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Is Microfinance Really Effective in Alleviating Poverty?

| Friday June 22nd, 2007 | 4 Comments

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A provocative article from the summer issue of the Stanford Social Innovation Review, titled “Microfinance Misses Its Mark,” is available for free on the SSRI website. The author, an associate professor at the University of Michigan’s Ross School of Business, states that, “…my analysis of the macroeconomic data suggests that although microcredit yields some noneconomic benefits, it does not significantly alleviate poverty.” The article’s subheading summarizes his conclusion:

Despite the hoopla over microfinance, it doesn’t cure poverty. But stable jobs do. If societies are serious about helping the poorest of the poor, they should stop investing in microfinance and start supporting large, labor-intensive industries. At the same time, governments must hold up their end of the deal, for market-based solutions will never be enough…

Comments have been posted there by readers raising some good questions and objections to the viewpoint expressed in the article. Worth checking out for those interested in microfinance and global development. And while you’re there, consider subscribing! The Stanford Social Innovation Review “is a quarterly journal that brings the best in research and practice-based knowledge to individuals and organizations working for social change around the world.” You may also be interested in their Social Innovations podcasts offered for free online at http://www.siconversations.org/.


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  • Naul

    Very interesting… but microfinance projects certainly dont *hurt* right? It seems silly to radically dismiss them. Perhaps large labor projects help more people more quickly, but surely encouraging leadership and entrepreneurship in a community is never a bad thing!

  • Stacey

    Karnani actually does contend that microloans can hurt the poorest borrowers. Because of the high interest rates sometimes charged for microloans, there is a chance that the recipient will not be able to earn a great enough return to cover the interest, and thus become poorer. He also observes that, “the vast majority are caught in subsistence activities. They usually have no specialized skills, and so must compete with all the other self-employed poor people in entry-level trades. Most have no paid staff, own few assets, and operate at too small a scale to achieve efficiencies, and so make very meager earnings. In other words, most microenterprises are small and many fail…” He does acknowledge, though, that “Microcredit is certainly a noble idea and a genuine innovation that has provided some positive impact to its clients, particularly to women’s noneconomic empowerment.”

    A woman who recently visited microlending clients in Peru posted a comment to the article. She observed that some of the women she met were able to grow thriving businesses and even export their goods. As a result they felt more confident and empowered to lobby for better services from the government that will help to lift up the whole community. It seems that microfinance can be a very useful tool. The author’s point, I believe, is that it will likely not the be one “silver bullet” that will eliminate poverty.

  • Jessica Schessler

    Quite the interesting read! Definitely something needs to be done about the poorest of the poor, but what? It’s on such a large scale, it’s hard to imagine the implications of something without some sort of negative consequence.
    But, speaking of helping with poverty, I’m working for a non-profit that is working with farmers in Central America to teach them sustainable farming techniques instead of using slash and burn. The outcome is incredible. They end up saving rainforests, plant more trees, and end up having left over crops to sell for income. It just seems to me like a great solution to many different problems, instead of just trying to fix one thing without looking at all of the others that are related.
    If you want to learn more about them…
    http://www.sustainableharvest.org
    Oh! And we’re also being featured on Stonyfield yogurt lids. Stonyfield is donating $40,000 to three non-profits based on voting, so if you want to help some forests out, you can vote here:
    http://www.stonyfield.com/specialOffers/BidWithYourLid/
    Plus, you can get a coupon for a free cup of yogurt online, and then use that to mail in and vote and get free prizes. :)
    Thanks!!

  • Jessica Schessler

    Oh my goodness! I’m so sorry that posted 3 times. It froze and then I accidentally clicked a link in an excel document, and it started loading a new page in this window. I thought my post hadn’t gone through, so I tried again.
    *my bad* ^^