Microfinance – contributing towards a better world

| May 21, 2013

It has been hailed as a ‘miracle cure’ to end global poverty. Rob Haggett from microfinance initiative Good Return explains how microfinancing has the potential to be a powerful tool in helping poor people around the world.

The concept of microfinance isn’t new and chances are you’ve encountered the term in some capacity since its modern inception in the early 1970s. In fact, the story of microfinance is a somewhat turbulent tale; a venture which set out to help contribute to solving global poverty ended up being accused of doing anything but, harbouring as many critics as champions along the way. So how did all of this come about? To help answer this question it would first be useful to look at what is meant by microfinance, how did it come about and why was it seen as a potential saviour to millions of impoverished people around the world?

Microfinance is the offering of financial services, such as loans, savings and insurance to low-income clients who are usually deemed too high a risk to provide for through the traditional financial channels many of us take for granted. As such, those who support microfinance generally believe it provides an opportunity to help poor people out of poverty by promoting economic development, employment and growth through the support of micro-entrepreneurs and small businesses.

This was the vision of the modern day microfinancing pioneer Muhammad Yunus in the 1970s. Offering a private-sector, market-driven model of poverty reduction presented an opportunity for people to start their own enterprises using capital from trustworthy, reliable sources instead of relying on high-interest money lenders.

In this light, it is easy to see how the potential benefits of microfinance attracted the support of so many. Hailed as a ‘miracle cure’ to poverty, the sector grew at a substantial rate over the last few decades. The Microfinance Information Exchange (MIX) estimates that today, microfinance institutions currently operate in over 100 countries, serving more than 92 million clients.

So if millions of people are being provided with the opportunity to improve their standard of living then surely this can only be a good thing, right? Well, yes, in essence it is. But like all good things, without someone steering the ship in the ‘right’ direction, there is always the potential for things to go wrong.

Critics point out that the impact of microfinance has not been the miracle cure everyone had hoped. Many borrowers only ever see a marginal increase in their incomes and for many to escape poverty, more assistance beyond the scope of microfinance is needed. In their book, Poor Economics, economists Abhijit V. Banerjee and Esther Duflo argue that “so much of anti-poverty policy has failed over the years because of an inadequate understanding of poverty. The battle against poverty can be won, but it will take patience, careful thinking and a willingness to learn from evidence.”

For too long, many microfinance institutions have been overlooking the evidence – that by focusing on financial performance and prioritising profits over clients, they have lost sight of the reason for which they are in business: to help, not hinder the poor. As a result, the microfinance sector has been tarnished with tales of unethical behaviour, with institutions harming the very people they set out to help.

Fortunately, it’s not all doom and gloom. In the last few years, NGOs and government institutions have strived to change the thinking around microfinance. If client wellbeing is paramount, then measuring this social performance alongside a financial one is critical. This is where the concept of Social Performance Management originates.

Social Performance Management sets out a framework that helps set social goals and targets that can be monitored and managed. It’s a powerful tool that can help translate social missions into day-to-day practice in the microfinance sector.

Microfinance may not be the ‘miracle cure’ of global poverty, but used in the right way it can be a powerful tool in contributing towards a better world.



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