| MICROFINANCE – As the ECRC Brussels conference will feature a workshop focusing on microlending and its potential as a source for wider, better, more adapted and more affordable credit, a recent report by the CATO Institute could initiate the posting of other material defending the various views. |
Among the many articles praising the achievements of micro-finance to date, the following piece “A Second Look at Microfinance” provides some food for thought to help look at the sector from a more balanced perspective. Although microfinance is praised as one of the best methods for lifting the world's poor out of poverty, a new briefing paper from the Center for Global Liberty & Prosperity (Cato Institute) casts doubt on those claims, and argues that micro-loans may not foster as much economic development and entrepreneurship as previously thought. In the report, author Thomas Dichter, a veteran of international development work since 1964, uses an historical approach to critique the practice, demonstrating that it does not noticeably affect economic growth or successful business development.
A SECOND LOOK AT MICROFINANCE: THE SEQUENCE OF GROWTH AND CREDIT IN ECONOMIC HISTORY
by Thomas Dichter (February 15, 2007, Development Briefing Paper no. 1)
Thomas Dichter is the author of Despite Good Intentions: Why Development Assistance to the Third World Has Failed (Amherst: University of Massachusetts Press, 2003). He has worked in international development since 1964 in a variety of institutions including the World Bank, the United Nations Development Programme, the Peace Corps, and numerous nongovernmental organizations.
Microfinance—the provision of financial services such as small loans to the world’s poor—has grown in the past decade, extending billions of dollars in credit to tens of millions of people. A major aim of the microfinance movement is to provide funds for investment in microbusinesses, thus lifting people out of poverty and promoting economic growth.
Recent experience and the economic history of rich countries, however, suggest that those expectations are unrealistic. Most people, poor or otherwise, are not entrepreneurs, so there is little reason to think that mass credit would in general lead to viable business start-ups. Today as in the past, business start-ups in the advanced countries depend predominantly on savings and informal sources of credit; past forms of microcredit never played a role in small business development, and much microcredit is actually used for consumption rather than investment. In the history of today’s rich countries, moreover, economic growth occurred first, then came credit for the masses. That credit was and is predominantly for consumption rather than investment.
There is no reason to believe that the nature and sequence of growth and mass credit are fundamentally different for poor countries today than they were in the past. We should not expect microfinance to noticeably affect growth or successful business development.
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FT article reporting on the report
MICROCREDIT POTENTIAL ‘GROSSLY OVERESTIMATED’
(By Barney Jopson in London, Published: February 15 2007 21:54)
The potential for the world’s poor to be lifted out of poverty by microcredit from institutions such as the Nobel Prize-winning Grameen Bank is grossly overestimated, according to the Cato Institute.
In a paper published on Thursday, it says the mass provision of small loans will not boost economic or business growth significantly because most people are not entrepreneurs and loans tend to be spent on consumption.
The Cato Institute’s critical analysis was published in the week Germany said it would use its Group of Eight presidency to push for the creation of a high-profile new microcredit fund for African entrepreneurs.
Microcredit has enjoyed a surge of publicity and received millions of fresh dollars from international donors since Muhammad Yunus last year won the Nobel Peace Prize with Grameen Bank, the pioneering lender he founded in Bangladesh in 1976.
Thomas Dichter, a development expert and author of the Cato report, said: “In Bangladesh, 30 years after Yunus’s invention, poverty statistics are worse than they’ve ever been, so something else is the source of the problem and microcredit is not helping.
“Too many agencies, especially philanthropists, are jumping into this field making too many assumptions and are not looking at the different causes [of poverty] in different regions.”
Mr Yunus has called credit a human right and advocates say microcredit lets the poor work themselves out of poverty by investing in small businesses such as shops or crafts-making, or by acquiring assets.
But the paper from the Washington-based think-tank says: “The average poor person in the past [and today] is not an entrepreneur, and when he or she has access to credit it is largely for consumption or cashflow smoothing.
“The best financial services for poor or low-income people are savings-based services, which in their pure form do not need outside financial help, or for that matter the large micro-finance industry that has evolved,” the paper argues.
Some 500m people around the world use micro-finance – encompassing loans, savings, insurance and payment services – but the number of potential users is 3bn, according to estimates by CGAP, a think-tank based at the World Bank.
Less gloomy analysts of microcredit say that even if it does not generate broad-based economic growth, it can help to improve the lives of individuals and families, especially the children of loan recipients. |
| ID: |
39592 |
| Author(s): |
iff |
| Publication date: |
30/03/07 |
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Created: 02/04/07. Last changed: 02/04/07.
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