The Pros and Cons of Microfinance – A View From The Field (Part 1)
By Nick Hamilton, KF13 Haiti and Dominican Republic, KF14 Colombia
I have now come to the end of my second placement as a Kiva Fellow. I have seen microfinance at work in two organisations – Interactuar and Esperanza International – in three different countries; Colombia, Haiti, and the Dominican Republic. My 6-month stint has been an eye-opener. It’s been fun and interesting, challenging and frustrating.
I embarked on this journey knowing very little about microfinance. I had a notion of the supposed pros and cons of this exciting, largely unproven and sometimes controversial industry but was determined to approach my time in the field with an open mind.
I’ll start by setting some expectations. First, I am no microfinance expert. I have neither a degree nor a professional background in (micro)finance. I came into this raw. Second, my experience of microfinance in the field is neither broad nor long-lived. There are thousands of Microfinance Institutions (MFIs) operating in scores of countries across the world, offering a range of services in vastly conflicting environments. Six months is arguably far too short a time to obtain hard evidence of the long-term effects of microloans.
In my favour, though, I have interviewed hundreds of borrowers. True, interviews are not detailed studies. But, for the most part, I have faith in what I was told and evidence in what I saw. I also spent roughly half my time working in the MFIs’ offices. This gave me a good insight into the operational side of microfinance and allowed me to study the important question of MFI efficiency.
With these concessions in mind, I hope you find this article frank and candid. The article will be published in 3 parts. The first will concentrate on the pros of microfinance, the second on the cons, and the third on what I perceive to be the best conditions for successful microfinance.
In my first placement as a Kiva Fellow I was placed with Esperanza International, a Christian MFI with 9 branches across the Dominican Republic and 2 in Haiti. With visits of up to 100 borrowers a week (Esperanza International offers group loans, hence the high number) I soon got a feel for the pros and cons of their service.
A number of the cons were answered in my second placement with Interactuar. I saw that rigorous vetting of entrepreneurs and businesses and an exceptional training programme made a signicant difference. This should not be seen as a slight against Esperanza International. Instead, I simply think that Interactuar’s model should be the inspiration of MFIs the world over. It is the future. I also think that microfinance is most effective in the sort of environment in which Interactuar operates – poor communities within a relatively developed infrastructure – and not in the ‘third world’.
This article will centre on the pros and cons of what I witnessed during my time with Esperanza International. I have been so impressed by Interactuar that I will use its model to describe (in Part 3) where I think MFIs should be heading. I’ll also use Interactuar to discuss the optimum environment for effective microfinance.
So, let’s start with the pros. The fundamental benefit of a microloan is that it gives borrowers access to cash. Microfinance clients typically cannot open a commercial bank account. Even if they could it’s likely that the nearest ATM (if indeed ATMs readily exist – in Haiti they do not) would be miles away: many of the clients I visited lived in rural communities devoid of common amenities.
For many borrowers the only previous means of obtaining a loan was visiting the local loan shark. Here, interest rates could be as high as 300%. The inevitable consequence was crippling debt, often only paid off by borrowers’ first loans from an MFI. Microfinance critics often cite high interest rates as a major drawback. This may be true, but there’s no getting away from the fact that often the only other option is far more burdensome.
Microloans create choice. They allow people to switch profession and work in a field that interests them, or at least interests them more than their last job. The loans also allow them to develop a new skill. This does not necessarily lead to a higher income. However, it often means the difference between being content or being unhappy. Developing this concept further, I’ve also witnessed microloans giving people a lifeline when things go really wrong. One community I visited in the Dominican Republic had their entire village burned down by local thugs. Esperanza’s loans allowed them to rebuild, mount new businesses and start afresh.
You may have noticed that over 80% of entrepreneurs on kiva.org are women. There’s a reason for this, and herein lies one of the great benefits of microfinance. In the Dominican Republic and Haiti women are obliged to stay at home to look after their children. The children are often numerous, ranging greatly in age, meaning that women are generally homebound for most of their adult life. Microloans allow these women to run a business out of their home. The effect is two-fold. First, it gives them something new and interesting to do. Second, it provides the family with an additional source of income.
Even in highly under-developed areas – where I am skeptical of microfinance’s ability to effectively advance a community – microloans really can make a difference to certain individuals. An example I often cite is María Lucía, a Dominican lady I met who used just 3 loans to set up three different businesses, one run by her, one by her husband and one by her daughter.
While (in such under-developed areas) people like María Lucía are the exception, microfinance critics should not underestimate the difference made by the small changes afforded by a slight upturn in income. One Dominican lady I met proudly showed me the radio she bought with the profits from a corner shop set up and developed through a series of loans. The radio provided music where before it had not existed. Considering that this lady spends all day at home, that’s a massive change.
People should not be under the illusion that every microloan will haul someone out of poverty. It will not. However, what may seem like a trifling addition in a developed country can make all the difference to the world’s poor. Material possessions aside, imagine the difference between being unable and being able to pay for your child’s education. I have witnessed microloans making that difference.
I also admire the solidarity which resulted from the Grameen group model, which is employed by Esperanza International. Not only does it promote responsibility, organisation and accountability (members have to pledge for each other in the event that one person cannot make a payment) it also brings people together in a social setting. Again, for women who are typically tied to their house and children, group repayment meetings are a fun and stimulating occasion.
Finally, Esperanza International does not only provide microcredit but also a selection of wrap-around services, such as insurance, a savings account, healthcare and recreational activities. These are all very important services (healthcare especially) to which the borrower had no previous access. When critics cite high interest rates, they should be aware that these services are often included ‘in the price’.
To be continued in Part 2, which will published on Tuesday May 24th, 2011.
Want to see what it’s like to be a Kiva Fellow? Watch this video.