Microfinance: Virtuous or Vulgar?

Our enlightened self-interest and our own humanity should question the wisdom of asking the poorest of the poor to pay dearly for their own futures.
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My blog last week on the deplorable microfinance situation in the Indian state of Andhra Pradesh concluded that -- while hysteria and expediency are precipitating a media and political overreaction -- the microfinance industry needs to take heed.

The mythology of microfinance extols the marketplace as a cure-all for poverty, then resists governmental oversight as counterproductive and simultaneously ignores the industry's bad actors. That is a formula for failure.

Andhra Pradesh brings forth an important question which needs asking, and I was remiss in over-looking it: Why is it indispensable for microfinance programs to achieve financial sustainability?

The most radical and startling economic development driver for microfinance programs is the expectation that they must be profitable or -- in economic development terms -- sustainable. This is not a standard typically used for other public goods and services.

Most anti-poverty programs -- from health clinics to water projects to schools -- are budgeted with long-term external subsidies, donations, grants and in-kind assistance. As public goods, it is expected that the long-term community benefits deserve underwriting by taxpayers or donors.

Neither Silicon Valley companies in California nor destitute truck drivers in Cameroon are expected to capitalize their own roads with private investment repaid from private economic activity. Public sector investments of $1.00 in United States roadways generate $6.00 of economic activity and the indirect return in jobs, taxes and quality of life improvements is deemed sufficient.

In contrast, microfinance funders expect the poor to bootstrap themselves into profitability. If local microfinance programs don't increase microloan interest rates to at least cover costs, development funders and commercial markets soon look away.

Because international aid agencies, governments, foundations and donors do not have unlimited funds and because microfinance competes for scarce global resources with other worthy causes, the microfinance intelligentsia has convinced itself that private capital markets can be a steady cornucopia of cash. In a virtuous circle, social investors invest, microfinance pays profits and poverty is whisked away. "Doing good by doing well" goes the slogan.

As I raised in a recent speech in San Francisco, "Is social entrepreneurship about creating a viable asset class to make money while doing good or about building a social movement for economic justice? Are we advocates for the poor or advisers to the well-off?"

Paradoxically for an anti-poverty movement built on capitalism, a whiff of "microfinance Marxism" hovers in the air. As Marx viewed the human condition principally in terms of economics, some microfinance leaders are attracted exclusively to its economic entrepreneurism. As impoverished women are monetized, the unintended consequence is microfinance fulfills its mission by making women more profitable chattel (or, in the parlance, creating self-help business opportunities). The idiocy often begins by defining the microfinance mission as access to financial services, instead of poverty reduction.

In the absence of any other option, there is still something vulgar about charging the impoverished a penny more than is necessary to make microfinance programs self-sufficient. Our enlightened self-interest and our own humanity should question the wisdom of asking the poorest of the poor to pay dearly for their own futures.

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