I spent two months this summer living in a rural village in Western Kenya where I taught optimistic, bright women basic accounting skills, coached them in computer literacy, and led community development exercises. I arrived animated and eager to achieve every goal outlined on my job description, but when I left the country eight weeks later I had not accomplished a single one of my original objectives. Instead, I had gained a clearer pictures of the complexities associated with microfinance and with the challenges that it seeks to address.
The effectiveness of microfinance in alleviating poverty is both championed and criticized by development experts in the international community. Mohammed Yunus champions microfinance as a tool capable of ending global poverty. He sees the poor as a vast resource of fresh, entrepreneurial ideas just waiting to be unleashed, and believes that micro-loans provide the masses with this opportunity.
Yunus sketches the Grameen Bank's largely successful model of micro lending. The bank gives small loans to individuals who are expected to repay the money over the period of one year in weekly installments at a twenty percent interest rate. The bank requires prospective borrowers to form into groups of five prior to receiving a loan, and to undergo a weeklong training program that culminates in an oral examination. Group formation ensures that, "if an individual is unable or unwilling to pay back her loan, her group may become ineligible for larger loans in subsequent years," which pressures group members to honor their agreement. Borrowers undergo an intense screening process by local authorities before they are given loans, and "all business conducted during center meetings [is] done out in the open," in order to promote honesty, accountability and transparency throughout the loan process.
Microfinance institutions such as the Grameen Bank have many positive impacts on the individuals and communities that they work with. In my own experience working with a microfinance organization in Western Kenya, flourishing businesses supported by these loans enabled families to put their children through school, buy fresh produce and meat, expand their homes and more. Despite these inarguably positive results, microfinance, like all business ventures, is not without its flaws and limitations.
One of major challenges faced by the international microfinance organization I worked with was a communicative and visionary disconnect between the organization's leaders in the United States and the women who had volunteered to run the organization's branch in the village. Many of the instructions given to the women on the ground were either culturally inappropriate or unrealistic. For example, the Kenyan leaders hesitated to give names of the defaulters to the local chiefs capable of seizing repayments because the leaders feared the societal repercussions they would face from ruining their neighbors financially. Nuances like this are difficult to notice from abroad, and in this specific situation were compounded by the fact that the villagers only criticized one another's ideas indirectly. Because of this many of the leaders' procedural complaints went unnoticed over the phone during our conversations with the United States.
Similarly, the business model imposed on the village was not fitting with their pace of life. Women showed up to meetings late after stopping to chat with neighbors or deciding to pick their beans before the clouds they saw on the horizon turned to rain. Repayment schedules did not account for the starvation months, before families could sell their ripe crops, and many women defaulted on their loans in order to feed their families. The villagers needed education to learn how to communicate via email, and none were familiar with the accounting skills used in the States to track loan repayments.
My skepticism about the effectiveness of the operation was also fueled by an observation about the scale of the businesses. The income generated from these businesses was barely enough to cover the costs of repaying the loan, and I met many women whose businesses failed altogether. The most successful businesses did generate income that enabled families to put their children through school, buy fresh produce and meat or expand their homes, but it seemed unrealistic that any of the family-owned businesses were on the path to expansion. As Banerjee & Duflo observe, "The enterprises of the poor often seem more a way to buy a job when a more conventional employment opportunity is not available than a reflection of a particular entrepreneurial urge."
Microfinance has inarguably positive impacts on the individuals and families who succeed in adopting its dogma, however, the challenges that I observed illustrate several of the limitations on the scale of its potential impact. Perhaps it is time to accept that microfinance is only one of the many tools we can use to put an end to global poverty, and, as Banerjee and Duflo say, to "stop pretending that there is some solution at hand and instead join hands with millions of well-intentioned people across the world... in the quest for the many ideas, big and small, that will eventually take us to that world where no one has to live on 99 cents per day."