Is Microfinance an Effective Tool for Helping Eradicate Poverty?

On Tuesday night the APPG on Microfinance hosted a debate on the motion: ‘Is Microfinance an Effective Tool for Helping Eradicate Poverty?’

The panel of speakers was composed of two teams with Martin Greely (Institute of Development Studies) and Tom Sanderson (Five Talents) debating in support of microfinance and Milford Bateman (Overseas Development Institute) and Malcolm Harper (Cranfield School of Management) arguing against the motion. Almost 100 members of the public, including members of the Houses of Parliament, academics, private investors, representatives of international organisations and microfinance institutions, attended the event.

The debate was heated and each speaker was required to present the argument in a succinct manner, being given just eight minutes to set out their argument. Martin Greely, who started the debate, gave a good introduction to microfinance and some of the reasons why it has been criticized as an effective tool to fight poverty. He argued that we have moved away from the traditional, founding concepts of microfinance and as it becomes more and more commercialised, people are starting to dismiss the real ethical impact microfinance has in the lives of the very poor. Where it is not concerned with profit making, he argued that microfinance really works. Dr Greely argued that Muhammad Yunus and the Grameen Bank won their Noble Prize because of the real difference microfinance has made in places like Bangladesh.

Dr Bateman made the first contribution to the counterargument stating that after more than 30 years we have yet to see evidence that the very poor have been lifted out of poverty by microfinance. Moreover, he argued that microfinance seems to be causing problems rather than representing a solution. For example, microcredit can cause greater indebtedness through the charging of high interest rates. Bateman likened microfinance to the tobacco industry which causes long-term health problems that the same donors who support microfinance will have to come back to fix in the future. He also argued that microfinance is creating an overinflated informal sector in many settings without contributing to the formal private sector which is essential for long term growth.

Milford Bateman, Malcolm Harper, Annette Brooke, Tom Sanderson and Martin Greeley

Tom Sanderson followed with some supporting arguments from his experience in the field in Uganda, and argued that in these places you can see that people want, can and do save money while insuring themselves against the risks posed by their environment and life. He added that just as we depend on financial services, so do people in developing regions. The ability to choose gives people and in particular women the feeling of accomplishment. He has literally seen women ‘walk taller’ as a result of accessing microfinance. He finished by stating that microfinance never promised to do wonders, that it is micro for a reason and that change can be generational, rather than immediate.

Finally, Professor Harper contributed with an analogy that highlighted some of the features of a traditional-style microcredit loan and asked whether people in the audience would be interested in taking out a loan if it required you to first form a solidarity group, share your personal and financial details with others and then had to pay very high interest rates. He argued that microfinance is nothing more than a substandard, ‘pure vanilla’ financial product.

The chair of the meeting, Annette Brooke MP, gave speakers the opportunity to conclude the argument, before opening the floor for questions and comments. The opposing side argued that individual anecdotes are not sufficient to prove that microfinance works, while the action of Compartamos, SKS and more recently studies done by academics and the Inter American Development bank show that microfinance has not delivered what it was expected to. Dr Greely and Mr. Sanderson refuted these statements underlining once again that studies are not always carried out over a sufficient period of time to underline the positive impact of microfinance and that while we are focusing on viewing microfinance as the golden bullet, we forget that the original pioneers of microfinance stated that change is long-term. Microfinance does not necessarily have an immediate effect; ultimately it is about empowering people and giving them the dignity and tools to invest in themselves and generations to come.

After each side had made its case, members of the audience were invited to present their own thoughts, ask questions and challenge the speakers further. Representatives from microfinance organisations, Parliamentarians and entrepreneurs raised several important points that supported both the arguments for and against microfinance.

One participant noted that the increasing number of Initial Public Offerings (IPOs, when a company issues stocks to raise capital and therefore becomes part or fully owned by shareholders) of major microfinance institutions show that microfinance works, but that it has the potential to work for the wrong people if the social mission is lost. More so, it was underlined that we need to make the distinction between privatised and social microcredit when criticising the tools employed by microfinance. Finally, microfinance is about self worth and inclusion. It gives women the opportunity to become more involved in society and play a bigger role in family related decision-making. It also develops new platforms, creating networks and links between people in the community.

The event was concluded when all attendees voted for or against the motion. While the majority voted for the motion and in support of microfinance, the debate has overall served as a very useful informative tool and has helped the APPG on Microfinance to raise and bring new arguments to the table. Annette Brooke noted that the APPG was established to promote microfinance but that it is important to be critical and push for better evidence about what works and how to deliver microfinance that has a lasting impact on the poor. A key conclusion was that the microfinance sector is no longer homogenous and that the APPG needs to do further work to identify which types of microfinance are effective for helping to alleviate poverty and warrant further support from the UK Government and other donors.


2 responses to “Is Microfinance an Effective Tool for Helping Eradicate Poverty?

  1. Pingback: Tweets that mention Is Microfinance an Effective Tool for Helping Eradicate Poverty? | RESULTS UK – The Power to End Poverty --

  2. Pingback: Recording and summary of microfinance debate now available | RESULTS UK – The Power to End Poverty

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