The Micro Miracle?

A group of women who have received microfinance loans, showing their loan cards, Kolkata, India, 2006 (Shamik Banerjee/The India Today Group/Getty Images)

In the November 19 issue of The New York Review, Sue Halpern wrote about Nicholas Kristof and Sheryl WuDunn’s new book, Half the Sky: Turning Oppression into Opportunity for Women Worldwide. Her piece describes the systematic abuse of women documented by Kristof and WuDunn throughout the world, and the considerable success of microfinance programs—pioneered by the Nobel-prize winning economist Muhammad Yunus, whose book is also included in Halpern’s review—in countering this problem by helping poor women gain economic power. Following is an exchange between Halpern and Kristof about the spread of microfinance and some of the criticisms that have emerged about it.

Sue Halpern: In my piece, and in your book, we write about Mohammed Yunus, the Grameen Bank, and using microcredit schemes to alleviate poverty. A number of the success stories you tell in the book involve a small, entrepreneurial loan. Recently there have been a number of compelling critiques of microfinance—that it keeps poor people in debt, that its high interest rates benefit traditional lenders and exploit the poor, that it does nothing to foster systemic economic development. How do you address these, and other complaints about microcredit?

Nicholas Kristof: Microfinance is no more a silver bullet in the poor world than macrofinance is in the rich world. We’ve seen over the last couple of years that banks can make quite a mess of it in our own country, and yet for all that we wouldn’t want to do without banks. I think the criticisms of microfinance have some validity—it’s certainly true that if a borrower can’t invest productively enough to generate a high rate of return, he or she will be more indebted and worse off than before. And it’s equally true that microfinance hasn’t worked as well in Africa as it did in South Asia.

But Sheryl and I have also seen lots of families, in Africa as well as Asia, that benefited enormously because for the first time they got access to credit—as well as the counseling and peer support that comes with most microfinance programs. In Half the Sky, we talk about a woman in Burundi who turned her life around with a $2 loan from CARE, which she used to buy fertilizer. It doesn’t always work so neatly, but it does surprisingly often, and giving women ways to earn incomes hugely elevates their status. One of the market failures in poor countries is that there is little access to credit, and another is that women are underutilized, and microfinance programs tend to address both those problems. So the failures are real, but my take is that the successes far outnumber them.

I should add that the biggest need in microfinance isn’t microlending but microsavings. Poor families often have no way to save. They get income once or twice a year, after the harvest, and then they have no bank account to put it into. So they can keep money in a coffee can under the bed, in a hut that can’t be locked. Or they can deposit it with a money-changer, who will charge interest on deposits—in West Africa, an 80 percent annualized interest charge on deposits is common. So naturally, people don’t save as much as is optimal, and then when a child needs a school uniform there’s no money in the house. Or when a woman is in obstructed labor, she dies for want of $100 in savings to pay for a C-section. I’d love to see microfinance organizations work more on this savings end of the equation. Perhaps half of families have the savvy to benefit from loans, but every family in the poor world can benefit from a pad of savings.

SH: I take your point on micro-banking, and I’m aware that this was the topic of a recent conference convened by Mercy Corps, which is very active and creative in microfinance. But I want to return to my original question about microcredit trapping the poor in a cycle of debt. This seems like a powerful critique, and one that’s leveled quite frequently at the microcredit movement. I understand that individuals are able to take a very small amount of money and use it to catapult themselves from destitution to someplace better, but what about the poorest of the poor as a class. Does microcredit ensnare them in this way, or is this critique baseless? You mention that microcredit has worked better in South Asia than in Africa, yet a number of the critiques I’ve read that make this point focus, specifically, on Bangladesh and its neighbors.

NK: I have seen some cases of very poor people being trapped in debts by microfinance, but in my experience those are the exceptions—particularly where a microfinance organization has a good model. The success of microfinance has led to a rush of new entrants, some of whom aren’t so good at tweaking their models, and those new imitators probably have much higher failure rates.


In the good models, though, there is an emphasis on screening people to see that they have good investment plans that should bring in more income. The initial loans are also small, to give people experience, and they get counselling on how to run their businesses. So in my experience the well-run microfinance institutions lend for projects that are actually viable and do generate cash to pay off the loan and usually leave people better off.

Granted, there are problems: a husband confiscates the cash and uses it to buy a bottle of homebrew, a woman buys a goat that then dies, a borrower uses a loan not to invest but to pay for a doctor’s visit for a child, and so on. In those cases, the borrower’s family is indeed worse off, but I think those are unusual. Records kept by lenders like Kashf in Pakistan also seem to support the notion that most borrowers benefit significantly—although one definitely should be skeptical of in-house monitoring and record-keeping.

Editor’s Note: The exchange between Sue Halpern and Nicholas Kristof continues here.

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