Microfinance and the Development of the Less Developed World

1. Microfinance and the Development of the Less Developed World By Rachel Luehm

2. 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 wealthy • Concept 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

3. Grameen Bank • Devised by Yunus in 1976 • Means “rural” or “village” in Bengli • Its 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

4. What has the Grameen Done? • Has had nearly 9 million borrowers since it began in 1976 • Has a 90% loan recovery rate • Over $2.5 billion dollars in loans • Created a sense of community between borrowers • http://www.grameen-info.org/

5. 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

6. Critics • Milford Bateman (University of JurajDobrila 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 • AneelKarnani (University of Michigan’s Ross Business School) • Should have more focus on job creation and worker productivity

7. Milford Bateman Argument #1 • Economies 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

8. Milford Bateman Critique #1 • Ethnocentric assumption • Who says these countries WANT to emulate these countries?

9. Milford Bateman Argument #2 • Microfinance is only diverting funds and resources from other development programs and poverty solutions

10. Milford Bateman Critique #2 • What 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

11. 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

12. Michael Miller Critique #1 • Why 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?

13. Michael Miller Argument #2 • Programs like the Grameen Bank and other microfinance institutions don’t solve poverty, they only take borrowers from abject poverty to poverty

14. Michael Miller Critique #2 • Whether 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.

15. AneelKarnani 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

16. AneelKarnani 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

17. AneelKarnani 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?

18. AneelKarnani 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.”

19. AneelKarnani Critique #2 • To 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

20. My own critiques of microfinance • Does 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?

21. Conclusion • Microfinance has had an impact on the world with regard to poverty alleviation and may have other lasting impacts to come

22. Bibliography • Akula, V. (2011). A Fistful of Rice. Boston, MA: Harvard Business Review. • Batesman, M. (2010). Why Doesn't Microfinance Work?. Retrieved May 7, 2012, from http://0- site.ebrary.com.woodhous.aquinas.edu/lib/aquinasmi/docDetail.action?docID=10 409307 • Batesman, M., & Chang, H. (n.d.). The Microfinance Illusion. Retrieved May 7, 2012, from http://www.econ.cam.ac.uk/faculty/chang/pubs/Microfinance.pdf • Hancock, G. (1989). Lords of Poverty. New York, NY: The Atlantic Monthly Press. • Karnani, A. (2007, August). Microfinance Misses Its Mark. In Stanford Social Innovations Review. Retrieved May 7, 2012, from http://www.ssireview.org/articles/entry/microfinance_misses_its_mark • Miller, M. M. (2007, November 28). The Big Picture on Microfinance. In Action Institute. Retrieved May 7, 2012, from http://www.acton.org/pub/commentary/2007/11/28/big-picture-microfinance • Morduch, J., & Haley, B. (2002, June 28). Analysis of Effects of Microfinance on Poverty Reduction. In NYUWagner Working Papers Series. Retrieved May 7, 2012, from http://www.microfinancegateway.org/gm/document- 1.9.29382/Analysis%20of%20the%20Effects.pdf • Pitt, M. M., & Khandker, S. R. (n.d.). The Impact of group-based credit programs on poor households in Bangledesh: Does gender of participants matter?. Retrieved May 7, 2012, from http://www.pstc.brown.edu/~mp/papers/pitt-khandker-jpe.pdf • Reinert, E. S. (2007). How Rich Countries Got Rich and Why Poor Countries Stay Poor. New York, NY: Public Affairs. • Yunus, M. (2003). Banker to the Poor. New York, NY: Public Affairs.