In Defense of Microcredit
About fifteen years ago, a credit agent in the microcredit program that I managed in Guinea, in West Africa, told me his bold idea: limit every client to a maximum of three loans. “Why!?”, I asked. “Because,” he replied, “after three loans, the clients are so poor, it’s really not fair to lend them any more.”
That remark was the beginning of the end of my love affair with microcredit, and over the following years that romance deteriorated into squabbling and quarrels, and finally ended altogether in the late 2002, when I discovered Savings Groups, and we started hanging out.
Recently, a chorus of development professionals and the popular media have started asking similar questions about microcredit, most recently and dramatically in the Duvendack Report, which asks “What is the Evidence of the impact of microfinance on the well-being of poor people?” and comes to the conclusion, “Not much”.
In fact, the tide of public opinion is turning so quickly against microcredit (though with important exceptions of course) that I find myself in the uncharacteristic position of wanting to defend microcredit. So here are three things that the microcredit movement did that I think we should all be thankful for:
First, microcredit raised the profile of financial services for poor people. It moved them in the public eye, from mere recipients of assistance, to legitimate actors, people who produce goods and services already, and want to produce more. It celebrated poor people as people with integrity and a good work ethic, who were not a problem but could be part of the solution. Groups like Results, the Micro-credit Summit, and KIVA got people excited and involved and supportive.
Second, microcredit showed that it was possible to bring useful services to poor people at affordable cost in a sustainable way. Wow! What an exciting change that was from earlier development paradigms! Microcredit changed everything, and we are still reaping the benefits of it. The four million savings group members in Africa - soon to ten or twenty million - are there today because microcredit settled the question with donors about whether it is possible to reach millions of people. It is possible, and micro-credit proved it.
Third, finally, the micro-credit movement showed the key role that local formal institutions must play in economic development. Whether for-profit or NGO, most of the large microcredit institutions are locally registered, locally managed institutions, some of them extremely efficient high-performers that would rival US and European firms. Many get foreign capital and foreign technical assistance, but are phasing out of dependent relationships in a strategic, ordered way.
And, micro-credit is not over. The best MFIs seem to provide very useful services. I continue to argue that the credit-only MFIs are 20th Century phenomena, and there is no reason to support them ever again now that we have so many better options. But that is a hard-line provocative position designed to get people’s attention - in my heart I am not quite so doctrinaire.
Let us celebrate the contributions of micro-credit, as some of us run ahead, looking to see how to make financial services for the poor even better.
NB: Originally published August 2011. We moved this up on the chronological list because saying something good about microcredit is especially important these days, when even the microcredit people are dissing microcredit. It's over, but it made a contribution. End of story.