MICROCAPITAL BRIEF: Representatives of Cambridge, Care, Center for Global Development, SKS Microfinance Discuss “Does Microfinance Help People Escape Poverty?”

Associate director Ms Madeleine Bunting of British newspaper The Guardian recently facilitated a discussion to address the question of whether microfinance helps reduce poverty with Mr Ha-Joon Chang, Cambridge University economist; Mr Ajaz Khan, microfinance advisor for Swiss nonprofit organization Care International; Mr David Roodman, senior fellow at US-based, nonprofit think tank Center for Global Development; and Mr Vikram Akula, chairperson and founder of Indian microfinance institution (MFI) SKS Microfinance [1].Mr Chang suggests the role of microfinance in poverty alleviation has been exaggerated by “grand claims” that have sold it as a “main vehicle for economic development”. Rather, he believes that microfinance has a “useful limited role to play” within a comprehensive set of interventions.

Mr Khan argues Care International’s position that “microfinance is a very effective tool for poverty alleviation”, but emphasizes that microfinance must be defined to include a broad range of financial services including savings, insurance, money transfers and micro-leasing. Furthermore, he suggests that the question should not be “whether microfinance works” but rather “what type of microfinance is best for particular types of poor people”.

Mr Roodman asserts that “microfinance does not lift people out of poverty but builds dynamic institutions that bring useful services to many people”. The claims that the microfinance industry’s rapid growth of “70 percent per year for five to ten years” contributed to recent negative developments in the sector such as the spate of suicides reportedly related to over-indebtedness in India [2]. In addition, he recommends that more rigorous impact studies be conducted in order to supplement qualitative evidence.

Referring to the US-based fast food chain, Mr Akula propones that “for microfinance to truly have an impact on the global war on poverty, it needs outside investment as well as the efficiency of the McDonald’s model”. Furthermore, microfinance should focus on income-generating loans and steer away from lending for consumption. To this, Mr Chang responds poor people cannot develop viable businesses if MFIs charge interest rates that run between 30 and 40 percent per year.

The audio of this discussion is featured in The Guardian Focus podcast series, which can be accessed at http://www.guardian.co.uk/world/audio/2011/apr/01/focus-podcast-development-microfinance?INTCMP=SRCH

By Jacqueline Foelster, Research Associate

About Care International: CARE International (CARE) is a Switzerland-based non-governmental organization with global poverty reduction programs aimed at developing women’s economic capabilities. Founded in 1945 with the aim of sending supplies to post-war Europe from America, it has evolved into a multipurpose humanitarian organization. As of June 30, 2009, CARE reportedly supported 800 poverty-fighting projects in 72 countries that reached 59 million people. That year it reported total assets of USD 952 million.

About SKS Microfinance: SKS Microfinance is a microfinance institution (MFI) that was launched in 1998 and delivers microfinance products through a group-lending model to impoverished women in India. It is a for-profit, non-banking finance company that converted to a public limited company in May 2009 and launched an initial public offering on July 28, 2010. Equity investors include Quantum Hedge Fund, Sequoia Capital, Vinod Khosla, Small Industries Development Bank of India, Bajaj Allianz, Yatish Trading, Kismet Capital, Sandstone Capital, Silicon Valley Bank and Unitus. According to 2010 data from the US-based nonprofit data provider Microfinance Information Exchange (MIX), SKS Microfinance reported total assets of USD 1.2 billion, a gross loan portfolio of USD 1.2 billion, approximately 6.6 million borrowers, return on assets (ROA) of 6.3 percent and return on equity (ROE) of 22.4 percent.

Sources and Additional Resources:

[1] Guardian Focus Podcast, April 1, 2011, “Does microfinance help people escape poverty?” http://www.guardian.co.uk/world/audio/2011/apr/01/focus-podcast-development-microfinance?INTCMP=SRCH

[2] MicroCapital.org Brief, January 14, 2011, “Urged by Local Politicians, Microfinance Borrowers in India’s West Bengal State Stop Repaying their Loan”, https://www.microcapital.org/microcapital-brief-urged-by-local-politicians-microfinance-borrowers-in-india%E2%80%99s-west-bengal-state-stop-repaying-their-loans/

MicroCapital Universe Profile: Care International, https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=CARE+International

MicroCapital Universe Profile: SKS Microfinance, https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=SKS+Microfinance

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