Microfinance again

Two of my recent posts, “Joas” and “The Babati Rotarian’s Plan,” are linked by virtue of the decision last year by Joas Kahembe, Karimu’s indispensable man in Tanzania, to join the Babati Rotary Club. Joas joined because Marianne and I believed we had made a fruitful connection to the Santa Cruz Rotarians (which in the end amounted to nothing). So he came along on the visit to Bacho by the Babati Rotary Club’s leadership on the afternoon when I heard about the volleyball factory that one of the Babati Rotarians wants to see built between Dareda and Bacho.

The ambition of the Rotarian’s plan for economic development of the two villages far surpasses Karimu’s modest flirtation with microfinance. When I send money to Joas for school construction in Bacho or Dareda, I wire to his account with Tanzania’s National Microfinance Bank. It maintains a branch in Babati, where Joas lives, but neither of the much smaller and poorer communities of Bacho and Dareda has a bank and the villagers cannot easily travel to Babati. Whether or not a volleyball factory would benefit them, Karimu lacks the resources to build a factory, anyway. Thus we need to look at the possibility we could help Bacho and Dareda by introducing microfinance lending there.

The excitement over microfinance climaxed four years ago in the award of the Nobel Peace Prize to its originator, Muhammad Yunus. Yet microfinance has many critics to whom Karimu must pay attention. My May 22 post “Got Miracles?” summarized the lukewarm results of MIT development economist Esther Duflo’s study of microfinance in Hyderabad, India. On the basis of her data, Duflo counsels against expecting microfinance to work miracles, yet she never claims microfinance lending is useless–unlike Milford Bateman, to whose acid critique of microfinance I now turn. I’ll say in advance that, although Bateman’s research deserves careful consideration, ultimately his criticisms strike me as overstated and as suggesting an imperative not for abandonment of microfinance, but for correction and caution.

Bateman has produced an extended abstract of his research whose title, as well as his opening salvo against microfinance, both hint at overreliance on what philosophers call the “genetic fallacy”: interpreting a perceived defect in the origin of a claim as discrediting the claim itself. Bateman’s abstract–“Is Microfinance-Induced Informal Sector Activity A Workable Substitute for Basic State Welfare Provision?”–is accessible online at http://www.ijf.hr/Conf2008/program%20schedule/Bateman.pdf. He begins by pointing out that “ascendancy of neoliberalism in the 1980s saw the rise of significant political support everywhere for the phasing out of basic welfare state income support provision” and its replacement, notably in Thatcher’s Great Britain and Reagan’s United States, by incentives to independent entrepreneurship.

No doubt the surge of neoliberal “market absolutism” since the early 1980s, the childhood of microfinance, has fed its growing popularity. But even if it had originated in wholesale commitment to neoliberal assumptions by Muhammad Yunus himself, microfinance could still have value in the absence of those assumptions. Instead of asking who invented microfinance and why, or who promoted it and why, we should ask what microfinance accomplishes. We can grant that anyone determined to shrink or abolish state efforts to reduce poverty will naturally embrace microfinance. It does not follow, though, that microfinance can operate only to the exclusion of government attempts at poverty reduction; in fact I believe that, ideally, such government efforts and microfinance lending would complement one another. We must not overreact to the recent excessive glorification of entrepreneurship to the detriment of basic state welfare provision by denying all worth to entrepreneurship. Entrepreneurship and basic state welfare provision both make crucial contributions to those economies that do the best job of marrying wealth creation to just wealth distribution–economies whose ranks we should work to populate with African nations.

Yet desire for basic state welfare provision in a country like Tanzania has little or no relevance to the work of a small nonprofit such as Karimu, which cannot possibly muscle the Tanzanian government into doing its job adequately. Exactly like banks and deep-pocket investors, government barely makes its presence felt in small, marooned villages such as Bacho and Dareda. Thus Karimu must consider introducing microfinance to Bacho and Dareda because doing so lies within our power.

Despite exaggerating the affinity of microfinance for neoliberal withering away of the state, however, Bateman and like-minded analysts give good reason for caution in handing out microloans. At least in theory, microfinance could produce no net economic gain for a community since every microfinance success story might entail the failure of a competitor. Bateman notes that a handful of studies published between 2003 and 2007 furnish empirical support for this theory and “point out that almost all developing countries are already effectively awash with poverty-push microenterprises,” leading to reduction in the “margins/wages/profits of all incumbents, thus generally increasing the level of poverty, self-exploitation, social violence and so on.” In the same vein, Duncan Green, longtime Head of Research for Oxfam GB and author of From Poverty to Power, observed last year that a place like La Paz, Bolivia, with “one street seller for every 3 families in the city, does not need more vendors” (http://www.oxfamblogs.org/fp2p/?p=623).

Green also warns that where poor communities become awash in microlenders, each lender’s slice of the client pie will shrink so that the profit-driven lender must raise interest rates–thus the “MF [microfinance] providers and the loan sharks start to look indistinguishable.” The risk of microfinance, Green continues, lies in “encouraging a debt rather than a savings culture.” Though many Americans and residents of other wealthy countries have recently learned the hard way about the hazards of debt culture, the studies cited by Bateman confirm the reasonable expectation that debt culture would pose far higher hazards in the developing world. As Bateman writes, “many microenterprise new entrants simply collapse after a short period of operation, taking their hapless owners into even deeper depths of poverty and despair.”

Bateman and Green are serious men and I take seriously their concerns about microfinance. However, I derive from them lessons about how Karimu can do microlending right, not the conclusion that we must eschew the practice altogether. First, Karimu must seek minimal profit, if any, from microlending. Second, Karimu must certainly take care not to saturate the villages we serve with microloans. Yet we have slim chance of doing this: as far as I know, Bacho features precisely one vendor–a tiny kiosk selling little more than soda, beer, and cigarettes–and, relative to its larger population, Dareda doesn’t seem to have an awful lot more going on. I’m convinced that, under those circumstances, a measured program of microlending by Karimu would do Bacho and Dareda no harm and some good.–Don Stoll

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About Don Stoll

Don and his wife, Marianne Kent-Stoll, are co-founders of the Karimu International Help Foundation. They established Karimu in 2008 at the request of the people of Dareda Kati Village, in the Manyara Region of northeastern Tanzania. Karimu is devoted to working with the residents of Dareda Kati in order to satisfy their development needs, as defined by the villagers themselves.
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