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Wednesday, March 9, 2011

Microfinance—Not a Panacea, but still Pro-Poor

Nobel-prize winner Muhammad Yunus’s unceremonious oust (for his allegedly improper conduct or for more political reasons) from the Grameen Bank is the latest disturbance in the world of microfinance. For our part, we’ll definitely withhold judgment on Yunus’s character or the fairness of his dismissal from the institution he founded. There is a more interesting discussion to be had.

Many have commented that this scandal is just the latest reason to be disillusioned about microfinance. Microfinance is simply the practice of lending out small, low-interest loans to people who would be too poor to qualify for loans at a typical commercial bank, people who would otherwise be targeted by the loan sharks who would drive them into miserable debt. This was the simple, but effective, concept behind Yunus’s Grameen Bank, which claims to have helped over 10 million families to cross the poverty threshold (currently defined as living on less than $1.25 a day). In its early days, microfinance was hailed as a brilliant development in poverty eradication, a panacea to the problem of families across the world who simply could not seem to get ahead.

As with every ‘miracle cure’, there was inevitable backlash. The truth is, the practitioners of microfinance aren’t uniformly saintly. As microlending institutions became more common, they also became more commercialized, motivated by the profits they might earn if they became more aggressive in their lending and collection methods. Some families defaulted, and in some cases were driven to suicide by the debts they incurred.

Perhaps it goes without saying, but HOPE International Development Agency follows a non-profit model for lending small loans to the poor. We also maintain that loans are not always enough - access to credit needs to be accompanied by training and social support. $40 might be enough to help a Cambodian woman to start a business. But $40 plus a course in accounting plus a small group of friends to meet with about the challenges she faces would probably be enough to help her maintain a profitable, viable business.

So while the backlash carries on, we’ll be perfecting our approach to financing the ventures of poor women on the verge of changing the quality of their children’s lives for good. What is the lesson we take from the controversies associated with microcredit these days? A good idea could always become a great idea. We feel loans for the poor are good - but loans with support for the poor are far better.

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