Daw Su Su is ultra-poor, in that she earns less than $1.25 a day. As the NGO Seep Network points out, the ultra-poor “have very limited physical, human, and financial assets and social networks to draw on to mobilize and leverage household and community resources or external assistance. Ultra poor households face many deficits and therefore require not only adapted financial services and market development programs, but also improved access to social safety nets, human services, and specific asset building pathways.”
Two years ago, Daw Su Su - not her real name -gave birth to her third child. Due to complications, she had to have an emergency caesarian-section. At the time, she was in the process of applying for her first microfinance loan of 200,000k ($168). However, the loan did not arrive in time, and she was forced to pay the 150,000k($126) hospital bills by using a loan shark, who charged her 20 percent per month. When she did receive her microfinance loan, almost all of it went to paying back that debt. The second loan she received - a year later - was also spent immediately. With monsoon season approaching, and no roof over her head, she used the majority of the money for necessary home improvements.
The complexities of poverty
The problem with microfinance as a tool of fighting poverty is that it vastly underestimates how complex and convoluted an issue poverty is. The underlying idea behind using microfinance as an antipoverty tool is that what keeps poor people in poverty is a lack of credit. Give them a loan, they’ll invest it optimally, and grow their businesses to a size where they get themselves out of poverty. Easy, or so it is portrayed.
The biggest flaw of this conception of the poor is that it assumes all poor people are amazing entrepreneurs. The reality is that these people, like Daw Su Su are very poor, and live extremely hard lives where much of their time is spent doing the grueling things necessary to their own survival, such as walking five miles to get clean water and so forth. This is not exactly an environment conducive to enterprise.
While it is certainly true that some individuals are amazing entrepreneurs, and do use microfinance as a tool to grow their business and pull themselves out of poverty – it’s just that these people are rare. A groundbreaking MIT study on the effectiveness of microfinance found that “business profit does not increase for the vast majority of businesses, although there are significant increases in the upper tail of profitability”, and concluded that “Microcredit therefore may not be the ‘miracle’ that it is sometimes claimed to be.”
Even if the poor people who received loans were all amazing entrepreneurs, in a given village industries are often very clusteredand also isolated from outside markets. Therefore, microfinance is hampered by a lack of demand. Take a village where most villagers grow tomatoes. Microfinance allowing the doubling of tomato production is unsustainable unless the demand for tomatoes also doubles. Further interventions are needed to diversify the industries that microfinance effects, and to help foster markets within which businesses can actually grow.
This solution to poverty is also very narrow minded in that it ascribes too much importance to lack of credit over other, more structural causes of poverty, such as the vast debt of developing countries that keeps poor countries poor, or the weakness of the state in developing countries, which often suffer from issues such as poor tax collection corruption, and are therefore unable to provide basic goods such as roads or healthcare or education, or even the psychological effects that abject poverty has. As Sir Fazle Abed, founder of the Bangladeshi aid group BRAC, explains, “poverty is not just poverty of money or income - we also see a poverty of self-esteem, hope, opportunity and freedom. People trapped in a cycle of destitution often don’t realize their lives can be changed for the better through their own activities.” To expect an individual loan to be able to overcome these factors is overly idealistic – it requires a stronger intervention.
Daw Su Su’s case
Looking back at the case of Daw Su Su, it clear thatthis is not how microfinance is supposed to work. This woman is still very much in poverty. Microfinance has done nothing for her financial situation to alleviate her poverty. She has gained no skills, her business has not expanded, and she still lives an extremely hard life. However, consider the opportunity cost, the alternative, if the two loans were not available. Roofs and C-sections are not exactly impulse buys. Without her microfinance loan, she would have had no choice but to spend her money on them anyway – however, she would have been forced to visit loan sharks, and been burdened by a debt that would be growing at an alarming pace.
Microfinance therefore clearly has a vital role. Ultimately though, it plays a necessary rather than sufficient role in reducing poverty. Poverty is a deeply complex problem, and therefore requires an equally complex solution. Just giving credit isn’t enough – as studies have shown. What is required is a multifaceted approach. Microfinance can only work as a solution to poverty when it is accompanied by other interventions, such as, for example teaching people how best to use their loan money.
The ‘Graduation Model’
One of the most successful examples of this approach is the Graduation Model, which incorporates a productive asset grant, training and support, life skills coaching, temporary cash consumption support, and typically access to savings accounts and health information or service. The coverage of results speaks for itself – as quoted in the New York Times: “…much of the news about global poverty is depressing, but this [the graduation model] is fabulous: a large-scale experiment showing, with rigorous evidence, what works to lift people out of the most extreme poverty.” The Economist calls the results “promising” and that the intervention makes the “blight of abject poverty looks a little less intractable”. A lecture given in December last year at the London School of Economics is also worth watching.
Even without these additional interventions, microfinance programmes provide a good starting point. Firstly, in many developing countries such as Myanmar, there is a deep mistrust of financial institutions (with some reason). Incorporating these people into microfinance programmes goes a long way to rebuilding this trust, and laying the foundations for further interventions, which are better suited to dealing with poverty. Connected to this point is the fact that a large microfinance network provides aninstitutional infrastructure network through which research and further interventions can be easily rolled out. Secondly, the majority of microfinance loans are given to women, empowering thousands. Thirdly, without microfinance, an individual often suffers from very uneven income – they may earn no money in one month, and lots of money the month after. The problem with this is - as the case of DawSu Su showed - if they are suddenly forced to pay a large upfront cost such as a doctor’s bill, either they are unable to, or they have to visit a loan shark who will charge extortionate rates. Microfinance allows for an amount of cash to function as a buffer, and to smooth income so that such shocks have less of an impact on their already precarious lives.
By itself, microfinance is not going to solve poverty. While it does have a vital role to play in fighting poverty – and, indeed, in many ways it is doing a great job - more appreciation needs to be given to how complex an issueit is. Ultimately poverty is not just a financial problem - it also has structural, political and psychological elements, and only once this is understood can the problem begin to be solved. Until then, microfinance is making many people’s lives immeasurably more livable – or at the least helping to pay emergency bills, as Daw Su Su understands so well.
The author previously worked with a micro financial institution or MFI in Myanmar.