Microfinance: Hype or Vital Service to the Poor?

picture courtesy of The World Finance Review

Ananya Roy, Professor of City and Regional Planning at the University of California, Berkeley and Education Director of the Blum Center for Developing Economies, has written an intriguing and well-researched article on microfinance in The World Finance Review. In it, she asks pointed questions regarding microfinance, considered by some to be a panacea for poverty in the developing world. For instance, she notes that microfinance can no longer be separated from the rest of the economic world, walled off as simply an "anti-poverty tool":

But today microfinance is much more than an anti-poverty tool. It is also a global industry and indeed an “asset class” for global finance capital. Under the watchful eye of the World Bank based Consultative Group to Assist the Poor (CGAP), the microfinance industry has increasingly turned to the rules and norms of global finance to formulate standards of scale and sustainability. Concerned with portfolio quality rather than poverty, with return on equity rather than social equity, microfinance now bears the promise of commercial expansion. In a piece titled “Profit and Poverty: Why it Matters,” Michael Chu (2007), a well-known interlocutor in the world of microfinance, makes the case for this approach: “No longer funds-constrained, the number of poor people reached and the volume of capital disbursed has exploded.” Chu’s vision is an instance of “bottom billion capitalism,” the emergent efforts to mine what C.K. Prahalad (2004) famously labeled the “fortune at the bottom of the pyramid.” This too is the democratization of capital, for now the poor are treated as financial consumers, now the walls between formal finance and finance for the poor are broken down.

She also notes the often-overlooked importance of teaching the value of saving in the world of development economics:

While much of the hype in microfinance has been focused on microloans, it turns out that one of the most vital financial services for the poor is savings. In Bangladesh, the Grameen Bank and other microfinance organizations not only give out microloans but also attach such loans to obligatory savings. Anthropologist Arjun Appadurai (2001) has described poverty as the “tyranny of emergency.” If this is the case, then the crucial role of savings in helping the poor cushion risk and vulnerability and manage lean seasons of hunger and deprivation is obvious. Savings also help microfinance organizations manage risk. Indeed, compulsory savings rather than joint liability may explain the forms of financial engineering that lie behind the Grameen Bank mantra, “the poor always pay back.”

Read the entire article here.

Jul 102012
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