Flannery: Microfinance Just ?One Factor? in Economic Growth

Thursday, May 1, 2008

Matt Flannery, cofounder of Kiva.org, a website that partners with microfinance institutions to allow people to loan money to entrepreneurs in the developing world, discusses the microfinance industry and its growing popularity among large financial institutions and the development community. He says the practice of providing financial services to the poor is not necessarily going to increase a country’s economic growth rate. Despite the high costs associated with making small loans, large financial institutions have become more interested in microfinance in recent years. Flannery says the combination of large sums of capital and limited opportunities for investment has caused the industry to become “clogged.”

Since you started Kiva, microfinance has become quite a buzzword in the development community. People are making very big claims about what microfinance can do in terms of poverty reduction. What do you think microfinance can do and what are its limitations?

Microfinance is the practice of providing financial services to the poor, which is a great thing in and of itself. The poor deserve to have credit. Then again, I’ve failed to see a study that proves that there’s a linkage between macroeconomic growth of a country and the provision of financial services to the poor. So my conclusion at this point is that microfinance is weakly associated with macroeconomic growth. It’s just one factor; it’s not necessarily going to cause a country’s GDP [gross domestic product] to increase. It has to be accompanied by things like good governance, infrastructure, transparency in economics, and all sorts of other things that microfinance cannot in and of itself to bring about.

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Source: Council on Foreign Relations (link opens in a new window)