Microloan Crisis Prompts Questions

Giving small loans to the working poor as an answer to poverty has had huge appeal to people of all political persuasions, and it proved especially popular in Seattle, where at least 20 different organizations support microlending.

Now some are saying that its merits have been oversold.

“Microfinance got romanticized,” says Rick Beckett, CEO of Global Partnerships, a Seattle nonprofit that funds microloans and other services for the poor in Latin America. “We have to own the fact that we fell in love with it.”

“That story, as cool as it is, is just not true,” he says. “A $100 loan does not change the world.”

Beckett and other experts in microfinance met here last week to take stock of a crisis that is shaking the worldwide microlending movement to its core. The discussion was hosted by the group Global Washington.

After growing at a red-hot pace over the last decade, institutions in India that provide credit to poor borrowers now find themselves facing new regulations that have brought the industry to a halt and encouraged widespread default.

Nowhere was the growth as fast as in the Indian state of Andhra Pradesh, where profit-driven lenders seeking higher returns competed for borrowers, who often juggled multiple loans.

One Indian company funded in part by Seattle backers, SKS Microfinance, went public last summer and generated millions for its wealthy investors.

Making so much money on the poor became politically difficult, says David Roodman, a senior fellow at the Center for Global Development in Washington, D.C., who participated in the discussion.

The core problem was fast growth, Roodman says. “It sounded a lot like the mortgage crisis here.”

Microcredit also has taken off in other parts of the world, with varying degrees of risk. Roodman suggests establishing a credit bureau to collect and share information on the financial obligations of microcreditors would help create a culture of restraint. And growth financed by savings deposits rather than outside investors provides much more stability.

While microcredit does give people more control over their finances, there’s no proof that it has alleviated poverty, he says. In the U.S. what reduced poverty most was industrialization.

But microlenders’ networks of village credit provide one of the very few ways to reach hundreds of millions of poor people, Beckett argues. They can serve as distribution channels for other things, such as health education or technical assistance for farming. One of the organizations his group funds is Pro Mujer, which combines loans with low-cost health services for women.

Peter Bladin, former vice president of the Washington, D.C.-based Grameen Foundation, says that when small loans help parents improve their incomes, the next generations tend to be better off. He calls microfinance “one of the best tools for development ever devised.”

Roodman, eager to dispel what he called another misconception about the industry, says microfinance can’t claim the only reason it targets women is to empower them.

Another big reason is that women “were found to be more reliable when it came to repayment,” he says, which made the work of bankers easier. “They didn’t argue as much as men.”

It’s uncertain how the crisis in India will be resolved, but with the field of microfinance in flux, supporters will have to strive for measurable results and clear social benefits, participants concluded.

Chris Wolff, a senior director at ACCION International, says one lesson is to just listen to clients.

Loans may not be “the only thing they want, need or say they benefit from,” he says. “Let’s get better at what they really need and what their lives demand of them.”

Microloan Crisis Prompts Questions
The Seattle Times |  Kristi Heim | May 14, 2011