Last updated on January 17, 2011
Given the popularity of my initial posts on microfinance (see here and here), I continue blogging about the topic this week.
This week, however, I am blogging about microfinance as seen from within the industry. As such, I am blogging the five-point response a friend of my wife’s and mine — whom I refer to by the pseudonym “Chad” — has made to my previous two posts.
Chad works for a microfinance private equity firm and used to work for a leading online microfinance website. More importantly, Chad has traveled extensively to the field to meet with stakeholders along the microfinance supply chain. See here, here, here, and here for his first four points.
Chad’s fifth and last point was:
“Ultimately, all of this negativity should not and will not deter the growth or importance of microfinance. Yes, the industry will have learned some important lessons (and will continually need to do so) but as in any business, the court of public opinion should not and will not deter the dedicated. Professor Yunus spent decades building Grameen in anonymity and he and others like him will continue doing so to the benefit of the poor. Whether or not they are recognized by the Nobel Committee, the New York Times, or the Clintons is immaterial because like any great business leader will tell you, it is during the tough times that the great ones emerge. I do believe that all of the good press attracted a lot of naive people to the sector and now we are seeing what happens when those people are suddenly faced with the realities and challenges of the sector. Personally, I think this is a good thing because it will help separate out those who have the stomach and fire to make microfinance succeed from those who gravitate to the latest development fads.”
That is absolutely right, and MFIs will be lending to the poor as long as it is sustainable — as distinct from profitable — for them to do so. After all, no one has ever asked whether big banks such as Bank of America, Citigroup, Wells Fargo, etc. reduce poverty, and if someone were to run a randomized controlled trial to test whether the loans big banks make to individuals reduce poverty, I doubt the banking sector would care.
What does matter, however, is when microfinance becomes a matter of public policy. In other words, whether microfinance reduces poverty matters when scarce public funds are allocated to MFIs. The Gates Foundation can do whatever it pleases with its private funds. Informed US taxpayers, however, should care whether USAID allocates its public funds to development projects that actually work.
As for Chad’s last point about who selects into working in the microfinance sector, I could not agree more. Just like I wouldn’t want the health care professionals who will eventually take care of me to have become health care professionals because of Grey’s Anatomy, I find it almost equally disheartening when I meet students who know nothing about the realities of the developing world but are seemingly attracted to microfinance because it is what is hip.