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Microfinance has lost its halo………Dhirendra Kumar
A book named Portfolios of the Poor has attained a certain amount of fame over the last couple of months. The book is based on a research project carried out between 1999 and 2005. This research project tracked the finances of 300 poor families in South Africa, Bangladesh and India to analyse how these people managed with their small and uncertain incomes.
The importance of this book lies entirely in the fact that it doesn’t just quote numbers and draw trends, but that it tells stories. It’s nice to see a graph showing the Internal Rate of Return on short-term loans being taken by the inhabitants of a slum, but it’s actually more important to read the details of how a particular loan had to be taken because someone’s savings were stolen.
I think one the contributions of this book should be to clarify the exact role that microcredit plays in people’s lives. In recent times, microfinance has lost some of the halo it had earlier. A number of people have said that it’s not really proven what kind of an impact microcredit has on increasing incomes and alleviating poverty.
What the stories (and data) in Portfolios of the Poor demonstrate forcefully is that raising incomes through microenterprise is not the only contribution — or even the most contribution — that microfinance can make. Raising people out of poverty depends on far too much on broader economic development and in any case, everyone who is poor cannot become a microentrepreneur.
What we see happening in this book is that access to small credit actually goes a long way in making poverty manageable. This microcredit doesn’t mean a formal system—in most cases it still means informal money-lending, ad-hoc loans from employers, or self-help savings clubs. The biggest financial service that the poor need is the smoothening of whatever income they do have. Unpredictability literally makes an income worth less than the numbers indicate and the poor go to extraordinary lengths (and cost) to smoothen this flow.
For me, the biggest discovery in this book was that once you recognise that the smoothening of income flows is a vital goal, it follows that there are circumstances when borrowing at a higher rate to save at a lower (or zero) rate is sensible behaviour. This behaviour is common across the countries that the authors studied. People borrow at 15 or more per cent a month and then slog to pay off these loans just to keep a stash of cash at home to deal with unforeseen circumstances.
The picture that this book paints is fascinating but unlike many reviewers, I’m not sure if the final message is one of hope. There’s a huge set of problems that these stories tell of, and some do not have easy solutions.
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