Microfinance misses its mark

-it has been suggested that microcredit really help the poor (wealthy philanthropists, banks, and online donors are fascinated with microcredit, even UN declared 2005 as the International Year of Microcredit and said that it will grow thriving businesses, and in turn provide for their families leading to a strong and flourishing local economy).

-but an alalysis of microcredit suggests that althought microcredit yields some noneconomic benefits, it does not significantly allieviate poverty

-sometime it even makes life at the bottom of the pyramid worse.
-contrary to all the microcredit enthusiasts, the way to end poverty is to create more jobs and increase worker productivity.

-consider these 2 options: (1) a microfinancer 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 100K to one savvy entrepreneur and helps her set up a garment manufacturing business that employs 500 people. In the first case, the women not only have to repay the loan with interest, but she is also competing with others for the same market niche. In the second case, the business can exploit economies of scale and use modern manufacturing processes and organizational techniques to enrich not only its owners but also its workers.

-but what is microfinace?
microfinance addresses a serious flaw of the formal banking system: poor households can't get capital from traditional banks b/c they don't have collateral to secure loans and traditional banks do not want to take on risks and costs of making small, uncollateralize loans. W/o this capital, poor ppl cannot rise above subsistence.
-microfinanciers use innovative contractual practices and organizational forms to reduce the risks and costs of making loans (e.g. lending to groups, offering education on top of the loan, training, health care and other social services).
-most of these above mentioned organizations are NGOs
-however, commercials banks only offer financial loans
-also most microfiancing organizations target women because they are most likely to invest in healthcare, security and welfare of the family.
-major selling point with microfinance is empowerment of women. Microcredit is said to increase women's bargaining power within the home, centrality to the community, awareness of social and political issues and mobility. It also increases self-confidence and self-worth.
-BUT!!!!!! microfinance alone cannot overcome ingrained patriarchal systems of control. In spite of having access to credit, some female microcredit clients do not have control over loans contracted or the income generated by the microenterprises.

-So what's wrong with microcredit?
-well many comprehensive studies found that microloans are more beneficial to borrowers living above poverty line than to borrowers living below poverty line. Why???? b/c those with more income are willing to take the risks, such as investing in new technology, that most likely will increase income flows. Poor borrowers on the other hand tend to take out conservative loans that protect their subsistence and rarely invest in new technology, fixed capital, or the hiring of labor.
-Some microcredit investors (i.e. banks) charge high interest loans which end up doing more harm than good (reduces cash flow to the household). Some argue that these interest rates are still below the ones charged by informal moneylenderes but if poor clients cannot earn a greater return on their investment than the interest they must pay, they will become poorer as a result of microcredit not wealthier.
-Another problem with microcredit is the businesses it is intended to fund. The microcredit business is targeted to visionaries (entrepreneurs) who convert a new idea into a business. However most folks living in poverty are caught in subsistence living (hell even in first world countries, most folks are employees not entrepreneurs). They usually have no specialized skills and end up competing with other self-employed poor people in entry level trade. Most have no paid staff, own few assets,and hence make a very meager earnings. For this reason, many microenterprizes often fail.

-So what's the solution???? Jobs, not microcredit
-microcredit is certainly an innovative field and can and does play some positive role in clients' lives. But is does not help eradicate poverty.
-China, Vietnam, and South Korea have significantly reduced poverty in recent years without much help from microcredit. On the other hand, Bangladesh, Bolivia, and Indonesia haven't seen as successful in reducing poverty despite an influx of microcredit.

Why the hell not????
-well most microcredit clients are not encroentreoreurs by choice. They would gladly take a factory job at a reasonable wage if it were available (this is the best way to take ppl out of poverty). Employment is linked with economic growth and poverty reduction. And why did I mention productivity??? B/c increased productivity leads to higher wages, which in turn lead to employees earning enough to rise above poverty. This is why creating jobs is not enough. Regions must also increase labor productivity through use of technology, management techniques, specialization,etc.

What is the role of government?
-poverty alleviation cannot be defined only in economic needs, it must also encompass social ones (e.g. public safety, education, public health, infrastructure nurture, etc). These needs increase productivity and employability of the poor and thus their income and well-being. Governments must accept the responsibility of all these needs (there seems to be a boom in the private sector which undermines the public sector).

-Given the missing public sector, many believe that markets would do a much better job at providing these non-economic needs. That is one of the reasons why microcredit is so popular... it's a market-based approach to eliminate poverty. But markets aren't enough. We need the government to step up as well.