The Limits of Microfinance

Daniel Akst in Slate reviews alternative methods for charity giving and concludes that microfinance is the best option available.

Given that charitable giving usually involves a non-transparent NGO with unverifiable overhead, the fiscal clarity and direct to recipient approach of microfinance are undeniably attractive. However, it’s important to also recognize the limits of microfinance – specifically, that it doesn’t scale up to SME finance or strenghten local financial institutions that can evaluate and finance SMEs. If you help a fisherman in Uganda purchase a boat, that’s great, but Uganda’s problem is not a lack of fishing equipment. In a sense, what’s good for the individual in this case may have little impact on society. Microfinance has a thousand individual success stories but I have yet to see a communal success story involving microfinance.

And microfinance does little to challenge the cartelized structure of the banking industry which obtains in many developing countries, in which loans are restricted to all but an elite group of borrowers. Even in countries without cartelized banking industries – very few banks give loans of $100. Microfinance might be transparent, but it has almost no knock-up effect to help the overall financial sector become more transparent and efficient.

Microfinance is successful on its merits – and attractive to donors – because it directly targets individuals. Accountability and transparency are easy to measure. However, this quality also limits is effectiveness because directly targeting individuals entails avoiding institutions. And in developing countries – or any country – the latter matter before everything else.