This weekend, I went to El Tunco, El Salvador with a couple of Kiva Fellows for a few days of surf, sand, fish tacos, flat julie filming (the new Kiva Fellows class intro video), smoothies, more fish tacos, and apparently a barrage of questions from some of the most unconvinced, microfinance skeptics I have met traveling.
Now, obviously I will have a tendency to defend microfinance as an industry because it is what I´m doing right now. More than that, its something I believe does a lot of good for a lot of people (maybe not everyone, but a lot of people), and even more than that, I am doing it voluntarily–so yes, I believe in microfinance. But as we sat in hammocks talking to our fellow travelers, we got hit with a ton of skepticism of the industry (a lot of which I would like to clarify and respond to).
I mentioned that the typical Guatemalan moneylender charges 10% a month, and their immediate response was what you charge 9%? (for the sake of simplicity, I will response from my microfinance institutions (mfi) point of view and not Kiva´s). There are two things that are implied by this question: one, that the majority of mfis are seeking to maximize profit, and two, that the marginal benefit that mfis provide is well, non-existent. Uninformed on both counts. My mfi charges 3% monthly interest which is significantly lower than the moneylenders and in line with microfinance competition in the area. Contrary to popular belief, most mfis are not for profit (if you would like to discuss SKS´s IPO we can talk one on one), my current mfi included. The majority have a social mission of expanding their clients access to credit and other basic services and generally to alleviate poverty. In this sense, a 3% monthly credit coupled with other services (see my last three Kiva fellow blogs) doesn´t just provide marginal value to their clients, but adds significant value. Let´s also not insult the client´s intelligence, they would know if they were being taken for a ride, and contract microfinance services because they want too and because the services provided have a higher value for them then their other options.
That´s still a high annualized interest rate. Yes, I agree. It is high, but in order to administer the loans, it is significantly more expensive than going to chase.com and signing up for a mortgage or a credit card. Loan officers met and vet each client individually and then have to collect repayments and follow-up on the loan. The fact of the matter is that microfinance is correcting a market failure (to provide credit to the poor) and at first, correcting this market failure costs more money. Like I mentioned before, most microfinance organizations are not profit seeking and because of their social missions, some have even lowered their interest rates over time. As the market failure is corrected, more competition will be introduced, and the markets will become more efficient.
Not everyone is an entrepreneur, so whats the point? Does it do anything for the person that gets a loan to provide the same service as another ten people in the town? First of all, Yunus would disagree with this: everyone is an entrepreneur he would say. But I understand the criticism. Through microfinance, are we just enabling the clients to provide services that already exist? I would say that most businesses started with a microfinance loan aren´t unique: you will see 12 Kiva loans for corner stores, another 20 for tailors, and 15 more for pig farmers, but the fact of the matter is that they have access to financial services (and hopefully other services through the mfi) that they didn´t have before. So, although we can´t specifically say that microfinance has improved the lives of its participants (although it is irrefutable that it has improved the lives of some), we can say that providing access to financial services is a step in the right direction to alleviating poverty.
So, for all the skeptics, microfinance isn´t perfect, but until you find something more effective, I´m going to keep working with this system knowing that it is doing a lot more good than harm.