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Fisticuffs Over Microfinance

Is turning every poor person into an entrepreneur a surefire way to fight poverty? Is microcredit—the practice of lending small amounts of money to impoverished individuals to start businesses—deserving of the billions of dollars devoted to it? Does the popularity of microcredit distract from other tested strategies for economic development? These are the very important and provocative questions posed in a new article from a social innovation journal.

"Contrary to the hype about microcredit," writes University of Michigan business school professor Aneel Karnani, "the best way to eradicate poverty is to create jobs and to increase worker productivity." Think Karnani is spoiling for a fight—or at least a vigorous debate—over the merits of microfinance?


Karnani attacks the microfinance movement in Microfinance Misses Its Mark, published in the new issue of the unfortunately named Stanford Social Innovation Review (it’s actually a much more interesting journal than it sounds!). Karnani starts off declaring that microcredit is no "silver bullet for alleviating poverty" and goes on to summarize the research about the drawbacks of microfinance, especially as relates to the very poorest among us.

To be sure, Karnani’s far from the first to question the amount of money and other resources pouring into microfinance programs. In a Boston Globe op-ed two years ago, a law professor declared that “even the most established microlending programs have yet to prove that microlending is more successful than welfare-style programs in lifting people permanently out of poverty.” Just this past April, Newsweek ran a piece about the “backlash” to microcredit, citing the practice of charging high interest rates and the high incidence of loan defaults, as well as the fact that loan recipients are barely eking out a living.

Most of the critics aren’t saying microcredit programs are worthless. Mostly they seem to be issuing a warning to donors and governments: Don't be blinded by your zeal for microcredit to other strategies that hold promise for lifting people out of poverty. Karnani advocates job creation, pointing to China, Vietnam and South Korea as places where employment is reducing poverty. Others have called for public investment in healthcare, education, clean water and other basic services.

What do you think? Is the current popularity of microfinance among foundations and groups concerned about poverty leading to overdue criticism or overblown criticism? You can discuss this and other topics related to social entrepreneurs and innovative ideas in the comments section here or on the NOW Enterprising Ideas message board.

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Comments

The concept of microfinance is interesting yet I wonder what market elements can be used to protect what would have to be some of the most vulnerable new ideas ever to be introduced into a competitive market. Are there any protection mechanics to shield the new entrepreneur and their ideas?
John

I am currently working for BRAC, a large NGO in Bangladesh. One of the key poverty alleviation programs at BRAC is microfinance. The organization provides support for participants ranging from health care to education. In addition, BRAC uses its lending experience and extensive network of income generating enterprises to all but ensure that loans can be repaid, participants' businesses will prosper, and that they will remain involved in their village lending organizations.
This method is more hands-on, and dare I say patrimonial, than the one used by most MFIs. While it ensures a level of success for participants it has yet to be seen what the limits for household and village level economic growth are when working within BRAC's economy. These emerging entrepreneurs are shielded from a competitive market, but how long will participants and the nation benefit from such a system before it becomes bogged down by inefficiency and stifles robust market oriented growth?

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