Macro Problems With Micro Loans

Are for-profit micro-loan companies making false promises to the world's poorest women?

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For years, micro loans have been promoted by everyone from Nicholas Kristof to Oprah Winfrey as a great way to help women in developing nations pull themselves out of poverty. The idea is simple: lend women a small amount of money to start businesses, thereby empowering them, their families, and ultimately their communities.

Yet as it grows from a small, foundation-based practice to a full-fledged industry, micro loans are under new scrutiny. Some commentators are skeptical that for-profit microfinance institutions can preserve their mission of helping the world's poorest women get ahead. Moreover, some say that the loans themselves cause trouble, as the sudden influx of money inadvertently puts women in danger. Here are three of their biggest concerns:

  • The Business Is Too Big  Non-profit microfinance organizations have morphed into mega-corporations like India's SKS, and Forbes's Shloka Nath worries that they have forsaken their original purpose in search of a profit.
SKS is also on the verge of becoming the first-ever MFI in India to go public: It could sell its shares in an initial public offer in the first quarter of 2010 and thus offer existing shareholders an opportunity to book profits. Internal conflicts couldn't have come at a worse time. Not only is the management divided on how to grow, but is also facing charges of overstretching and 'mission drift' - of losing sight of its customers in favor of profitability and investor targets.
  • Loans Make Women Targets  At The Daily Beast, Gayle Tzemach Lemmon says female recipients of micro loans in Afghanistan are being abducted and threatened by "thugs" who want their money.
Female entrepreneurs now see their families threatened regularly. Sons, nephews, and sometimes the entrepreneurs themselves are abducted by thugs demanding tens of thousands of dollars, a death knell for businesswomen in a capital-starved country where banks don’t tend to lend to small businesses, particularly ones owned by women without either collateral or a track record. The Afghan National Police have proved powerless to rein in the criminality now menacing the entrepreneurs the nation needs, if it is ever to stand on its own two feet without the financial backing of the increasingly impatient international community. (Habiba's son was released after being held for about six weeks.)
  • Too Corporate to Do Any Good  At Reuters, economic blogger Felix Salmon says microfinance isn't ready to become a corporate, for-profit industry. It’s undoubtedly true that microfinance could be a lot bigger than it is now. But the way to get there from here isn’t to throw for-profit private-equity dollars at it," he writes. "The real constraint is finding and training good local women who can underwrite well and who know their customers on a personal level." He also argues that the businesses should be locally based. "If western do-gooders want to support microfinance lenders, they should simply donate their money to grassroots organizations in the developing world."
Timothy Ogden of The Harvard Business blog agrees. He says questionable ethical and marketing practices have taken "some of the shine" off of businesses like Kiva, an online micro lending site:
This summer the organization announced that it would allow users to make loans to borrowers in the United States. This policy change led to the formation of 'Unhappy Kiva Lenders,' a group of users who claimed that adding U.S. borrowers to a platform that was launched to focus on alleviating poverty in the developing world "undermined the very core" of what made Kiva special. (Of course, all lending is voluntary, so someone who doesn't want to loan to a U.S. borrower doesn't have to.)
This article is from the archive of our partner The Wire.