What's Wrong with Microfinance?

ISBN 978-1-85339-667-0

Edited by Thomas Dichter & Malcolm Harper                                                                      

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Abstract

Microfinance has been a long-lived development movement since the 1980s. In 2005 it enjoyed the accolade of a UN international year and in 2007 one of the founding fathers of microfinance received a Nobel Prize.

However, despite the undoubted successes, there are also some important problems and fundamental questions to be addressed. Is microfinance really a step on the road to economic growth, or is it a short-term palliative, keeping poor people poor? Can an MFI really work if it embraces the ‘double bottom line’ of both profit and social good? Is microfinance, especially credit, harmful, often landing the vulnerable poor in debt? Should microfinance be reaching the poorest? The chapters, written by well-known experts in the field, are grouped around the categories: clients, institutions, and expectations.

The authors aim to sound a timely warning to governments, bankers, donors and the general public. The intention is not to halt or slow microfinance initiatives, but to encourage a reassessment of experiences and a rethink of expectations and policies. Microfinance can never be a panacea and may sometimes be actively damaging to its intended customers. 

Commendations

"This book by microfinance insiders will be invaluable to the enthusiasts as well as the critics of microfinance not only to reflect on its true potential but also to temper the unrealistic expectations that have been triggered by the UN year and the Nobel prize".

Sukhwinder Arora, a microfinance enthusiast

"During a stampede it’s useful for someone to ride apart from the herd and speculate about where the multitude is going. The Harper and Dichter book does this for the widely promoted and highly praised microfinance industry. While acknowledging that the industry has contributed to development, authors in the volume argue that results are over-hyped and that expectations have been unduly inflated. The authors are skeptical about a number of features in the industry.

One of the arguments in the volume is that loans are proving to be a weak tool for alleviating poverty: few of the poorest-of-the poor receive loans, few of the programs penetrate rural areas where much of the poverty is located, and loans create few new entrepreneurs. Another argument presented is that many of the microloans are used to smooth consumption, rather than to boost capital formation and new enterprises. Still another argument is that the industry has underemphasized savings deposit, a service that may be more beneficial for the poor than is lending."

Dr. Dale W Adams, Professor Emeritus, The Ohio State University

"What’s Wrong With Microfinance unapologetically asks questions that others have been too polite, complacent, or uncritical to ask. Each chapter challenges received wisdom about banking the world’s poor. You don’t have to agree with everything here, or even most of it, to learn a great deal. Creating the next generation of inclusive banks will require tough-minded appraisals of what we know and what we don’t. By tackling hype, What’s Wrong With Microfinance provides hope for achieving the real promise of microfinance."

Jonathan Morduch, Professor of Public Policy and Economics, New York University and co-author of The Economics of Microfinance

"A timely collection of expert treatises questioning the scope of and rationales for microfinance. Specifically aimed at giving a reality check at a time when hype around microfinance's potential has never been greater, the book's uniquely well-informed authors success in debunking key myths that have arisen in the mushrooming of this global industry."

Dr Ben Rogaly, Senior Lecturer in Human Geography, University of Sussex, UK

About the editors

Thomas Dichter has spent half of his 40-year career in international development working in microfinance on three continents. From 1994 to 1998 he was senior consultant to the World Bank’s ‘Sustainable Banking With the Poor’ project. He is the author of Despite Good Intentions: Why Development Assistance to the Third World has Failed.

Malcolm Harper was Professor of Enterprise Development at Cranfield School of Management, UK, until 1995, and since then has worked mainly in India. He was Chairman of Basix Finance (1996–2006), and is Chairman of M-CRIL, the microfinance credit rating agency.

About the contributors

Hugh Allen hugh@vsla.net has focused for the last 36 years on microfinance and market development activities. He is on the faculty of the Boulder Microfinance Training Program and Southern New Hampshire University’s Microenterprise Development Institute. He is the founder of VSL Associates and writes extensively on community-based microfinance.

Milford Bateman milfordbateman@yahoo.com is a freelance consultant specializing in sustainable local economic development policy and programming and community development strategies, focusing mainly on the Western Balkans. Since November 2005, he has been Visiting Professor of Economics at the University of Pula, Croatia.

Thomas Dichter tspdich@gmail.com has spent half of his 40-year career in international development working in microfinance on three continents. He has published on microfinance and other development issues and is the author of ‘Despite Good Intentions: Why Development Assistance to the Third World has Failed’. He has a Ph.D. in anthropology from the University of Chicago.

