Archive for the ‘Microfinance Issues’ Category

In researching my article on carbon financing in the developing world, I had the opportunity to speak with Erik Wurster, the carbon finance manager at an organization called E+Co.  E+Co has been on the forefront of this industry and has been one of the leading innovators.  Newsweek recently highlighted their efforts to distribute clean-burning cookstoves – a topic I have discussed in this journal – in Ghana.  It provides a great overview of how this complicated process works.  In an article for Next Billion, Tracy Smith of E+Co describes the company’s focus:

E+Co, a mission-driven clean energy investor in developing countries, is working to implement strategies that enable Wall Street investors to put capital to work in developing countries through the carbon markets.  Unlike more traditional carbon finance developers, however, E+Co strives to ensure that dollars flowing from carbon credits make it to the bottom of the pyramid.

I asked him a series of questions about some challenges facing organizations trying to break into this space.  Be warned that it contains more technical jargon than I usually have in the Journal.  I have included the answers to all of his questions here.  (more…)

Read Full Post »

An Envirofit cookstove - designed in Colorado.

I am in the process of researching an article about the impossibly complex topic of using carbon credits to finance small-scale energy ventures in the developing world.  The experience reminds me of a religion course I took in college on the Old Testament.  I was confident that my five years of Hebrew school (I graduated when I was 12) would be sufficient to land me a high grade without much effort.  Unfortunately, I found out (too late) that there are, in fact, six five books of the Old Testament and I was familiar with a very small part of one those books (Genesis).  Likewise, trying to learn more about this topic has led me to everything from arcane parts of the Kyoto Protocol to how the global market for carbon has fluctuated in the downturn.  I wish I had chosen an easier topic, but the damage is done and now, hundreds of articles later, I know something about it. (more…)

Read Full Post »

Portfolios of the Poor: How the World Lives on $2 a Day has become one of the most talked-about book in the world of development.  It is an analysis of how poor – specifically, the poorest – people live.  The authors chronicle how people make and spend their money – tracking the inflows and outflows to better understand the daily routine.  The subjects keep detailed financial diaries of everything having to do with money in their lives.  The results are as illuminating as they are beneficial in the practice of development.  Here is the description from the website:

Portfolios of the Poor: How the World’s Poor Live on $2 a Day (Princeton University Press, 2009) tackles the fundamental question of how the poor make ends meet. Over 250 families in Bangladesh, India, and South Africa participated in this unprecedented study of the financial practices of the world’s poor.

These households were interviewed every two weeks over the course of a year, reporting on their most minute financial transactions. This book shows that many poor people have surprisingly sophisticated financial lives, saving and borrowing with an eye to the future and creating complex “financial portfolios” of formal and informal tools.

Indispensable for those in development studies, economics, and microfinance, Portfolios of the Poor will appeal to anyone interested in knowing more about poverty and what can be done about it.

The reason research like this is so useful and even groundbreaking is that it blows the doors off the misconception that the poor live on $1-2 a day, everything. (more…)

Read Full Post »

A recurring theme in this journal is the amount of self-criticism within the development community.  There is no shortage of critics of an academic mind to point out the flaws in an approach to development without offering a reasonable alternative.  One common criticism is that microfinance doesn’t really offer a sustainable long-term economic solution to the problem of poverty.  It is too focused on the individual and not enough on the big picture – what is good for the population as a whole.  Most micro-businesses will never grow to a meaningful size because the capital provided by microfinance is not enough to bring them to scale.  So, the reasoning goes, poor people are destined to amble along without actually making their financial situation any better, while the small and medium enterprises (SMEs) that actually create the jobs needed to move the needle on macroeconomic development and poverty alleviation are neglected.

This critique is too simplistic.  For one thing, the argument that microfinance institutions operate at the expense of SME financing is a straw man.  It is true that there are a limited number of aid dollars in the world and allocation is a zero-sum game, but that is irrelevant here since the largest microfinance institutions are financially sustainable, raising money through unsubsidized loans at commercial rates, public equity, and their own operations. The World Bank, the IMF, and NGOs around the world do provide a lot of money for research, seed capital for smaller MFIs, and pilot programs for non-financial services.  But, for the most part, there is not much diversion of aid funding as a result of microfinance.  This is more of a gripe with how some critics frame their arguments.  The more important point is that there is a tendency among critics on both sides of the debate to ignore the complexities of the issues and create false tradeoffs in order to simplify the debate.  It is easier to argue in black and white than deal with shades of gray. (more…)

Read Full Post »

One criticism of microfinance is its inability to produce meaningful poverty movement on a macro level. The belief is that providing credit for micro-entrepreneurs produces some incremental change on an individual basis, but doesn’t produce the substantive change needed to lift a community out of poverty. By substantive change, I mean employment, infrastructure, commerce, and improvements in healthcare and education. In this post I want to focus specifically on the idea of microfinance’s inability to produce businesses of adequate scale.

