This week is the 75th birthday of Muhammad Yunus, the inspiring leader who asked a question which struck at the root of a paternalistic approach to poverty alleviation: Why do for people what they’re capable of doing for themselves?
This question served as the basis of Yunus’ groundbreaking work in the 1970s as he founded the Grameen Bank, pioneered the modern microfinance movement, and garnered some impressive recognition, including Presidential Medal of Freedom and a Nobel Peace Prize.
Hundreds of thousands (myself included) have been inspired by the model of microfinance and signed up to help unleash women’s and men’s creativity around the world.
But recently there have been articles and thoughtful research projects critiquing this tool. Does this recent criticism undermine the microfinance movement? Does it unravel all that Yunus envisioned and many of us have worked to implement?
Intuitively, it makes sense that microfinance has the potential to benefit a community. Many of us have benefited from a savings account, a mortgage, business coaching/mentoring, access to loans for business investment or to care for an urgent need. Why assume those in poverty wouldn’t have similar needs for financial services or benefit from the services you and I enjoy?
Instead of a grand critique of microfinance, I find the recent articles and data contain important lessons for those of us who implement these ideas. It’s an invitation to do some soul searching and consider where we might have gone wrong in implementing these ideas – and perhaps pop a few myths.
Myth #1: Everyone should borrow.
Initially, it was thought that if every person received a microloan, then poverty would be eliminated. The reasoning was that any person could receive a small loan and start a business . . . but this hasn’t proven to be true. Not everyone has a successful business idea, and not everyone needs additional capital. It’s possible for a person to actually become worse off if they take capital and use it for unhelpful or irresponsible consumption spending. Assuming that everyone needs a microloan just doesn’t makes sense.
Instead, a growing number of organizations are realizing that while not everyone should borrow, everyone should save. The approach is shifting from focusing primarily on loans to placing a significant emphasis on savings. This is why I hope we can finally banish the word “microcredit” and replace it with “microfinance,” recognizing that a loan is only one part of providing families with the services they need.
As one example, initially at HOPE International, we focused on microloans. Over the past decade, our services have expanded to include savings and today 74% of the families we serve only save with us, 25% save and borrow, and 1% only borrow. The impact of savings is largely underestimated.
Myth #2: Profits are all that matter.
Microfinance began as a movement among nonprofits and credit cooperatives, but something changed in the 2000s. I remember going to a presentation on microfinance in New York, and the only metric that highlighted was the quarterly financial return and how microfinance was an investment opportunity uncorrelated with global markets. The message was simple: Invest with us to maximize your return. This had nothing to do with serving families, investing in dreams, or honoring dignity.
Over time, this “maximize profit” approach resulted in the removal of anything that didn’t directly contribute to quarterly profits. Entrepreneurship training, health services, and group celebrations for clients were left behind. It’s made some microfinance institutions look more like payday lending shops than community-minded organizations seeking to positively impact families.
Microfinance institutions that are truly effective have always focused on investing holistically in the client, providing resources and training opportunities so that they can grow professionally, personally, social, and communally. At HOPE, we take this one step further by investing in clients’ spiritual lives, knowing the transformation that is possible through a relationship with Jesus.
Myth #3: Microfinance will eradicate global poverty.
Early positive stories caused a rush of enthusiasm for microfinance; finally, there seemed to be a business approach to alleviate global poverty that could be scaled to assist millions of families! At some point, enthusiasm crossed over into the land of fairy tales, with the promise that one single approach could effectively eliminate poverty.
But poverty is complex. And while savings services, stronger community relationships, greater hope for the future, access to small loans for expanding a business, and cash flows smoothing all help, none can, on their own, eradicate poverty. Instead, a huge number of other issues—justice, property rights, education, health, nutrition, infrastructure investment, social constructs, government transparency and corruption—all come into play.
By understanding that each of these elements has an important role and by creatively linking with other organizations, we believe real impact will occur.
By soberly understanding the places where we’ve got it wrong, we can help ensure that microfinance remembers why this tool was created and get back to work serving families. I can think of no better birthday present to give Yunus on his 75th birthday.