Review of Why Doesn’t Microfinance Work? The Destructive Rise of Local Neoliberalism by Milford Bateman (Zed Books, 2010)
Microfinance is a poverty trap, argues Milford Bateman in this polemic. That is probably an exaggeration; but so too are the claims of microfinance enthusiasts.
‘In a poverty-free world,’ says Muhammad Yunus, ‘the only place you would be able to see poverty is in the museums.’ Touring schoolchildren, aghast at the misery of poverty, would ‘blame their forefathers for tolerating this inhuman condition, which existed for so long, for so many people’.
Yunus is the founder of Grameen Bank, a Bangladeshi organization that pioneered the concept of ‘microcredit’: tiny, low-interest loans to the poor. Conventional banks are wary of lending to the poorest people, who generally lack collateral or a credit history. But Yunus showed how microcredit could be made viable, organizing rural women into ‘solidarity circles’ to support repayment. He set up Grameen Bank in 1983; today, it has 8.8 million members, 97% of whom are women, with a loan repayment rate of 98%.
Many are impressed. For the last decade, microfinance (which also includes savings and insurance) has been the hottest thing in development economics. There are now an estimated 10,000 microfinance institutions around the world, with $10 billion of private sector investment. The World Bank alone has invested over $4.5 billion in the sector. The plaudits have rained down: in 2006, Yunus and Grameen Bank were awarded a Nobel Peace Prize.
The only problem, says economist Milford Bateman, is that microfinance doesn’t work. In Why Doesn’t Microfinance Work?, he takes on the grand claims of practitioners to argue that ‘microfinance is actually a “poverty trap”, an “anti-development policy” that ultimately destroys the potential for sustainable local economic and social development’. This is not a book that sits on the fence.
The original Grameen Bank model was abandoned in the 1990s, says Bateman. Instead, a ‘new wave’ of microfinance institutions developed along more commercial lines: big profits, big salaries and swish new offices. Interest rates soared. When Compartamos, a Mexican lender, held an initial public offering in 2007 it raised $450 million for existing shareholders – including senior managers, NGOs, and the World Bank – while its borrowers paid effective annual interest rates above 100%. Yunus himself fretted that a new class of moneylender was being created.
The commercial model was pushed by USAID, the American development agency, and by the Consultative Group to Assist the Poor (CGAP), a partnership of development organizations housed at the World Bank. The justification was a simple one: microfinance needed to be financially self-sustaining, both to attract capital and to eliminate inefficiencies. High interest rates were an unavoidable consequence of serving the poor. After all, nobody was forced to take a loan. If the poor were borrowing, that was because of the high rates of return they could earn from investments in their businesses.
The focus on business investment is key. The world’s poorest people, in this model, are imagined as an army of entrepreneurs, a billion Bill Gates just waiting for a loan to get started. In the words of Yunus, microfinance ‘opens up the door for limitless self-employment’. This is capitalist myth-making, says Bateman. Borrowers typically use loans to fund consumption, not income-generating activities. John Hatch, founder of FINCA (a microfinance network), estimates that 90% of microloans are used in this way.
Even where borrowing is used to fund a business, it may be a bad thing. So-called ‘micro-enterprises’ are just that: micro. They do not generate employment, nor are they especially profitable. New businesses just take customers from existing ones; demand is too weak to generate substantial revenues. Microfinance traps individuals in the precarious informal sector, and whole economies in a cycle of deindustrialization. Here, Bateman channels the work of Marxist geographer Mike Davis, who writes of the ‘informal survivalism’ of the urban poor in his apocalyptic Planet of Slums.
Bateman rightly castigates microfinance practitioners for their casual use of evidence (a detailed review by the UK Department for International Development, published a year after Bateman’s book, said that the microfinance phenomenon is built on ‘foundations of sand’). But he too lacks support for some of his more hyperbolic assertions. This is not entirely his fault. The debate on microfinance has run a long way ahead of empirical evidence.
Fortunately more studies have been done in the six years since Bateman was writing. Some of his claims are supported: microcredit seems to have only small impacts on jobs or incomes, for example. Others are rejected: a review of seven randomized controlled trials, by a team from the Massachusetts Institute of Technology, found little evidence that new businesses crowd out existing firms.
On his big claim, though, Bateman seems to be right: micro-enterprise is not a route out of poverty. For example, a study in Hyderabad, India, led by renowned academics Esther Duflo and Abhijit Banerjee, found that the typical business started in neighbourhoods with access to microfinance was less profitable, and less likely to have more than one employee, than businesses started elsewhere. Microfinance, the authors conclude, ‘does not lead to the miraculous social transformation some proponents have claimed’.
So much for Bateman’s technical arguments. But he also insists upon a political point: that microfinance has been ‘colonized by neoliberalism’ as a means to ensure that ‘the poor will in future present much less of a challenge to capitalism’. Unfortunately, this is the weaker part of the book. In a rushed chapter on the politics of microfinance, Bateman flings around strong accusations without much careful analysis. It feels like an attempt to add some revolutionary frisson, perhaps fearing that the technical stuff is too dull.
This is a shame. ‘Neoliberalism’, used properly, can give a name to apparently disconnected phenomena, helping to challenge concentrated power. There is surely interesting work to be done on the genealogy of microfinance, with its emphasis on the individual and on pulling yourself up by your bootstraps (reminiscent, in many ways, of the self-help doctrines of Victorian England). But this book is not it.
Inevitably, the polemic sometimes overtakes the analysis. Microfinance is probably not as bad as Bateman makes out. Even if it doesn’t lift people out of poverty, properly regulated lending may still give people more control over when and how they consume – and so what if they are only borrowing to buy a TV?
But if you want balance, don’t read this book. As the title suggests, Why Doesn’t Microfinance Work? is a polemic, and a compelling one at that. Bateman only tells one side of the story. But given all the noise on the other side, he may be forgiven for that.