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Microfinance: How Well Does It Actually Work?

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Recently, I read an article that stated hopes for African development lie with its women. A couple of nights later, I caught a small snippet on BBC News 24 about women’s microfinance in South America. And yesterday, by happy coincidence, Tanglad had an article at Racialicious that posited that microfinance (or microcredit, as it is also known) actually causes more problems than it solves. Well, does it?

Tanglad’s problem with microfinance appears to stem from the “loan circles” whereby women who have taken out loans are organised into groups and police each other to ensure repayment. The culture of shame means that there is immense societal pressure to repay the loans and thre are reports of women cutting back on household expenditure or being forced by other circle memebers to sell personal goods to make repayments. Obviously, pushing people into greater poverty is not one of the aims of microfinance, and such outcomes ought to be regarded as failures.

The BBC only keeps its broadcasts available for seven days after transmission, but in my search for the original audio file, I did come across an article from last year about women succeeding with microfinance, which recounted how the founder of Grameen Bank, Muhammad Yunus, was awarded the Nobel Peace Prize in 2006 precisely for his efforts in spreading microfinance in Bangladesh. The article is broadly favourable and doesn’t mention any difficulties people may have making repayments on their loans.

One thing I did notice, however, both in Tanglad’s blog and in the Guardian article, was that the focus was on women. Is there no microfinance for men? If you’ve been following our Tweets, you’ll have seen that we caught wind of another Guardian article which addresses this very point. But this isn’t about the gender wars; they can wait for another day.

Personally, I believe that microfinance can be a force for good, provided it is managed properly. In addition to ensuring that people will be able to pay back their loans, it’s also essential that they are equipped with the basic business skills they will need to thrive. There is no point loaning money to someone who is innumerate and has no long-term plan for how they are growing their enterprise.

What I would really love to see, however is midi-finance: loans that are larger than microfinance, but not quite on the scale of having to seek venture capital. If we’re going to become a knowledge economy and technology hub, there have to be numerous startups. Not all of us can get a bank loan, not all of us will be running businesses big enough to support silent partners or investors. In such circumstances, it’s important that there are alternative sources of funding new businesses. There doesn’t seem to be anything that fits the bill at the moment.

[Image by Jungle/Arctic]

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