Microfinance under scrutiny!

On Friday (22nd March 2013), I attended a seminar on micro finance entitled "'Evaluating' Microfinance: Academic irrelevance" by Professor Salim Rashid who is the visiting professor of the department of development studies in the Faculty of Economics and Administration in the University of Malaya. In the abstract provided before the seminar, the professor has explained that the choice of Microfinance (MF) by the Millennium Development Goals (MDG) as the primary means of poverty alleviation should have brought clarity to the role and functioning of MF, but instead it seems to have generated a fog. It is desirable to take a fresh look and start from first principles to clear the air. Microfinance is microfinance --- it is finance writ small. If finance works, microfinance works. Much of the difficulty has been created by academics and arises from scholars treating MF as though it is some new economic phenomenon. With a series of specific questions, and with the Bangladeshi case in mind, it will be argued that many of the interesting and constructive questions have not been on the research agenda. Instead, the attempt to rely on randomized controlled trials is serving to distract.

Before giving more details about the seminar, first let me clarify why I have added this text on microfinance here in this blog. When I was working in villages, the micro finance was one of the choices we were focused in certain areas where sustainable livelihood was targeted. However, the way we were working was based on "group initiatives" rather than individual endeavor. In our model, there is always a group as an entity that will be involved in micro finance. As a facilitator of group activities, I think this works better than the individual initiatives for various reasons.

Professor Salimm said that microfinance requires special attention. He also mentioned that it is culture and context oriented. It means that those applying for finance, they have to have certain habits (such as to be organized); without these habits they cannot easily enter business to generate money. He said most of the time, the people use finance as consumption loans. They use the money for other necessary things in their life and then for returning the money, they might apply for another loan. Here the story starts and never ends. Loan after loan. In fact, people have to use the money in an income-generating business with a good profit to be able to return the money and the interest to the Micro Finance Institute. The professor gave a series of examples to clarify the issue. He said that there is not enough empirical data on success of microfinance, especially there seems to be a lacuna in intertemporal research.

To my point of view, group activities (based on group facilitation) where people can share their own experiences and resources - is very important in micro finance, especially when people earn "hot money". Loans are only "cold money" that cannot generate money. They can complete the capital, but what is more important is the "hot money" generated by the group in a well-defined business with defined role for every member of the group.