Microfinance: behind the mythology

Village savings and loan scheme in Sierra Leone. Photo by CARE

In response to DiA writer Nate Barker’s arguments against microfinance, Emma Howard defends the practice and claims it is often misrepresented. Emma is a Communications Assistant at Lend With Care, a microloans site run by CARE International.

Once lauded as one of development’s great success stories, it now seems to some that microfinance has dramatically and all too predictably fallen from grace. But the grandiose rhetoric, good and bad, that has engulfed microfinance is not always useful and can often overshadow the work that goes on.

Such polemical arguments turn what is a highly complex issue into either a silver bullet or a phantom menace. Microfinance is neither. Yet this not to say that as a tool for poverty alleviation it is merely mediocre or indeed ‘ineffective at best’ as Nate Barker describes.

Quite simply, microfinance is what we make of it: ‘we’ being the borrowers, lenders, microfinance institutions and those that fund and support them. The debate that rages on the endemic merits or otherwise of microfinance often seems to forget how comprehensively the term is used. When critics speak of ‘microfinance’ they are speaking of tiny village savings and loan schemes in West Africa and of a multi-million dollar commercial bank in Mexico charging interest rates over 100%.

But offered to the right people at the right time using the right microfinance partner, a microloan can trigger a slow but sure transformation in the life of an individual.

Lendwithcare.org is not-for-profit and run by experts at one of the world’s most experienced development charities – CARE International UK. Lenders do not make interest on the money they loan and it is they who cover the risk of default. Incidentally, this risk is minimal; no borrower has yet defaulted. This allows us to offer the microfinance institutions we partner access to a rare commodity: credit that is both interest-free and risk-free. Henceforth, the MFI has no need to exert pressure upon the borrower to repay; and if they do default, the debt is rescheduled or cancelled and is in no circumstances transferred to the family. This keeps poverty alleviation but also our relationship with the MFI at the heart of the process.

No two microfinance institutions are the same – which is why Lendwithcare  takes great care to choose the appropriate MFI to partner with and to maintain a strong long-term relationship with them. Due diligence is done: all must comply with CARE’s Code of Conduct in Microfinance. Their interest rates must remain reasonable and fair within the local context; in fact the funding provided by lendwithcare sometimes enables them to lower their rates.

Ines, an entrepreneur from Ecuador. Photo by CARE

Debate is of course essential: there is clearly a vital need for responsibility and accountability in the sector; brought forth by academic research and media coverage. It should not be ignored or dismissed, but engaged with in the light of the many stories not deemed controversial enough to be told.

David Roodman, one of the key critics in microfinance, procured space in the Washington Post recently with the headline ‘Microcredit doesn’t end poverty despite all the hype’. This is not as controversial as it may sound – so long as its scope is qualified, his statement is correct. Microfinance alone will not provide us with a cure for global poverty. Having the capital to manage a market stall is no use if the roads are not in place to transport your goods and neither does earning an elevated income automatically grant you access to clean water.  This is why the diversity of the work that CARE does is so crucial – be that in education, healthcare, conflict resolution or disaster relief.

Just one loan will not save any lives. Diligence, support and training on behalf of the entrepreneur, provider and MFI are also necessary to the process. Many MFIs provide basic training in bookkeeping and marketing, but some of those we partner with go much further: Ecuadorian MFI FACES educate their borrowers on many subjects from sexual health to domestic violence and Zene za Zene in Bosnia & Herzegovina provides practical training such as in weaving or vegetable production and educational classes in business, leadership and legal rights.

As important as the debate is, the evidence that microfinance can make a mark is to be found in the field. As many of the entrepreneurs we have met testify, the loan is a crucial contributing factor to the growth of their business; and the business is what places them on a trajectory moving out of a life of poverty towards sustainable independence. When microfinance is implemented effectively, its success should not be signified by swathes of rhetoric, but by the small yet significant changes in the lives of individuals – be that a business able to recruit another employee, a child equipped to go to school or a wife more able to support her sick husband. On a global scale, these successes are micro-successes, but in the life of an individual, they can be transformative.

To read more stories of microfinance, visit the lendwithcare blog: http://lendwithcare.blogspot.com/

Emma Howard is a communications assistant at lendwithcare

Follow Emma & lendwithcare on twitter at twitter.com/EmmaEHoward & twitter.com/lendwithcare

The views expressed in this article are those of the author and do not necessarily represent the views of Development in Action.


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  1. This makes a case for why lendwithcare.org one of few scrupulous organisations within the microfinance but it fails to tackle the greater problems with the design of the industry. For example, credit provided is usually used for consumption spending regardless of any business idea set forth, and when a business is actually created it usually fails leaving the client in a worse position than they were to begin with and often the clients children are pulled from school in lieu of paid labour to aid the failing business. These issues need to be addressed as is Roodman’s case that was referred to.

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