David Ellerman david@ellerman.org is visiting scholar at the University of California/Riverside after 10 years at the World Bank (advisor to Chief Economist Joseph Stiglitz) and has recently published: ‘Helping People Help Themselves: From the World Bank to an Alternative Philosophy of Development Assistance’.

Dr Prabhu Ghate pghate@airtelbroadband.in was formerly a Senior Economist with the Asian Development Bank and is now an independent researcher and consultant based in New Delhi. He was the lead author of ‘Informal Finance: Some Findings from Asia’ (OUP, Hong Kong, 1992). He has a Ph.D. in public policy from Princeton University.

Malcolm Harper Malcolm.harper@btinternet.com taught at Cranfield School of Management until 1995, and since then has worked mainly in India. He has published on enterprise development and microfinance. He was Chairman of Basix Finance from 1996 until 2006, and is Chairman of M-CRIL, the microfinance credit rating agency.

Mary Houghton and Ronald Grzywinski are chairman and president of ShoreBank Corporation, a US$1.9 billion asset regulated commercial bank holding company, operating banks and NGOs in low- and moderate-income African-American neighbourhoods and two rural regions in the US, and providing advisory and investment services in Africa, Asia and Eastern Europe. ShoreCap International is the equity investment company it has managed since 2003 for regulated financial institutions specializing in lending to the self-employed and small firms.

David Hulme is professor of Development Studies, Institute for Development Policy and Management, University of Manchester, UK.

Susan Johnson has a background in economics and agricultural economics and has a Ph.D. in development studies from the University of Bath where she is lecturer. She has undertaken a range of research on microfinance and local financial markets particularly investigating their gender dimensions and impact.

Vijay Mahajan, a graduate of the Indian Institute of Management (Ahmedabad), was the founder chief executive and is now chairman of the Basix Finance group of companies in India. He is on the board of numerous livelihood promotion and other institutions. He is a charter member of the Development Finance Forum.

Imran Matin and Munshi Sulaiman work at BRAC’s Research and Evaluation Division, and M. A. Saleque works in BRAC’s Development Programme.

Richard L. Meyer meyer.19@osu.edu is emeritus professor in the Department of Agricultural, Environmental and Development Economics in the Ohio State University. He is the former director of the Rural Finance Program.

Paul Mosley p.mosley@sheffield.ac.uk is professor of Economics at the University of Sheffield. He has worked on microfinance and microinsurance in Asia, Africa and Latin America and is co-author of ‘Finance Against Poverty’ (Routledge, 2 vols.,1996).

Dr J. D. Von Pischke jdvp@erols.com is president of Frontier Finance International, the Washington office of IPC and ProCredit Holding. He was a World Bank staff member from 1976 to 1995, specializing in financial sector policy, and rural and small-scale industry finance

S. M. Rahman smr@bangla.net was educated in business administration and statistics. He has worked in development banking, microenterprise and microfinance. He has reviewed microenterprise and governance issues of MFIs for joint donor strategy, and has authored articles on microfinance regulation and a book on client satisfaction in microfinance programs for CARE Bangladesh and co-authored a book on the commercialization of microfinance for the Asian Development Bank.

Paul Rippey paul@rippey.org has worked in MFI management and as a technical donor in Africa over two decades. He is doing penance for past sins of debt-
mongering by working with village savings and loans associations and
consumer education, and as a climate change activist.

Namrata Sharma is currently a freelance consultant. She was the founding managing director of the Center for Microfinance Nepal and then director of the Indian School of Microfinance for Women, Ahmedabad. She has also been a visiting research fellow at the University of Bath, and is a board member of Microfinance Opportunities, USA and other organizations in Nepal.

Frances Sinha francessinha@edarural.com is co-founder and executive director of EDA Rural Systems Pvt. Ltd, a development consultancy for microfinance and livelihoods. A graduate from Oxford University and the London School of Economics, Frances has over 20 years’ development experience based in India.

Kim Wilson Kimberley.Wilson@Tufts.edu is lecturer in international business at the Fletcher School, Tufts University. Previously, she was director of the Microfinance Unit at CRS. At varied points in her career she has been a microfinance client, microloan officer, manager, board member, consultant, investor, donor and evaluator.

Table of contents

Introduction 
Thomas Dichter

Part One: Clients

Part Two: Institutions

Part Three: Expectations

Reviews

'The book's most common challenge against microfinance is its over inflated sense of success and its underdeveloped plan for holistic vision and action…The book is written for people in the Microfinance industry; it is not a fun read for laypersons, but fascinating for activists and essential for policy-makers.' 

Feminist Review 2007

Related links

• Further titles on Microfinance  
• Practical Microfinance: A Training Manual