Microfinance and the Development
of the Less Developed World
By Rachel Luehm
What is Microfinance?

Microfinance Institutions have been created with
the belief that credit is a basic human right:
◦ Current system
 Requires collateral
 Neglects poor
 Thus seen as a right only for those who are already wealthy


Concept of (MFI) was perfected by Muhammad
Yunus (won the Nobel Prize) in order to answer
the issue of poverty in his country of Bangladesh
Small scale lending mostly to the poor in order to
make them more financially stable and pull people
out of poverty
Grameen Bank
Devised by Yunus in 1976
 Means “rural” or “village” in Bengli
 Its goal is to change the system from “low
income, low saving & low investment” to
“low income, injection of credit, investment,
more income, more savings, more
investment, more income”
 90% of share holders are borrows

◦ the rest is the government of Bangladesh

Found in Banker to the Poor by Yunus
What has the Grameen Done?
Has had nearly 9 million borrowers since
it began in 1976
 Has a 90% loan recovery rate
 Over $2.5 billion dollars in loans
 Created a sense of community between
borrowers


http://www.grameen-info.org/
Critiques of the current economic
system by Yunus:
Sees people as either laborers or
consumers but does not mention the
ability to be self-employed
 Free-Trade policies have create structures
of dependency

Critics

Milford Bateman (University of Juraj Dobrila
Pula, Croatia)
◦ Economies still can’t compete with 1st world
◦ It takes away from other aid

Michael Miller (Acton Institute)
◦ Dependence on borrowing
◦ From Abject poverty to poverty

Aneel Karnani (University of Michigan’s Ross
Business School)
◦ Should have more focus on job creation and
worker productivity
Milford Bateman Argument #1

Economies still can’t compete with first
world:
◦ “If poor African, Latin American and South-East
Asian countries seriously wanted to emulate the
rich Western economies or the newer East Asian
‘Tiger’ economies, and so also patiently build
relatively sophisticated and scaled-up industrial
and agricultural sectors from the ‘bottom up’, I
remember thinking, the growing emphasis on
microfinance as development policy was leading
them in completely the wrong direction.”
◦
http://0-site.ebrary.com.woodhous.aquinas.edu/lib/aquinasmi/docDetail.action?docID=10409307
Milford Bateman Critique #1

Ethnocentric assumption
◦ Who says these countries WANT to emulate
these countries?
Milford Bateman Argument #2

Microfinance is only diverting funds and
resources from other development
programs and poverty solutions
Milford Bateman Critique #2

What other development programs and
poverty solutions?
◦ Those that are in place such as foreign aid,
“free-markets,” and welfare do not seem to
be doing the job of ending, or even alleviating
poverty
Michael Miller Argument #1


“The Grameen Bank prides itself on its
role in empowering women, but perhaps
the most insidious effects are the possible
unintended consequences for women. In
any culture that prizes boy children more
than girls, the practical effect of
promoting fewer children will be the
abortion or abandonment of girls, who
are seen as financial burdens.”
http://www.acton.org/pub/commentary/2007/11/28/big-picture-microfinance
Michael Miller Critique #1
Why would they be seen as financial
burdens if women are being empowered
through microfinance and becoming the
bread-winners?
 There seems to be no substantial
evidence to back up Miller’s claim –are
the girl babies still being devalued despite
the growing value of women in these
societies?

Michael Miller Argument #2

Programs like the Grameen Bank and
other microfinance institutions don’t
solve poverty, they only take borrowers
from abject poverty to poverty
Michael Miller Critique #2

Whether this is true or not, I argue that just
that small step can make a big difference in
people’s lives
◦ More income, even if it is only alleviating poverty
and not eliminating it, is still crucial to the survival
of the people receiving the loans; they can buy
more food and send their children to school
 Being able to afford these two basic necessities is
instrumental to long-term poverty eradication
 If these families are able to provide their children with
education because of microfinance, and education is linked to
greater income, microfinance may be a tool to begin the
upward mobility of the poor, although the affects may not be
seen until much later.
Aneel Karnani Argument #1

More focus on job creation and worker productivity:

