Karen Gilmore is a rising senior at Notre Dame. From Reynoldsburg, Ohio, Karen is studying Sociology. On campus, she is part of the Student Coalition for Immigration Advocacy. After college, she hopes to pursue a career in human rights law.
Recently, many scholars and policymakers have been disappointed by the seemingly small impact that microfinance organizations are making in the developing world. Though only a few years have passed since it was regarded as a ‘silver bullet,’ with the potential to bring about the change that development workers seek, it has not adequately achieved the goals of raising income and consumption levels in poor communities. It also has failed to grow the small businesses of the loan recipients to a degree that overseers find satisfactory. Nonprofits that coordinate microlending – like the microfinance institution Kiva – come under fire as a result of this lack of efficacy. The failures of microfinance are discouraging for those looking for a market-based solution. However, it’s important to remember that poverty is born out of more than a simple lack of cash.
The main challenge that development programs have to contend with is the fact that interventions don’t occur in a vacuum. That is, any effort to develop is a modification to a complicated web where social interactions, political systems, cultural traditions, physical characteristics of environments and countless other factors are interdependent in ways often impossible to account for ahead of time. The unforeseen complications due to the links between these spheres account for the shortcomings of microfinance.
By taking an entirely economic approach, development agencies end up immediately undermining their own efforts due to the social and institutional factors that permeate economic issues. The issue at hand is not that microfinance is an ineffective way to alleviate poverty, but that the state of the social web keeps it from doing so. Instead of regarding microfinance as a ‘silver bullet’, a better approach might be to look at it as a part of a fluid toolkit of possible solutions for problems in poor communities.
When creditors put conditions on a loan that hamstring the debtor into creating a small business without the expertise to run one, the entrepreneur has very little chance to succeed. But what if more microlenders focused on making the loan conditions more conducive to small businesses’ success? Providing more than just funds to cover startup costs is essential to growing a successful economy. Additional steps start with working with governments to protect property rights, investing in schools, and building infrastructure like roads and marketplaces. If microfinance organizations want to offer a comprehensive solution to poverty, they must find ways to re-weave parts of the web of community to facilitate small business success, or partner with other organizations that can help them do so. In an environment where small businesses exist amidst the conditions they need to succeed, fewer debtors default on their loans, and the lower interest rates that in result increase the accessibility of lending and growth on the whole.
The theory that small loans to cover startup costs can by themselves create businesses that thrive has been disproved. This does not mean that microfinance will not work. The failures of microfinance and other development strategies come from the assumption that simple solutions exist for very complex problems. While I fear that an effort to find a new ‘silver bullet’ will waste more precious time and resources, I do not believe that we should give up on microfinance. The change we’re looking for will only come if we open our minds to a solution that is as multifaceted as the problem it addresses, and microfinance can certainly be part of that solution.
Do you think microfinance could be a part of the solution? Let Irish Impact know how you feel in the comments section below!