The GiveWell Blog

My greatest fear about microfinance

How much of microfinance’s popularity in the world of philanthropy comes straight from this story?

I was shocked to discover a woman in the village, borrowing less than a dollar from the money-lender, on the condition that he would have the exclusive right to buy all she produces at the price he decides. This, to me, was a way of recruiting slave labor.

I decided to make a list of the victims of this money-lending “business” in the village next door to our campus.

When my list was done, it had the names of 42 victims who borrowed a total amount of US $27. I offered US $27 from my own pocket to get these victims out of the clutches of those money-lenders. The excitement that was created among the people by this small action got me further involved in it. If I could make so many people so happy with such a tiny amount of money, why not do more of it?

It’s an amazing and moving story. But it’s a story about one giver and 42 beneficiaries in one village.

In 2007, the Grameen Foundation alone saw over $16 million in donations and claimed over 7 million clients served (see its annual report (PDF)). It works in 32 countries on 4 continents. And it’s still putting that $27 front and center.

We know little about microfinance’s actual impact, and much of what we do “know” comes down to myths (myth #6, in particular, seems oddly fitted to the story of the original $27). We’ve seen very little interest in general in pushing skeptically on the appealing stories charities tell.

Dr. Yunus’s original loan was interest-free, while today’s microloans charge interest in the 30%/year range. We know that the for-profit participants in microfinance have been participating for reasons other than one great story.

I don’t feel nearly so confident about the philanthropic participants.

Comments

  • What I can’t get past is – isn’t for-profit microfinance exactly the same as a credit card?

  • jsalvatier on November 12, 2009 at 10:39 pm said:

    Of course, and credit cards aren’t exactly bad, are they? The fact that the poor pay to get microloans strongly suggests that they are better off with access to those loans than without them. The more important question (this is what Holden is getting at) is whether financing microloans is the *best possible* use of those funds.

  • James Edward Dillard on November 12, 2009 at 11:21 pm said:

    Heard Marc Epstein talk this week at Duke University quite eloquently about how micro finance has succeeded in scaling but not in scaling impact. (Although some of these arguments seem to be made in his paper here: http://bit.ly/1rIK17)

    The key, to hear him speak (and in a paper that I believe will be published sooner rather than later) is combining education and training with the liquidity provided by micro finance. Most micro finance institutions, however, in an effort to be self-sustaining are reluctant to provide this training (and therefore end up charging high interest rates).

    That said, there might be an opportunity for an organization that specializes in helping those who receive micro loans in using them effectively to scale their support alongside micro finance institutions and make their living based on social impact.

  • James, I have to say that I have trouble seeing the “opportunity” for an organization “make [its] living based on social impact.” I’m not trying to be cynical, but as we’ve been arguing, the facts suggest that charities get donations almost exclusively by telling great stories rather than by demonstrating impact. Of course, this is exactly what GiveWell is trying to change.

  • James Edward Dillard on November 13, 2009 at 2:49 pm said:

    Holden —

    When I said opportunity, I guess I meant to create social impact. Micro finance hasn’t been all bad because it has given people without access to liquidity access to liquidity.

    The problem is that these people aren’t particularly good at using the liquidity yet (according to Marc), leading to lagging social impact, especially when you factor in high interest rates, loan recipients scamming lenders by going from mfi to mif to mif and the improper incentives given to loan officers (many get paid based on the # of loans they give out rather than the repayment rate).

    My thought is that if an org could get a grant to design a training model for first time loan recipients and prove that it leads to higher repayment rates and incomes, then it would have several funding options: 1) traditional donors who would simply have to be educated about micro finances short comings 2) mfi’s who have an interest in seeing higher repayment rates and 3) the loan recipients themselves (who might be willing to pay a small fee if it leads to a lower interest rate).

    This group could use the same stories that MFI’s do, they’d just have to do a little donor education to help people understand that micro finance alone isn’t the answer…

  • James, agreed.

Comments are closed.