Microcredit, also known as microfinance, is a widely touted development technique that extends small loans to entrepreneurs in poverty-stricken areas. Microcredit loanshave now reached 100 million people worldwide, and have proven effective not only at alleviating poverty, but also enhancing other measures of development, improving education levels and increasing gender equality. The UN is holding a Global Microfinance Forum from November 7–9 in New York to discuss how microcredit can reach more people. Although “there’s a long way to go in serving all types of impoverished people around the world,” says Isobel Coleman, a senior fellow at the Council on Foreign Relations, microfinance “has served very poor people very successfully.” Coleman spoke with cfr.org’s Eben Kaplan on November 7.
Why is microfinance perceived as such a success?
Microfinance has a perception of success for a number of reasons—and it’s not just perception: In reality, it’s been tremendously successful. The first is that it is a true innovation in the development world. There was conventional wisdom out there that very poor people couldn’t afford to borrow money, they wouldn’t be able to do anything with it, they didn’t have the educational levels or the skill levels to be able to start businesses. Microfinance has proven that very wrong. In fact, there’s a whole class of entrepreneurs among very poor people, and you have great examples of people starting all sorts of businesses. They have started a lot of home-based businesses, [including] buying a cow and serving the whole community with dairy products; buying chickens and providing the community with eggs; [buying] start-up materials for handicrafts. And there are cell-phone ladies roaming all over Africa who will buy a cell phone and go village to village lending out minutes on the cell phone and making a profit on that. These are just some examples.
Microfinance has been so innovative in proving wrong the assumption that poor people couldn’t afford to start businesses. In fact, people are paying quite high rates—in some cases 30 [percent], 40 [percent], 50 percent interest rates—to be able to borrow money because there are opportunities for them to make a profit and return that money and grow a small business. And they’re willing to do it. It really has been a tremendous innovation that you can—at a break-even, sustainable, or even profitable level—make small loans to very poor people and they’re able to afford those loans and pay them back and start businesses and grow them. It really has been an eye-opener in the development world that you can do that, and the evidence over the last thirty years is that this is true worldwide.
Why are women so often the recipients of micro-loans?
Women do make up about 80 percent of the micro-borrowers, and I think it’s because women make up the majority of the poorest of the poor. They have no alternative access to credit. Women have long been marginalized in all of these societies, and they’re very eager and willing to be able to borrow small amounts of money to develop home-based businesses where they can both manage their household responsibilities and their child-rearing responsibilities. They make marginal income that really goes directly to the family in terms of providing better health, nutrition, and educational opportunities for their children. That’s what the evidence has shown most microfinance loans are used for—the borrowers’ families.
Critics contend that microfinance does not reach the poorest of the poor, that it only affects the better-off portions of poor populations.
It’s a fair criticism. It does tend to reach those who are not among the poorest of the poor, but let’s not lose sight of who it is reaching—those who, for the most part, are living on around two dollars a day, which is still very, very poor. I think it has been targeted to those individuals because [they’ve] been the easiest group to serve at this point. The very poorest of the poor—those who are living on less than a dollar a day—perhaps they’re not the best microcredit groups. If you’re in a situation where your children are literally on the brink of dying from hunger or disease or starvation, or if you’re in a war-torn society, a small mircocredit loan is not on the forefront of your mind. You’re probably thinking of survival. In that case, microcredit is perhaps not going to be so successful. I think the next frontier is to figure out how to make it available to the poorest of the poor because I’m sure there are communities where it could be successful. I think the criticism is fair, but again I come back and say it has served very poor people very successfully. There are about 100 million people who are recipients of microcredit loans today, but there are about a billion people who still have no access to credit. There’s a long way to go in serving all types of impoverished people around the world.
In what areas of the world might microfinance be successful where it is not yet widely used?
The Middle East is an interesting example of a region that has a very low penetration of microfinance—I think only about 2 percent of microfinance loans are made in the Middle East. It’s growing: Jordan has some very successful and fast-growing microcredit programs, as do Egypt and Morocco, so there are countries that are embracing microcredit. Even Saudi Arabia has some microcredit programs that are just starting up. There’s a huge opportunity to provide microcredit loans throughout the Middle East. Targeting them to women is a great idea, [as] it helps in women’s financial empowerment. One of the criticisms about microfinance is that it doesn’t become a driver for employment, and on average, microcredit businesses do employ less than two people. I think that’s missing the point: It does employ all sorts of people as individuals, provides marginal income to those families, and is an important driver of other economic activity, especially as it scales up. When you look at the Middle East, with many stagnant economies across that region, there’s a lot of opportunity to provide more microcredit loans to people in all different countries there.
The UN is holding a conference this week on microfinance. What is likely to come out of that?
It’s easy to be cynical about these summits and say, “Well, nothing comes out of it and there are not tangible results to point to.” The year 2005 was designated the “Year of Microcredit” [by the United Nations] I think five years ago, so there’s been some build-up to this. What you have with the summit going on in New York today is a greater integration of microcredit efforts around the world. You have public-private partnerships going on; you have a lot of microfinance practitioners working with those in the policy sphere to understand what it’s going to take to bring microfinance to the next level; you have a lot of people from the financial industry thinking about microfinance in innovative ways, thinking about opportunities to bring securitization techniques to microfinance so that you can actually leverage more capital for the industry. What you have is a momentum behind microfinance that didn’t exist even a few years ago, from both the public and the private sectors, and a realization that it’s a very powerful development tool if used correctly and implemented in the right way. You also have a commitment to put in place the correct enabling infrastructure to make microfinance successful. We have learned over the years that getting the financial regulatory environment and the legal environment right for microfinance is really important so that you’re not distorting the market in places where microfinance is just taking off. [People are] making sure those rules and regulations are put in place and it’s done effectively so microfinance can flourish and can be successful.