NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Thursday, September 17, 2015

Earlier this summer I wrote a response to the constant attacks from microfinance haters that are trending this year. It was a nice surprise to see that a piece referencing Taylor Swift could be taken seriously!

Obviously the hardcore haters are a small minority. More frequently I encounter the more moderate “post-microfinancists”: people who staunchly supported microfinance in the 1980s or 1990s but now consider it obsolete. Many of us left in the market find ourselves constantly having to argue that we’re not being left behind, focusing on the new innovations we’re trying instead of the model that accounts for most of our portfolio.

It wasn’t always this way. At one point microfinance was seen as almost a silver bullet of poverty elimination. Its popularity probably peaked around 2006 when Mohammad Yunus and Grameen Bank won the Nobel Peace Prize. His work in Bangladesh, on which BRAC drew substantially in its development of a microfinance model, inspiredwidespread adoption globally of a group-based model accessing savings facilities and small loans with a repayment of small, consistent installments on a weekly basis.

But in the age of mobile money, many question whether this type of standard loan, with proper regulation and safeguards, continues to provide a valuable financial service to poor people. While there is scope for improvement, many of the most common critiques from the post-microfinancists have flawed assumptions.

Here are three that I hope we can reexamine:

“Microfinance is too rigid to meet the needs of the poor.”

One of the factors of the sector’s success to date is the traditional simplicity of the product design: for example, a one-year loan with weekly installments of equal amounts. It’s a product that clients can understand and plan around. There’s virtually no fine print “terms and conditions.” It’s the same year after year. Regular, frequent repayments also create a sense of discipline and typically minimize the burden on a family’s consumption.