“To understand why creating jobs, not offering microcredit, is the
better solution to alleviating poverty, consider these two
alternative scenarios: (1) A microfinancier lends $200 to each of
500 women so that each can buy a sewing machine and set up her
own sewing microenterprise, or (2) a traditional financier lends
$100,000 to one savvy entrepreneur and helps her set up a
garment manufacturing business that employs 500 people. In the
first case, the women must make enough money to pay off their
usually high-interest loans while competing with each other in
exactly the same market niche. Meanwhile the garment
manufacturing business can exploit economies of scale and use
modern manufacturing processes and organizational techniques to
enrich not only its owners, but also its workers.” http://www.ssireview.org/articles/entry/microfinance_misses_its_m
ark
Aneel Karnani Critique #1 (a)

The women (and men) who are receiving the loans do not
receive it in order to solely “buy a sewing machine and set
up her own sewing microenterprise” rather those who are
receiving microfinance loans find a wide array of business
ventures.
◦ Therefore, they are most likely not “competing with each other
in exactly the same market niche” because one woman in the
group may sell milk, another tortillas, yet another clothing.
 It seems a little insulting to infer that all those receiving the loans would
be foolish enough to attempt entering the exact same market niche.
◦ Even if these microenterprises were competing with each other,
free-market economics says that competition is a good thing…
◦ And if they all wanted to go into the sewing business, the way
the microfinance system is set up in groups promotes the idea of
cooperation between the women so that they may join forces to
build the sewing enterprise
Aneel Karnani Critique #1 (b)

The system of lending to a “savvy entrepreneur and
helps her set up a garment manufacturing business
that employs 500 people” already exists –it’s called
capitalism.
◦ This system is already widely used and broken
 It has created dependent structures, job instability, and wages that
are below what is livable because there is very little regulation
and thus people more often than not behave according to their
own self interest
 Maquiladoras
 Sure, this model seems like a quick fix as it employs more people
initially, but employment does not mean that it is really helping
mobilize the poor.
◦ How many “savvy entrepreneurs” are there in the third
world? And what constitutes a savvy entrepreneur?
Aneel Karnani Argument #2

“Most people do not have the skills,
vision, creativity, and persistence to be
entrepreneurial. Even in developed
countries with high levels of education
and access to financial services, about 90
percent of the labor force is employees,
not entrepreneurs.”
Aneel Karnani Critique #2

To assume that the developed world is
not full of entrepreneurs because being an
entrepreneur requires a certain type of
person is faulty logic
◦ The developed world may have more laborers
because it has developed the social climate for
this type of economy
My own critiques of microfinance

Does not allow much mobilization of
capital
◦ The market for those participating in
microfinance may not be much bigger than
the village they live in and thus they depend
on their neighbors (who may also be poor) to
support their business.
◦ Where does capital come from other than
microfinance institutions and poor neighbors?
Conclusion

Microfinance has had an impact on the
world with regard to poverty alleviation
and may have other lasting impacts to
come
Bibliography

Akula, V. (2011). A Fistful of Rice. Boston, MA: Harvard Business Review.

Batesman, M. (2010). Why Doesn't Microfinance Work?. Retrieved May 7, 2012, from
http://0site.ebrary.com.woodhous.aquinas.edu/lib/aquinasmi/docDetail.action?docID=10 409307

Batesman, M., & Chang, H. (n.d.). The Microfinance Illusion. Retrieved May 7, 2012,
http://www.econ.cam.ac.uk/faculty/chang/pubs/Microfinance.pdf

Hancock, G. (1989). Lords of Poverty. New York, NY: The Atlantic Monthly Press.

Karnani, A. (2007, August). Microfinance Misses Its Mark. In Stanford Social Innovations
Retrieved May 7, 2012, from
http://www.ssireview.org/articles/entry/microfinance_misses_its_mark

Miller, M. M. (2007, November 28). The Big Picture on Microfinance. In Action Institute.
Retrieved
May 7, 2012, from
http://www.acton.org/pub/commentary/2007/11/28/big-picture-microfinance

Morduch, J., & Haley, B. (2002, June 28). Analysis of Effects of Microfinance on Poverty
In NYUWagner Working Papers Series. Retrieved May 7, 2012, from
http://www.microfinancegateway.org/gm/document1.9.29382/Analysis%20of%20the%20Effects.pdf

Pitt, M. M., & Khandker, S. R. (n.d.). The Impact of group-based credit programs on poor
households
in Bangledesh: Does gender of participants matter?. Retrieved May
7, 2012, from
http://www.pstc.brown.edu/~mp/papers/pitt-khandker-jpe.pdf

Reinert, E. S. (2007). How Rich Countries Got Rich and Why Poor Countries Stay Poor. New
Public Affairs.

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from
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Reduction.
York, NY: