A Pragmatist’s Guide to Microfinance

By Mohammed Al-Shawaf, KF9 Palestine

Lately, I’ve been trying to rationalize the fact that of the ten borrowers I’ve visited in cities and villages throughout the West Bank, I haven’t met anyone who’s “lifted themselves out of poverty,” the most common social motive for microfinance organizations and practitioners and one that first drew me to the field.

In fact, I’ve seen (and heard) of cases of over indebtedness–the frightening prospect that a client, upon receiving a loan, is not working towards some higher step on the economic ladder, but fighting to hang on to that ladder as repayments eat away too much of the individual’s monthly income.

Still, these cases haven’t been the norm. Most of the clients I’ve met have said that their businesses have improved because they were able to purchase more inventory/buy instead of rent a machine required for their work/refurbish or replace existing equipment. When they speak about what they want in the future, 80% of the time it’s been to obtain a larger loan—and not because they’re so over indebted that another loan is the only temporary solution to lift their heads above water. No, it’s because the amount of money in that person’s hand has marginally increased since becoming a client with the microfinance institution (MFI). And presumably, another loan will mean another small increase in that borrower’s pocket.

Ten clients among two MFIs across four cities in the West Bank is a decent sample, but I’ll grant you that it’s still very difficult to make sweeping observations about microfinance. Still, I’ll go back to what I said at the start: how do I rationalize the expectations I had of microfinance’s impact on low-income borrowers when I’ve yet to witness the “dramatic transformation” of a borrower’s life? Or were my expectations misguided to begin with? Must I make peace with the fact that small loans to shopkeepers and farmers are a fine, but inherently limited means to improve a person’s life?

I found my preliminary answer last week.

Hasan is a Kiva client of Faten, the largest MFI in Palestine. He is a cab driver in Bethlehem and, among other reasons, I was visiting him to see if the $2000 loan he requested from Faten to buy insurance and make improvements to his cab did, in fact, take place. While Hasen used half of his loan to pay for insurance, a necessity he said because of frequent police checks in the city, the other half never reached the cab. Instead, it was more important for him and his family to build a small room in his house. When I asked him why, he said that problems had arisen from the fact that his wife and two children had all been living in one room.

Hasan, like other clients I’ve met diverted from the “purpose of the loan.” Most of the time, family obligations are the reason. This specific case, though, showed me what microfinance can do and what it can’t.

Microfinance can give a person options, something that wouldn’t have been possible without access to a loan. I believe that you can draw a direct line between options and dignity– the ability to not only assess your priorities, but to have the tools to do something about it.

At the same time, Hasan admitted that he still needed to pay off construction expenses for his room. He must first take care of his current loan though, and by the time that happens, the yearly insurance he bought will have expired. For Hasan, microfinance hasn’t solved the costs of formalization–why every year for the conceivable future, he will have to scrounge just to be allowed in the driver’s seat of his cab.

Hasan splits his fares evenly with a business partner because he can’t afford to go into business alone. When I asked him what his hopes were for the future, I wish I could tell you that he said, with confidence, he would go into business for himself. Instead, I got the answer I’ve come to expect: He hoped for another, larger loan.

I believe that Hasen is better off because he is a client of Faten and has access to capital he didn’t have before. Microloans, in the least, will allow him to make a real difference in the lives of his wife and children. But from what I could tell, it won’t make him into a wildly successful entrepreneur and perhaps, won’t even allow him to go into business for himself.

I’ve come to the point of neither embracing the “power of microfinance” with open arms, nor ignoring the real impact it can have. The clients I’ve seen have had unmet needs that prevent them from being the success stories I’ve often read about. This is especially true in the context of the Palestinian Territories. Borrowers are even more vulnerable to shifting priorities, making it difficult to transform their lives from their businesses alone.

Still, I’ve seen that access to capital where there previously wasn’t any can be a small step toward towards a better future. I suppose, like Hasan and his real loan use, I too have become a pragmatist.

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Mohammed Al-Shawaf is serving as a Kiva Fellow with Ryada and FATEN, two new field partners based in Ramallah (West Bank).

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