Book ... Why Doesn't Microfinance Work?

Dear Colleagues

Milford Bateman, a friend has just circulated the following PR material about his new book.

Just released this week by Zed Books is my book on microfinance, titled 'Why Doesn't Microfinance Work? The Destructive Rise of Local Neoliberalism'. Clearly, it's a critical take on microfinance.

Quoting from the blurb on the back cover now, Zed have this to say:

"Over the last thirty years or so, microfinance has risen to become one of the most high-profile policies to address poverty and under-development in developing and transition countries. It is beloved of rock stars, royalty, movie stars, high-profile politicians and trouble-shooting economists. Its most famous pioneer, Muhammad Yunus, was awarded the Nobel Peace Prize in 2006.

In this provocative and controversial analysis, Milford Bateman reveals that microfinance doesn't actually work. That, in fact, the case for it has largely been built on a desire to advance a particular free market ideology, on hype and egregious half-truths, and -- latterly -- on the Wall Street-style greed, deception and individual self-interest of those promoting and working in microfinance. Using a multitude of case studies from across the globe -- from India to Cambodia, Bolivia to Uganda, Serbia to Mexico amongst many others -- he exposes why many of its most fundamental building blocks are largely myths. In doing so, he demonstrates that microfinance actually constitutes a major barrier to sustainable economic and social development, and thus also to sustainable poverty reduction.

As developing and transition countries attempt to repair the devastation wrought by the global financial crisis, Bateman argues forcefully that the role of microfinance in development policy needs to be urgently and fundamentally reconsidered."

I am looking forward to a careful read of this book ... some of the issues that are being raised confirm my experience, but some do not. This does not surprise me because, in my view, the good and the bad of "externalities" are way bigger than the best or the worst of microfinance.

One of the things that bothers me is that none of the many analysts and writers about microfinance seem to be spending much effort on these externalities and how they impact on microfinance performance.

Another thing is the issue of metrics which rarely make it possible to put the performance of a microfinance institution into any sort of area context. Places are different ... and the externalities are different.

I am looking forward to reading the book ... but not expecting that my mind will be changed very much. I expect that Milford Bateman will have made a good case based on the specifics that he knows about. I would argue ... I expect ... that it is dangerous to generalize from the examples to the whole industry. I know of many examples where the results of microfinance were very helpful ... but my expectations have never been that microfinance was going to be the single silver bullet that would make "development" successful. Bottom line ... there are hundreds of things in addition to the financial constraint that have to be addressed. I have heard Muhammad Yunus say on multiple occasions that there is systemic dysfunction in the economic system that causes poverty ... and accordingly there needs to be a systemic solution. Microfinance is only one little bit of this systemic solution.

I have also observed in more than one occasion over the past several decades that the main reason why microfinance became so popular was that all the other initiatives of the official relief and development assistance community were such terrible failures. In this context microfinance was a successful silver bullet!

Peter Burgess