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Book Review

Author queries role of microfinance in poverty alleviation

Why Doesn’t Microfinance Work? by Milford
Why Doesn’t Microfinance Work? by Milford Bateman. PHOTO | SALATON NJAU | NMG 

Ever since the Norwegian Nobel Committee awarded the 2006 Peace Prize to Bangladeshi economist, Muhammad Yunus, the concept of microfinance has evolved into a mainstay in discourse regarding financial inclusion and how to widen the reach of formal financial services at the bottom of the economic pyramid.

Microfinance is a buzzword for pushing the boundaries of what conventional levers for alleviating exclusion from formal financial services can realise. Not so much for Milford Bateman, however. His book Why doesn’t microfinance work? is a scathing critique of microfinance and the widely held belief that it has yielded tangible benefits in helping households exit the poverty trap and small businesses unfetter themselves from usurious money lenders.

The central argument of Bateman’s critique is that the combination of making credit available at relatively favourable terms (low interest rates and longer repayment periods), as modelled from Grameen Bank, was unsustainable unless lending institutions benefited from low-cost funds and possibly subsidies from the state.

As a result, the mid 1980s saw the rise of what Bateman refers to as the “neolibralisation of microfinance” with the primary focus of microfinance lenders shifting to profit maximisation, relegating the bankability of the financially excluded to a secondary goal. This shift has seen a proliferation of high cost microloans doled out to poorly informed borrowers, widening the reach of formal finance but at a cost that the target market can ill afford.

As a remedy for the perverse outcome that is the neoliberal model of microfinance, Bateman vouches for an approach hinged on a two-pronged solution state intervention through lending agencies dedicated towards micro, small and medium businesses and promotion of societies through which local communities can mobilise savings.

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The book cites the Vietnam Bank of Agriculture and Rural Development and the Small Business Finance Corporation in post-World War II Japan as cases in point of government efforts to de-risk lending to perceived high risk businesses.

This recommendation makes sense except that emphasis ought to have been put on the need for transparency and accountability whenever this approach is adopted.

In many economies, especially in sub-Saharan Africa, such state intervention exists with little to show by way of results owing to leakage of allocated funds. It is also intriguing that, in his case studies of success stories of bottom-up economic transformation, Bateman found it worthy to include Venezuela’s community-led development programmes “mostly financed by oil revenues”. If there is anything this example does, is to showcase the limits of relying on the state as an alternative to microfinance hijacked by profit chasing investors.

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