By Tamsin Harriman

What's Wrong With Microfinance? is a thought-provoking look at the rarely-discussed problems with microfinance. The book's contributors bring up many important questions and issues that have not been examined carefully enough, if at all, by the microfinance community. Most of the contributors are microfinance insiders, and many have spent their entire careers in the microfinance sector. The aim of the book is, as the authors state, "to sound a timely warning to governments, bankers, donors and the general public and to encourage the rethink of expectations and policies." The contributors do not claim that microfinance is wrong and should be discarded - though one or two do seem to imply as much. Mainly, they challenge the commonly accepted idea that microfinance as it is currently practiced is a panacea for poverty alleviation. Below are some of the questions and concerns that the book addresses.

One criticism shared by many of the contributors is that microcredit alone is not enough, and in fact may sometimes do more harm than good. They mention that some studies have found that though many borrowers are wealthier after taking out a microloan, a not insignificant proportion of borrowers become less well off. In addition, studies have found that poor people are usually more interested in a secure way to save their money, or in crop or livestock insurance, than they are in obtaining credit. The authors suggest that a much better way to help the poor is to emphasize savings, insurance, and skills training, rather than credit. This idea is becoming increasingly accepted, as has been discussed on this blog before. Many MFIs, such as SED and Common Interest here in Thailand, now emphasize savings in their programs and are moving away from a focus on credit alone.

Another common thread is the concern that MFIs are not transparent enough about their interest rates and fees. Borrowers often don't understand what the full cost of their loan actually is. There may be hidden fees, or interest may be calculated in a complex way that is hard for borrowers to understand. This can lead to borrowers' discouragement and make them more likely to drop out, and/or less able to pay back their loans if interest is more than they expected.

In addition, two contributors criticize the current standards for "impact evaluations" of microfinance. Understandably, such studies are difficult to conduct, often relying on borrowers' memories of what they earned before getting involved with an MFI, for example, or requiring some groups to wait a year or more for services that nearby villages already receive, so as to have a control group. In addition, many are not as scientifically rigorous as they should be. Thus, results may be overstated, or it may appear that a microfinance program has a large positive impact when in fact that impact is not statistically significant. Thus it is difficult to know which impact analyses to take seriously.

These and other concerns are detailed much more thoroughly in the book, which I would recommend that anyone who is serious about microfinance should read. The concerns that the contributors raise need to be addressed, or at least considered more carefully, if MFIs want to truly do their best to help the poor.

Contributors: Irina Aliaga; Hugh Allen (Boulder Microfinance Training Program and Southern New Hampshire University’s Microenterprise Development Institute); Milford Bateman; Thomas Dichter; David Ellerman (University of California/Riverside); Dr. Prabhu; Malcolm Harper; Mary Houghton and Ronald Grzywinski (both ShoreBank Corporation); David Hulme; Susan Johnson; Vijay Mahajan; Imran Matin and Munshi Sulaiman; M. A. Saleque; Richard L. Meyer (Ohio State University); Paul Mosley; Dr J.D. Von Pischke (Frontier Finance International, Washington, DC); S. M. Rahman; Paul Rippey; Namrata Sharma; Frances Sinha; Kim Wilson (Fletcher School, Tufts University).