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Microfinance: the good, the bad and the ugly

April 14, 2017 • By TAB team

In recent years, microfinance has boomed, but its egalitarian aims have existed for centuries, with the intention being to alleviate poverty by funding and educating the people fighting it. This is done with microloans – small, short-term, low-interest loans, extended to those who can’t raise finance via traditional methods.

In recent years, microfinance has boomed, but its egalitarian aims have existed for centuries, with the intention being to alleviate poverty by funding and educating the people fighting it. This is done with microloans – small, short-term, low-interest loans, extended to those who can’t raise finance via traditional methods.

For a number of reasons, microfinance is controversial, with its real-world impact notoriously difficult to measure. But thanks to bright individuals and bold companies it continues to grow throughout the world, with 200 million people using an industry totalling near $100 billion.

To maintain this growth rate and overcome the sceptics, regulation must keep pace.

A founding father

The father of modern microfinance is a Bangladesh-born professor of economics, Muhammad Yunus, who won The Nobel Peace Prize in 2006 for his lifetime of work that aims to “create economic and social development from below."

Yunus began making microloans in Bangladesh in the 1970s before founding Grameen Bank, a “bank for the poor”, in 1983. Ever since, Yunus and Grameen Bank have been at the forefront of the movement that aims to eradicate poverty through microlending, with Grameen serving nine million borrowers (97% women) in over 100 countries.

A modern platform

Using Crowdsurfer Pro, we looked at how Yunus’ work is being harnessed by microfinance institutions (MFIs) today.

Kiva, a San Franciscan platform at the forefront of modern microlending, has funded over 1.1 million microfinance campaigns and lent a total of $961 million.

Since inception, Kiva’s progress has been solid, with year-on-year growth.



Source: Crowdsurfer Pro.

Borrowers using Kiva raise an average of $856, with over 60% of campaigns being funded for a total campaign size of under £500.



Source: Crowdsurfer Pro.

This data provides a useful snapshot of global microfinance.

Like Kiva, the global market is growing and financing the people that need it. But growth for microfinance is only half the story. A more reassuring measure is Kiva’s repayment rate of over 97%. Grameen Bank assert that their “repayment rate is 99.6%.”

Not only is the industry growing, but the model works, with loans being repaid.

Microfinance: A force for good… and bad?

In spite of its growth, robust fundamentals and the outstanding work being done by the likes of Yusuf, Grameen Bank and Kiva, microfinance remains controversial.

One of the problems microfinance faces is that its initial promise – to eradicate poverty through credit – was unrealistic. It was a promise people wanted to believe, hoping the capitalist debt model that had efficiently served traditional finance for many years could be recalibrated to solve the problem of poverty.

But poverty is complex, involving trends (e.g. economic cycles) and powers (e.g. governments, corruption) more powerful than the microfinance model. With hindsight, microfinance was never going to be the silver bullet to end poverty.

Some also question the real world impact of MFIs, in part due to the fact that the effects of microfinance are hard to measure. Further, the operating costs for a global MFI are often passed onto borrowers through rising interest rates, and there are worries over the unintended consequences of financing uneducated entrepreneurs, with evidence for funds being improperly used, such as microfinance funding child labour in Bosnia.

This list of controversies highlights that charity and aid with the best intentions can end up muddied by controversy. With this in mind, it’s imperative that first-class regulation and governance are constantly updated in order to manage the tidal wave of capital waiting to be deployed. The challenges seem surmountable, with a heightened understanding of the diversity of the world's microfinance markets, increased regulation and subsidies being implemented to minimise the possibility of controversy, corruption and waste.

Summary

The success of microfinance is a real-world example of the democratisation of debt crowd finance. Thanks to visionaries like Muhammad Yunus, the poorest on earth have been given an opportunity to become entrepreneurs through credit.

As with all forms of crowd finance, there are risks. The system isn’t perfect. But it was never going to be perfect. In microfinance, there are opportunities to corrupt. But microfinance isn’t alone in being open to corruption.

The sooner we accept microfinance for what it is – part of the capitalist system that, for the most, intends to do good – the sooner correct regulation and controls can be utilised to make sure goodwill and capital are appropriately deployed. With regulation keeping pace with growth, the longstanding and robust fundamentals of microfinance will continue to thrive.

You can use Crowdsurfer Pro to keep track of the microfinance industry here.

Sources

responsAbility Microfinance Outlook 2016 Worldbank.org I.F.C. Microfinanceinfo.com Grameen Bank The National Bureau of Economic Research NextBillion