Panacea

For all the hype that surrounds microfinance, one can be excused for believing that it will save the world. There is an initiative by the Ugandan government called "Bonna bagaggawale" which, loosely translated from Luganda means "Prosperity for all". Few appear to take it as a serious policy statement, but as a long term vision it is laudable. Bonna Bagaggawale could, however, be the manifesto for the microfinance movement, the latest cure-all in a long sequence for the world's woes.

I've recently finished reading the provocatively titled book "Why Microfinance doesn't work" by Milford Bateman, which should be compulsory, if uncomfortable, reading for microfinance believers everywhere. Bateman poses the question of why countries that have achieved microfinance saturation over the last decade (for example Peru, Bosnia and Cambodia) do not demonstrate obvious and substantive poverty reduction and "bottom-up" development gains. While the book deals less with African countries (where the microfinance movement is younger and, presumably, reliable statistics are harder to come by), Bateman supports his arguments with impressive statistics and qualititative observations. His conclusion is simple: that most independent evaluations are unable to show concrete evidence that microfinance has had a significant impact on poverty alleviation.

Indeed, Bateman goes further. He asserts that, contrary to the major premise of the microfinance movement: that it promotes poverty reduction by enabling the poor to borrow and invest in income-generating activities (and create a kind of virtuous spiral of wealth creation by micro-entrepreneurs), that in fact the vast majority of microfinance loans are taken out for short term expenses like school fees, health care, funeral expenses or other consumption requirements. So, far from creating wealth, microfinance adds a new item to many household monthly budgets: repayments to the microfinance institution (MFI).

No doubt microfinance supporters can (and will) produce powerful statistics of their own in support of the developmental thesis rubbished by Bateman. So far, at least in my experience, their rebuttals have been feeble. Recently, on quoting from Bateman's book, a MFI Chief Executive responded to me that "poor people also have a right to credit". Well, I can't remember seeing that particular right enshrined in the Universal Declaration of Human Rights.

A few years ago, at the onset of the credit crunch, my brother remarked to me, after having lived for a year or so in Nairobi, that while there wasn't a great deal of money around, at least personal indebtedness was very low. After the consequences of the sub-prime mortgage crisis, this seemed to him to be an entirely positive aspect of African economic life. What he didn't appreciate was the colossal demand for short term debt to meet essential consumption requirements. Now, better by far to have this demand met by properly regulated MFIs than by the Tallyman with extortionate interest rates and brutal enforcement methods (hence the classic movie poster above), but to represent this as poverty alleviation? To me, that's a bit like saying that credit cards and other unsecured lending are the solution to the world's economic problems. I don't think so.