Economist tags microfinance as poverty trap, not solution

MANILA, Philippines - Microfinance is a poverty trap and not a solution to poverty, according to a leading economic professor.

Dr. Milford Bateman issued the statement at a recent seminar organized by the United Nations Conference on Trade and Development (UNCTAD).

Bateman is a professor of economics at the University of Juraj Dobrila Pula in Croatia, and author of the book, “Why Doesn’t Microfinance Work?”

The professor said there “is no proof that microfinance has a positive effect on the wellbeing of poor people, saying that the success of microfinance is little more than hype.”

Citing statistics from Vulnerability: The State of the Microcredit Summit Campaign Report 2013, the report show that close to 89 percent of microfinance clients in the Asia-Pacific continue to live in extreme poverty.

“Africa has already more micro-entrepreneurs in relation to its population than anywhere else,” adds Bateman. “However, Africa remains trapped in poverty.”

In 2011, 13 million fewer of the world’s poorest families received access to microcredit and other financial services than had in 2010.

This marks the first time since 1998 when the Campaign Report began tracking this data that the total number of clients and the number of poorest families reached has declined.

The report said that the total number of clients fell from 205 million to 195 million, and the sub-set of families living in extreme poverty, defined as less than $1.25 a day, from 137 million to 124 million.

Most other parts of the world saw moderate or slowed growth, with the exception of 1.4 million new clients in Sub-Saharan Africa.

“Despite this reverse in 2011, microfinance institutions still provided microloans to more than 124 million households living in extreme poverty. Assuming an average of five persons per family, this means that more than 621 million people were affected; this is twice the entire population of the United States,” it said.

Bateman attributes the steady decline in microfinance to the abusive interest rates that a number of microfinance institutions (MFIs) charge their clients.

He notes that the highest interest level ever registered came from Compartamos, the biggest microfinance institution of Latin America that is based in Mexico. It charged its clients an annual interest rate of 195 percent. 

Bateman also denounced another surprising aspect of the microfinance sector: in contrast to what is often thought, the majority of microcredit granted is not used to finance the creation of micro-enterprises.

The microfinance boom started in the late 1970s and was popularized by the Grameen Bank (village bank), founded by Muhammad Yunus, doctor in economics and Bangladeshi entrepreneur.

Yunus institutionalized a model of granting small loans to poor people in order to help them maintain and secure their productive activities within the informal sector. The main objective was to give people that are generally excluded from the conventional financial system (2.7 billion adults across the globe) a chance to escape from poverty. 

Yunus once noted that through microcredit “poverty will be eradicated in one generation (and) our children will need to visit a ‘poverty museum’ to understand the reasons behind these troubles.”