Commercializing risks and rewards of microfinance

Yali woman in Papua highlands, Indonesia

No one will protest when I say that Muhammad Yunus knows more about microcredit than I know about, well, everything else combined. But he probably overstates his case in claiming that...

Commercialization has been a terrible wrong turn for microfinance, and it indicates a worrying “mission drift” in the motivation of those lending to the poor. Poverty should be eradicated, not seen as a money- making opportunity.

Since attention in the US turned to microcredit as a possible solution to poverty, there have been reported problems with loan distribution and loan repayment--women turning loan moneys over to their husbands, needing to borrow from "commercial" (e.g., gray market) lenders to repay NGO-based loans on time, and so on. The problems with repayment that are afflicting SKS and others are not new, they have higher profile and perhaps higher incidence as more loans are made and as micro-finance institutions have increasing pressure to perform as investments themselves.

BUT: there's only conflicting evidence that microfinance 'eradicates' poverty, especially as a structural economic problem. Loan recipients have increased cash, and on occasion start or expand businesses, but overall poverty rates don't drop in the presence of robust programs. As important, commercialization of microfinance is motivated at least in part, if not primarily, by the desire to increase the flow of capital to the poor.

Finally, when repayment rates are running at 97 to 99 percent, per Grameen Bank reports, while loans are flowing to the most at-risk members of society, it would seem that microfinance institutions aren't really shouldering much risk at all. A little more risk, a few more defaults, and perhaps poverty will be reduced a bit more as well. After all, once the funds arrive in poor communities, at least a percentage, and possibly a high percentage, stay there even when the loan goes into default.

No?