The microfinance industry is estimated at $60-100 billion, with 200 million clients worldwide. It can have an impact in any country; it is just that it has different scope and potential customers depending on how developed the nation is. Yet, the initial fuss around microfinance is now gone and more and more organisations have started to criticise it.
Some experts like David Roodman, senior fellow at the Center for Global Development, assert that microfinance has some ‘perverse’ effects and that it just help loan sharks to reach more people, making them even poorer in the end.
Some economists also argue that too many small businesses end up in a decrease in product prices, and that they should instead integrate to be more efficient. So where could be the areas for improvement?
Conduct of Microfinance institutions
Even if it can seem a big task, the impact of microfinance has to be measured more effectively. As it concerns more than just loans, it has to include objectives towards social development and/or economic empowerment.
Microfinance institutions (MFI) should be checked and adhere to some code of conduct to make sure they are not disguised shark loans. A first set of measures can easily be set up, detailing the percentage of repayment, the delays (if any), the changes in the amounts lent, etc.
The microfinance institution should also make sure that the money borrowed is for a new initiative and not for repaying other debts or for personal consumption. This is possible through a reliable local network of people working for the institution and by building trust with the customers.
Enabling Micro entrepreneurs
Usually people are really willing to launch a new activity or expand theirs with the loan. Yet, they might lack basic business skills, thus defaulting whereas they were enthusiastic at the start. To avoid that, the microfinance institution (which is sometimes backed by an NGO) should also offer basic business training to its customers, as well as build a sense of community. For example, Accion, in partnership with the Chinese Association of Microfinance (CAM), announced last February the launch of its International Microfinance Management and Leadership Program.
The new programme aims at develop management and leadership capacity in microfinance in China, ideally reaching one million people. Raising awareness of micro entrepreneurs is very important as research has shown that micro-entrepreneurs are more likely to repay their loans if everybody around them is repaying theirs as well, in a form of ‘positive peer pressure’.
Facilitating economic growth and development
Last but not least, people (including customers) should be realistic about the potential outcomes of microfinance. Indeed, it seems a good tool to alleviate poverty, but it cannot be used on its own to decrease it significantly. Governments and local authorities should also launch development programmes to tackle poverty on a national level. It is good to rely on local initiatives, but it needs to be backed up by structural reforms on a larger scale.
Microfinance now has a significant place in some emerging economies and to a smaller extent in developed countries. When properly used and framed, its benefits are profound, enabling people to get just what they needed to start another business activity and go out of the informal economy.
Yet, microfinance cannot substitute itself to larger initiatives to decrease poverty, and should be used with other tools by the key stakeholders to develop economic activity. Governments can help with large-scale development programmes, followed by NGOs working on helping the poorest and external investors focusing on economic empowerment rather than charity giving.