In theory, microcredit aids people starting or maintaining small businesses to generate extra income for the family. (In reality, recipients of microfinance loans spend the money on expenses unrelated to the business altogether, but this is a different topic). Where microfinance is deficient is in shepherding these small businesses to become something bigger than just a micro-enterprise. For any business to grow, it needs to do two things: reduce the amount it spends and increase the amount it brings in. But micro-entrepreneurs can get stuck in a trap created by a lack of resources. For many of the poor communities served by microfinance, the cards are stacked against them. Let me explain with an example.


Read Full Post »

"I've got this thing and it's fucking golden!"

One of the reasons a lot of people find microfinance attractive is that it is a fundamentally capitalist approach to economic development.  Done right, it can be sustainable and even profitable.  By focusing on a social mission, successful microfinance institutions (MFIs) can reach more clients by leveraging capital, similar to commercial bank.  And just like the Ice Queen warns in Atlas Shrugged, government intervention in capitalist programs spells disaster.  Whether or not this is true for other industries (it’s not), it is most definitely the case in microfinance.  Successful government-run microfinance institutions are the exception, not the rule.  And not only are governments generally bad at administering loans, they can be destructive to the market as a whole.  On the CGAP website question 13 of the FAQ is “Do governments do a good job of delivering microfinance?”  The answer is thorough:

There are several highly successful government MFIs, such as Bank Rakyat Indonesia’s microfinance department. However, the vast majority government microfinance programs do a poor job of delivering retail credit. Such programs are usually subject to political influence, high default, continuing drain on national treasuries, and sometimes lending based more on the borrowers’ influence than their actual qualifications. Among government programs reporting to international databases, only 1/8 of clients are being served sustainably.

To begin thinking about why government microfinance doesn’t work, it is important to think about the types of governments serving microfinance communities and the nature of government in general. (more…)

Read Full Post »

Muhammad Yunus, the godfather of microfinance, contends that everyone is an entrepreneur.  And microfinance is about individual economic empowerment, built on the premise that credit is both a human right and a path to economic freedom.  This reading has been distorted by those who talk about the “entrepreneur myth,” which says that microfinance romanticizes the poor by pushing a false by-your-bootstraps narrative.  This narrative, in turn, undermines development by giving the poor something they don’t want – credit for a business – instead of something they need, which is steady employment.  This argument isn’t necessarily untrue, but it is irresponsibly oversimplified and demonstrates a lack of grounding in reality.   I want to discuss two articles that address this issue and use them to explain why this reading of microfinance is not only flawed, but is counterproductive in serving the poor.

Rational actors in the U.S.

The first one, titled “Romanticizing the Poor” from the Stanford Social Innovation Review, is a bit more difficult to refute, in part because I agree with the premise but not the logic, and also because I am intimidated by the fact that the author, Aneel Karnani, is an economics professor of South Asian descent and, I would have to assume, intellectually superior to me.  But I’ll try.  The article is less a refutation of microfinance as a poverty alleviation strategy as it is a caution against the merits of market-based solutions in general.  According to Mr. Karnani, the poor are not rational actors when it comes to economic decision-making.  Therefore, the argument goes, it is misguided and potentially harmful to try to apply free-market strategies – like microfinance – when the spending behavior of the poor is irrational.  He highlights the fact that the poor spend a disproportionate amount of money on booze and cigarettes at the expense of healthcare and education (Nicholas Kristof’s most recent article discusses the same issue).  The poor are more prone to impulse buying, so introducing more money and more material product choices will just drive them deeper into debt:

Many advocates of market-based solutions to poverty view poor people as rational consumers who, if given more options, would make better choices—that is, choices that would increase their economic welfare. They see no problem with encouraging the poor to spend their already meager incomes on low-priority products and services. They further argue that the poor have the right to determine how to spend their limited income and are in fact the best judges of what is in their best interests.

I don’t dispute the truth of these statements, mostly because I haven’t read the research.  I would say it’s not unreasonable to say that adults should be treated like adults when it comes to making decisions about how they spend their money.  Either way, they are irrelevant to an argument against microfinance.  (more…)

Read Full Post »

Older Posts »