For better or worse, microborrowing often entails a kind of bait and switch. The borrower claims that the money is for a business, but uses it for other purposes. In effect, the cash allows a poor entrepreneur to maintain her business without having to sacrifice the life or education of her child. In that sense, the money is for the business, but most of all it is for the child. Such lifesaving uses for the funds are obviously desirable, but it is also a sad reality that many microcredit loans help borrowers to survive or tread water more than they help them get ahead. This sounds unglamorous and even disappointing, but the alternative — such as no doctor’s visit for a child or no school for a year — is much worse.
This account is broadly in line with the position we’ve taken on what microfinance is (likely a very good thing for many disadvantaged people) and what it isn’t (the “make a loan, expand a business” picture that is often used to market it). What’s great about the article is that having made this distinction, it then goes on to give a detailed qualitative picture of how microfinance can actually help people:
Commentators often seem to assume that the experience of borrowing and lending is completely new for the poor. But moneylenders have offered money to the world’s poor for millennia, albeit at extortionate rates of interest. A typical moneylender is a single individual, well-known in his neighborhood or village, who borrows money from his wealthier connections and in turn lends those funds to individuals in need, typically people he knows personally. But that personal connection is rarely good for a break; a moneylender may charge 200 to 400 percent interest on an annualized basis. He will insist on collateral (a television, for instance), and resort to intimidation and sometimes violence if he is not repaid on time. The moneylender operates informally, off the books, and usually outside the law.
…if you want to know how much net saving is going on, don’t look at money. Banks may be a daylong bus ride away or may be plagued, as in Ghana, by fraud. A cash hoard kept at home can be lost, stolen, taken by the taxman, damaged by floods, or even eaten by rats. It creates other kinds of problems as well. Needy friends and relatives knock on the door and ask for aid. In small communities it is often very hard, even impossible, to say no, especially if you have the cash on hand…. Under these kinds of conditions, a cow (or a goat or pig) is a much better medium for saving. It is sturdier than paper money. Friends and relatives can’t ask for small pieces of it…. With a small loan, people in rural areas can buy that cow and use cash that might otherwise be diverted to less useful purposes to pay back the microcredit institution. So even when microcredit looks like indebtedness, savings are going up rather than down.
This qualitative account helps me understand how it is that microfinance can be a worthy intervention, even when clients are carrying persistent debt loads at high interest rates (as they often are). For any region where the picture painted by Cowen holds – i.e., when the only source of credit is moneylenders charging exorbitant interest rates and using the threat of violence – I would happily invest in a microlending program.
But I know there’s at least one good example of a microfinance program that came into a region where credit wasn’t already scarce – and consequently failed to have any noticeable impact. In my mind, this “what are you replacing?” question is one of the very most important questions for a microfinance program – and one that we haven’t seen any organization provide strong documentation on.
I believe that most discussion of microfinance – by nonprofits, by the media, and by donors – is frustratingly superficial, focusing on extreme success stories and simple statistics like the “repayment rate,” rather than on getting a real picture of where microfinance is helping and where it isn’t. Cowen’s take is refreshing, and with more conversation along these lines I hope we can get a better picture of an extremely promising intervention.