More Studies on Microfinance Could Aid Its Goal to Reduce Poverty

 

By Cynthia Kao

Xenia Intern

In Neil MacFarquhar’s New York Times article, “Banks Making Big Profits From Tiny Loans,” MacFarquhar explores the complicated role of microfinance as a for-profit business focused on fulfilling a social need. He brings up the questions that has been a major source of debate: How much profit is too much profit, and when do interest rates become too high?

Integrity has become a major issue, especially with the recent attention it has received from banks and financial institutions that have latched onto microloans after seeing its massive potential for profit. In essence, these instutions have replicated the very systems that microcredit was created to fight.
Yet, there are no regulations as to how much microfinance companies can make; even though they were made originally to fulfill a social purpose, they are not nonprofit companies. Rather, they are for-profit businesses that ideally puts social change at their core.
Recently, the exorbitantly high interest rates of some microfinancing companies has brought huge pubic uproar, such is in Nicaragua where the “No Pago” movement took place.
Many of these companies charge interest rates of over 100%, and while the general argument is that these high rates are necessary to cover operational costs, the reality is that many of these institutions have outrageously high rates simply for profit in the absence of regulation.
The issue of forced saving has also been harshly criticized by borrowers and third-party critics. The Nigerian microfinance institution, LAPO, is one such example that forced users to save 10% of their loan while charging full interest on the full loan. A lack of current and thorough information on ground organizations such as these is blamed on large Web sites that host them, such as Kiva or even Ebay.
Macfarquhar realizes that there are no easy solutions to the problems in microfinance, which is a complicated, vast system that sprawls around the globe — ever changing and moving. However, he sees the need for public awareness which can force companies to take responsibility.
While Macfarquhar does a fine job in not overblowing the problems or the success of the microfinance sector, and he does well in providing statistics and accounts over opinions, it is unfortunate that more solid statistics could not be found for the effects that microfinance brings. Perhaps because of the microfinance frenzy that followed in the wake of Grameen Bank, many articles have come out about the disadvantages — even the evils — of microfinance. Yet, as Macfarquhar does mention, though most acknowledge that microfinance does raise standard of living in some situations and a safety net from the worst perils of poverty, there seems to be a vacuum of statistics for the good and misfortune that microfinance causes.
Macfarquar seems to have run into the same problem that I had in writing my microfinance articles. Unbiased, hard-fact statistics and studies for the actual poverty fighting effects of microfinance are few and far in between, if at all existent. Generally, the “facts” on microfinance are portrayed as miraculous destroyers of poverty or as poverty causers that dip into the realm of financial slavery. While it is evident that there are both success stories and also stories of the failure of microfinance, no unbiased, detailed, over-arching study has appeared, leaving a veil of mystery over the massive microfinance system. Too often, the reports are charged with emotion and have the undertones of a sales pitch. Yet, microfinance is a large part of millions of lives around the globe where the reality is often in between the two extremes and varies wildly from region to region.

Perhaps, the best way to start regulating and reforming the microfinance industry is to first make a blueprint of the location, method, depth, and cause of the success and failure in microfinance. Then, instead of a fractured community with statistics pitted against one another, a more unified consensus among those concerned over microfinance can be formed. Then, together they can begin to move in a more pragmatic and informed manner towards achieving the initial goal of microfinance: that of alleviating poverty.

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