterprises were competing with each other, free-market economics says that competition is a good thing…

◦ And if they all wanted to go into the sewing business, the way the microfinance system is set up in groups promotes the idea of cooperation between the women so that they may join forces to build the sewing enterprise

Aneel Karnani Critique #1 (b)The system of lending to a “savvy entrepreneur

and helps her set up a garment manufacturing business that employs 500 people” already exists –it’s called capitalism.◦ This system is already widely used and broken

It has created dependent structures, job instability, and wages that are below what is livable because there is very little regulation and thus people more often than not behave according to their own self interest Maquiladoras

Sure, this model seems like a quick fix as it employs more people initially, but employment does not mean that it is really helping mobilize the poor.

◦ How many “savvy entrepreneurs” are there in the third world? And what constitutes a savvy entrepreneur?

Aneel Karnani Argument #2“Most people do not have the

skills, vision, creativity, and persistence to be entrepreneurial. Even in developed countries with high levels of education and access to financial services, about 90 percent of the labor force is employees, not entrepreneurs.”

Aneel Karnani Critique #2To assume that the developed

world is not full of entrepreneurs because being an entrepreneur requires a certain type of person is faulty logic◦The developed world may have more

laborers because it has developed the social climate for this type of economy

My own critiques of microfinanceDoes not allow much mobilization

of capital◦The market for those participating in

microfinance may not be much bigger than the village they live in and thus they depend on their neighbors (who may also be poor) to support their business.

◦Where does capital come from other than microfinance institutions and poor neighbors?

ConclusionMicrofinance has had an impact

on the world with regard to poverty alleviation and may have other lasting impacts to come

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