Is Microfinance Just Another Unpleasant Option for the Poor?

Microfinance wins on price in the context of the Bangladeshi, Indian and South African diary households.  It seems the context in the Philippines and Uganda is at least as favorable for microfinance.  To build our confidence in this conclusion, I really ought to find more studies of moneylenders and their borrowers in markets also served by microfinanciers.  For now, let’s assume that what I’ve found so far is truly representative of the global picture.

If so, how do we account for this increasingly well-known fact (seen in all three studies I’ve presented to you) that when microfinance institutions enter the scene, they don’t drive out the moneylenders, and they may even provide new lending opportunities for the banks (to the microfinanciers for starters, then to the better-off microfinance clients).  The poor have more options to choose from.

They often choose to take advantage of all the available opportunities – in surprisingly sophisticated ways.  This is the message of Portfolios of the Poor.  It resonates with the experience of Freedom from Hunger.  It is also the nub of David Roodman’s (Due Diligence) extension of Amartya Sen’s Development as Freedom argument to say that microfinance can contribute to development defined as freedom, because it increases options for the poor.

Yes, but what ways in particular does microfinance provide options unavailable from informal lenders and the formal bankers?

The typical microfinance offer is more structured, rule-bound and reliable than what moneylenders typically can offer.  The microfinance offer is intermediate between moneylenders and banks in terms of price, loan amount, convenience, and flexibility. 

These differences added to the price advantage must be powerful benefits to attract a client who also has access to relatives/friends, moneylenders and banks – especially in light of the disadvantages.

Microfinance loans typically are plain vanilla, one-size-fits-all to accommodate low-margin, high-volume operations aiming at more-than-full cost recovery.  Repayment is on a rigidly fixed and frequent schedule geared to the provider’s conviction regarding how the loans typically are used by the poor, with little to no opportunity for customization to the individual borrower’s needs.  Moreover, the typical microfinance borrower has been required to enter into joint and several liability with other borrowers – mutual guarantee of repayment in full, powered by peer pressure.

The disincentives of dealing with the moneylender or the banker must be powerful indeed for a poor person to accept the microfinance offer with all the above disadvantages.  The poor have more options when microfinance institutions are available, but it seems they still have only unpleasant choices.

Many critics of microfinance would have us believe so.  Are they right in their dreary view of the “benefits” of microfinance?