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Microfinance does not help the poor escape poverty……….From Mr Michael Herrmann
Sir, Your article “Compartamos helps out Mexican women” (May 20) makes me wonder once more, what’s the deal with microfinance?
Microfinance institutions charge exorbitant lending rates (in this case 68 per cent per annum) and provide loans for only a relatively short period in relatively small volumes. The poor assume loans with such horrendous conditions not because they represent a jolly opportunity, but because they ensure their survival when their meagre incomes fall. I am not the least bit surprised that microfinance institutions made more loans and had higher profits in the midst of the crisis.
In the crisis, many of the poor lost precarious employment or received fewer remittances from relatives abroad. The loans enabled them to feed their families, buy medicine and upkeep other necessary consumption expenditures. Thereby, the loans certainly helped the poor to fight against a deepening of their poverty, but they cannot easily help them to sustainably climb out of poverty.
Although many like to think that microfinance enables the poor to invest in productive activities, generate a sustainable income stream, and break the vicious cycle of poverty, let’s take a second look. If there are investment opportunities that justify an interest rate of 68 per cent, many of us would be in this business already.
Microfinance loans may be suitable to ensure consumption smoothing – although public welfare nets which help the poor without making them pay back the income supplement are preferable – but they are rarely suitable for productive investment, which creates employment and sustainably reduces poverty. Such investments demand loans at lower interest rates, in higher volumes and for longer periods, and such loans are provided by functioning commercial banks and functioning development banks.
In an ideal word, consumption smoothing would be addressed by public welfare nets, and investment finance would be provided by the aforementioned banks.
As long as the poor depend on microfinance they are at a major disadvantage; they pay more for their loans than anybody else, and their loans provide them with fewer remunerative investment opportunities.
Michael Herrmann,
New York, NY, US
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