Magazine article The Wilson Quarterly

Microfinance, Macrohype

Magazine article The Wilson Quarterly

Microfinance, Macrohype

Article excerpt

"The Microfmance Promise" by Jonathan Morduch, in Journal of Economic Literature (Dec. 1999), American Economic Assn., 2014 Broadway, Ste. 305, Nashville, Tenn. 37203.

Around the world, particularly in Bangladesh, Indonesia, and Bolivia, "microfinance" institutions have sprung up in recent decades to make small, usually collateral-free loans to the poor, enabling them to go into business for themselves. They become textile distributors, street vendors, and furniture makers. Some eight to 10 million households have taken such loans, and there is hopeful talk by the World Bank and others of expanding the total to 100 million by 2005. Advocates tout micro-finance as a way of alleviating poverty without permanent subsidies or massive government programs. They claim it is a "win-win" solution, in which both the lending institutions and the poor clients benefit. Morduch, a lecturer at Princeton University's Woodrow Wilson School of Public and International Affairs, urges a more cautious view.

"Alleviating poverty through banking is an old idea with a checkered past," he notes. From the early 1950s through the 1980s, many countries put reducing poverty through the provision of subsidized credit at the center of their development strategies. In nearly all cases, Morduch observes, the result was disastrous. "Loan repayment rates often dropped well below 50 percent; costs of subsidies ballooned; and much credit was diverted to the politically powerful away from the intended recipients."

Mindful of this past, microfinance advocates claim there is a new determination that the programs become financially viable without ongoing subsidies. "Programs typically begin by lending just small amounts and then increasing loan size upon satisfactory repayment," Morduch says, and repayment must start almost immediately. Microfinance advocates also stress the significance of innovations such as "group-lending" contracts. …

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