Does microcredit work?

Blogs such as MicroCapital and Poverty News Blog are reprinting a Newsweek article by Mac Margolis which is summed up in the standfirst: “Critics put trendy poverty lenders to the test,” it says, “and find they’re neither a real business nor a real help.”

Who are these critics? The main one is Thomas Dichter, a well-known aid-doesn’t-work type at the Cato Institute. The others are not clear: is it really a criticism of microfinance to say that most microfinance programs are unprofitable? Many microfinance types would say that their main job is poverty alleviation, not turning a profit, and that they’re more than happy to spend grant monies on the poor before trying to set themselves up as a profitable financial institution. I personally sit on the board of a community development credit union (CDCU) in New York – LES Peoples – which isn’t “sustainable” unless you count the grants we receive. But we’ve been receiving them for 20 years, we have assets of almost $20 million, we’re the largest CDCU in the country, and we’re widely lauded by everyone from Hillary Clinton to Mike Bloomberg. Just because you don’t turn an operating profit, doesn’t make you a failure. Not by any means.

Margolis also has an interesting way of spinning good news as bad news:

Alex Counts, director of the Grameen Foundation, which is in charge of replicating the Bangladesh-based Grameen Bank around the world, admits that only a tenth of the bank’s 7 million clients are “true entrepreneurs” who “started borrowing $100 and are now borrowing $10,000 to $20,000,” but says that most are making ends meet.

Admits“? That Grameen bank has helped only 700,000 clients to move from microloans to loans in the tens of thousands of dollars? If that’s failure, let’s have more of it!

As for Dichter, Margolis quotes an essay of his entitled “Microfinance Reconsidered,” which apparently has been published by the Cato Institute, although I can’t find anything of that name on the Cato website. The closest thing I can find is a paper by Dichter called “A Second Look at Microfinance: The Sequence of Growth and Credit in Economic History,” which is mainly historical and concentrates solely on the history of finance in developed countries such as the UK, rather than looking at microfinance in the developing world today.

As for the substance of the debate, Margolis is right that there’s much more heat than light in all the stuff being written. The big exception, in my view, is a wonderful paper by Shahe Emran, Mahbub Morshed and Joseph Stiglitz, which explains why microfinance works, in practice, in places like Bangladesh. It turns out that the main factor behind all these puzzles is the place of women in society, and especially extreme illiquidity in the market for women’s labor: a little bit of credit acts as a catalyst for women outside the labor market, turning them into economically productive individuals.

To put it another way, the interest on a microloan isn’t really return on capital, it’s return on labor. It’s just that without a tiny bit of capital, the labor is nascent and can’t be tapped. That’s why microcredit works.

This entry was posted in Portfolio. Bookmark the permalink.