The Microfinance Delusion: Who Really Wins?

Added: 07-10-2018

Despite the lack of hard evidence of success, the microfinance industry continues to make loans to impoverished people laments author and anthropologist Jason Hickel. Setting anecdotal reports aside, Hickel suggests that microlending tends to increase poverty by increasing debt load, favors the bottom-line of the lenders, and helps maintain the political structures that help create poverty in the first place.

poverty microfinance entrepreneurship debt interest critique Armando Barrientos Banco Compartamos burden David Roodman David Hulme Joseph Hanlon London School of Economics Center for Global Development

Type Reading Time Author Date Source
article 6 minutes JASON HICKEL 06-10-2015 https://www.theguardian.com/
Type Reading Time
article 6 minutes
Author Date
jason hickel 2018-07-10 00:00:00 UTC
Source
https://www.theguardian.com/
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Key Takeaways

  • Data-driven evidence supports the idea that microfinance and microlending, on average, are harmful to the impoverished loan recipients.
  • The author suggests that microlenders are the main beneficiaries of the microfinance industry; frequently interest rates are so high that they might be considered usury in other circumstances.
  • The practice of microlending is attractive because it appears to be a “win-win solution” to solve the problem of global poverty, but it fails to address the underlying causes.
  • The author suggests that, based on research evidence, giving money directly seems to be of greater benefit to the economically disadvantaged.

Summary

Jason Hickel, anthropologist and lecturer at the London School of Economics (LSE), writes and researches, according to his LSE biography, on finance and globalization with a recent focus on South Africa. In this article, he claims that while microfinance doesn’t work to help bring people out of poverty, the practice has taken hold and continues to attract followers. He points to research on the concept which shows that, even though there exists anecdotal evidence of success, the data shows little or no benefit to microlending in most cases; often poverty is worsened when borrowers are unable to repay their debt as frequently, money is borrowed to pay for consumption, not to finance production. Hickel suggests that even when the money is used for some entrepreneurial purpose, the community is often unable to sustain the new business. 

Lenders, Hickel says, are “the only consistent winners in the microfinance game.“ Giving examples of interest rates “up to 200% per annum” as figured by David Roodman for Banco Compartamos in his 2011 microfinance blog post on the Center for Global Development website. Despite these reports of excessive interest rates, microfinance seems to be a compelling solution to poverty for those who have money to lend.

Hickel suggests that microlending will only truly work when other, structural and political causes of poverty are solved. These causes include; unfavorable trade agreements, lack of state assistance for small businesses, “capital flight” from economically disadvantaged countries, and upholding workers’ rights. Giving money directly to people living in poverty has had some good success in improving health and economic indicators for the recipients; Hickel supports trying this approach as promoted in the 2010 book Just Give Money to the Poor: The Development Revolution from the Global South by David Hulme, Joseph Hanlon, and Armando Barrientos.


Notes



From https://www.theguardian.com/