Microfinance Will Not End Poverty, Microfinance Institutions Will

Inspired by Nicholas Kristof’s latest blog post: The Role of Microfinance

Microfinance is “the most visible innovation in anti-poverty policy in the last half century.” Because of this, many have put such high expectations on the effects of microfinance and the pace at which it can have an impact on ending poverty. Some have even called it the panacea for poverty.

The truth is, microfinance alone cannot end poverty and anyone who is involved in microfinance will tell you the same. But before you start freaking out and withdrawing all of your Kiva credit, let’s look at what microfinance can do.

Microfinance is improving the lives of many borrowers because:

• Microfinance institutions provide credit at a lower rate than local money lenders.
  • Even though the interest rates from microfinance institutions (MFIs) are high, they are considerably lower than local money lenders. This allows borrowers to save additional money.
• Microfinance gives people the opportunity to make large purchases.
  • With a loan, a borrower who has limited savings can purchase a cow or a vehicle, which they can use in turn to generate more income. They can also use a loan to improve their living conditions immediately instead of saving for a year.
• Microloans can be used to help borrowers make it through rough times
  • One of our loan products here at AMK is the emergency loan. A loan which can be applied for, approved, and disbursed in four hours. Clients often use this to help pay medical costs for family members.
  • Borrowers could also use microloans to help rebuild their businesses after a disaster.
• Microloans are not a handout
  • The reason “social entrepreneurship” has became a buzz word in development discourse is because what developing nations do not need are handouts. Handouts create a sense of dependency and prevent people from having a stake in their own future. By having people purchase items or take out loans, they have to actually want what is being given to them which will encourage them to make the most use out of it. Just think about how differently you use items you purchase versus ones you get free.

However as the article points out, “there is no evidence that microcredit has any effect on health, education, or women’s empowerment, at least right now, eighteen months after they got the loans.” The benefits of microfinance might just take more time, but is there a way we could speed that up? The answer is yes.

I believe that microfinance institutions can be the biggest players in the war on poverty, but not because of their ability to provide financing. MFIs are constantly trying to service more and more clients, so that their business can grow. Because of this, many MFIs have created these vast and rapidly growing networks of clients. These networks are VERY valuable. Also, since most microfinance institutions are profitable (which is not a bad thing), these networks are sustainable. AMK currently has operations in 50% of the villages in Cambodia. What AMK and many other MFIS are working on now is figuring out ways to use that network to do more.

Currently we are working on:

• Savings
  • AMK is in the process of obtaining their savings license from the National Bank of Cambodia. Once we receive it we hope to promote savings in every village we operate in.
• Life Insurance
  • AMK is looking into providing life insurance to our clients, which would help them significantly in the event of a family death.
  • Currently, we already have a policy that if a client dies we will write off their existing loan.
• Non-Financial Products
  • I’m actually working on this pilot. What we are trying to do is figure out a sustainable way to use our network to promote non-financial products that can improve the lives of our clients. In the initial pilot we are promoting solar lamps, water filters, and latrines. If this pilot is successful we can help eradicate the use of kerosene lamps and promote clean water and sanitation. Since we operate in half the villages in Cambodia, we could potentially help Cambodia achieve a millennium development goal:

Target 7.C: Halve, by 2015, the proportion of people without sustainable access to safe drinking water and basic sanitation

What if we went even further and figured out sustainable ways to use our network to do so much more:

• Health Insurance
• Cheaper Secondary School Education
• Business Development
• Providing Clients With Access To Larger Markets

The vast networks that microfinance institutions have are a very valuable asset in the war on poverty. As socially responsible MFIs figure out ways to sustainably use their networks to have a greater social impact, then they will have the tools that will do so much more to eradicate poverty than microfinance alone.

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