Hype and Crisis

Starting in the early years of the 21st Century and peaking with the Nobel Peace Price awarded to Muhammad Yunus in 2006, Microfinance was celebrated as the silver bullet all development agencies were looking for. The end of poverty was predicted by it’s proponents, claiming that the opportunities brought by this new access to finance will help poor communities to gain independence from the goodwill of donors in the global north.

But after every boom there is a bust: With all the hype around microfinance, Microfinance Institutions (MFI) all around the world were receiving a lot of cheap money. Compartamos Banco in Mexico, originally an NGO working in Microfinance, raised almost $500 million in their IPO in 2007. With more money to be given out as credits, credit agents were pressured to serve more clients at the time. Similar to other booming industries, agents became more risk-friendly. Credits started to be given out almost blindly, leading to a shift in granting processes.

Many of the innovations originally said to be responsible for the success of microfinance (i.e. group lending), where largely reversed in a search for more efficiency. Consequently, more and more borrowers started to use Microcredits for consumption rather than investments. Critics claim that they therefore often won’t have sufficient income to pay off the credits.

This could tempt them to take out new credits, which now were widely available, to pay the former ones leading to dangerous debt-spirals within the very same communities that MFIs claimed to be serving. In India, some argue, this problem of debt accumulation caused a spree of suicides in 2010, which was very widely published in the media all over the world. MFIs in India were temporarily shut down and new regulations were introduced in India in the wake of this scandal.

During the Mi-fi Day on the 19th of April at the University of Zürich, the effect of Microfinance on development will be discussed in more depth in workshops, presentations and a podiums discussion. In an introductory presentation, Pat Gleeson will be talking specifically on the relationship between microfinance and poverty. Mr Gleeson is Managing Director of ECLOF International and looks back on more than 30 years of Microfinance experience in many countries (more information)

We have seen some arguments for and against Microfinance. But what does research tell us about the effect of Microfinance on poverty? One possible answer will be described in the next blog entry.

Links & Sources:

[1] https://www.gsb.stanford.edu/insights/vinod-khosla-microlending-end-poverty

[2] http://www.adb.org/sites/default/files/institutional-document/32094/financepolicy.pdf

[3] https://www.researchgate.net/profile/Marcus_Taylor/

[4] http://www.bbc.com/news/world-south-asia-11997571

Microfinance and Poverty I – Hype and Crisis

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