There are growing concerns over whether microfinance can be an empowering tool to help reduce poverty by providing the poor with the credit to expand their economic and social opportunities. Needless to say, microfinance has long been projected as the solution to the problems of the poor and, very often, overhyped as if it were a magic potion for lifting the poor out of poverty. Most of the micro finance projects/ programs including Micro Finance Institutions (MFIs) are showcased as if their wholesome goal were poverty reduction only. But upon reflection, it has been coming out that microfinance alone is not sufficient to get people out of the poverty trap. Hence, microfinance should not be considered as a substitute for jobs and income that are not there. Here are some whys.
First, MFIs cannot run solely on charity. They are required to make profits to sustain themselves. Thus in the quest of sustainability, MFI’s projects and programs are debating various business issues like expanding their client base, providing credits to more clients, access and sustainability of non-financial services, expanding the number of micro credit lenders and the borrowers, expanding outreach, role of business development services for micro-finance and earning profit for MFIs among others. However, the very important issues of business competitiveness, which is vital for achieving business sustainability for all—including MFIs and other microfinance related projects/programs—is often easily forgotten.
Hence, microfinance programs need concrete answers on issues such as how they identify microfinance clients, often referred as poor or poorest of the poor. Are credits and businesses the right alternatives for their clients? If yes, are the clients willing to do business learn and adopt business principles? Do the clients have capacity to do business? Do the clients have the right business practices, attitude and environment? Is the business that they are engaged in a promising one? Is there a demand for their products? Can they earn profit and sustain in the long run? Clearly, microfinance programs should seek answers to these questions. For, the truth is that not all the microcredit clients aspire to be entrepreneurs. Researches and findings have shown that a large number of microcredit clients are willing to take up employment if reasonable wages are offered.
A recent article by NS Ramnath in Forbes India entitled “What Ails Microfinance?” looks into a research undertaken by David Roodman across the world over 10 years. It scans microfinance using three frameworks: Development as escape from poverty, development as freedom and development as industry building. Roodman concludes that there was no evidence for the first, mixed results for the second, and a strong case for the third. He has it that microfinance works best in industry building and in building microfinance institutions that compete, innovate, create jobs and cater to the poor—not in turning clients into entrepreneurs.
Microfinance alone cannot get people out of the poverty trap. It should not be considered a substitute for jobs and income that are not there.
Hence, even microfinance pundits seem to agree on the core business theory that micro-finance is for micro-business and micro-businesses will only sustain if some profits are realized. Thus MFIs will expand and sustain if their microfinance transaction increases, and the transaction will only increase if micro businesses take and use more financial services. Ultimately, micro businesses will only take financial services if their businesses are promising. The primacy of the issue, therefore, is ‘which businesses are competitive.’ So, we need to discuss and find the best or most appropriate answers to above-mentioned questions. This will, possibly, lead to discussions on business competitiveness, which in turn, will lead to real discussions on the sustainability of the MFIs.
Roodman also highlights that there was a lot of hype, but little evidence of microfinance raising people out of poverty. He further concludes that “India is improving economically, and that’s not because of tiny loans, but because of the broader changes in the economy.” Hence, Roodman’s recommendations for aid agencies and policymakers flow from this conclusion where he discourages lending efforts to the poorest saying credit would make their already risky lives even riskier as too much credit comes with risks both to customers and the organizations. He recommends reduced support for microcredit.
To come to our own context, Nepal is going to enter the globalized world as it is coming under WTO regulation soon. The issue of microfinance is even more telling for us because we are wedged between two giant economies of India and China. Therefore, there is a clear need for finance practitioners, professionals, advisors and institutions here to be more aware of these fundamental business principles before it is too late.
For microfinance to become efficient and competitive, it requires an in-depth understanding of the core business principles. Otherwise, most of the micro-businesses here can become less attractive compared to the ones across our border. This will, ultimately, lead most of the current or potential targeted clients of MFIs to stop doing business here and migrate to India and other countries for safer option for survival, which is labor. Others will, most likely, remain mere users of goods and services delivered either by a bunch of very competitive Nepali private sector businesses or by competitive business houses from across the border. In either case, we will have much to lose than gain.
The writer works with SNV in Cambodia as Senior Advisor for the Agriculture Programs
pokhrel2012@hotmail.com
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