The woman’s eyes sparkle at me from underneath her bowler’s hat. She is caught in mid action, hands deep in a mass of corn meal, kneading the day’s batch of tortillas. Her baby sits propped up on her shoulder— like some newborn quiver of potential oblivious to his immediate surroundings— wrapped tightly to her body by a colorful but worn indigenous shawl.
Of course the woman is just a picture –a greeting card really from some microfinance institution— sitting on the table next to all my other opened but unattended mail. Señora Ana Maria Villalba, the microfinance organization declares, in warm cursive script on the inside of the card, has worked her way out of poverty and started this small but thriving tortilla stall with a microfinance loan made possible by donations like yours.
Pledging ten to twenty dollars will help women like Señora Villalba around the globe break the chains of penury and reach the economic and social empowerment they deserve. Villalba’s smile, broad and genuine, and those eyes, dancing in the early morning light, are cultural ambassadors, a spokeswoman of sorts for the forgotten, unrepresented and, according to the microfinance institution, ‘unbanked.’
Ten …. Twenty bucks? That’s all it will take to help this enterprising woman in some far off land. It’s the price of a movie ticket and some popcorn, a down payment on a Sunday brunch in a trendy café in Brooklyn, an ill advised late night taxi ride to a bar I have no business being at.
What the hell,…twenty buck in NYC is gone in a flash anyway. Spent on some instantly forgotten consumption. At least this is a conscious act. Something I can feel good about. The money will be going to her. Señora Villalba and those like just you, Espera…. I am coming to help.
But hold on just a moment, who is this Señora Ana Maria Villalba, and more to the point, who is this microfinance organization that is purporting to help her? Where is my money really going? I hesitate and palm my twenty dollar bill back into my pocket. I’m torn; should I donate to this microfinance institution or not….. ?
YES. According to Matt Flannery, the Co-founder and CEO of Kiva, an online lending platform which has facilitated over $100 million in microfinance loans since its inception in 2005, making small, private donations to microfinance institutions (MFIs) “allows individuals in the developed world to loan to small business people in the developing world.” The Kiva website explains that “by combining microfinance with the internet, Kiva is creating a global community through lending.” Whether donating online through a ‘microfund’ intermediary such as Kiva or directly to a microfinance institution such as FINCA International, ACCION International or any other smaller microfinance program, the end goal of making small, individual, private donations to MFIs is the same: to empower the working poor by providing access to credit.
In its 2006 “Good Practice Guidelines for Funders of Microfinance” CGAP, the World Bank’s Consultative Group to Assist the Poor, declares that the “microlevel is the backbone of any financial system” and thus the “role of donors and investors is to strengthen financial service providers to achieve financial sustainability –which is essential to reach significant numbers of poor people and to realize long-term social returns— support experimentation, and provide capital to expand the reach of retail financial institutions when the supply of commercial financing is limited.” Indeed, all MFIs pursue multiple avenues of funding, from international official sector grants to loan financing to private donations in order to meet their financial and social empowerment objectives. However, it is the private donations to MFIs that allow lenders to create a human connection with their borrowers and have a direct impact on their lives.
Specifically, private donations to microfinance programs enable MFIs to offer a wide range of financial services —access to credit, savings vehicles, insurance policies– to poor people that were hither to deemed “unbankable” due to their lack of assets and ability to repay their loans. In addition, the capital raised from private donations, plays a vital role in building capacity in both the lending institutions and borrowing clients, where the presence of robust, financially sustainable MFIs can help to facilitate the transition of microfinance services away from informal lending and towards a nation’s formal financial system. Finally, private donations provide an important source of funding for MFIs to cover transaction costs associated with loaning to the working poor. With operating costs covered, MFIs can maintain lower interest rate premiums and thus be able to extend credit to more individuals, particularly women and the extreme poor.
In effect, while a single, private donation can have a positive, direct impact on an individual’s livelihood by providing much needed credit access to start a small business or invest in a child’s education, the aggregate amount of yearly private donations, can help catalyze a much greater cycle of systemic, economic generation throughout the entire community. According to CERISE, a knowledge exchange network for microfinance practitioners, although the relationship between social and financial performance in microfinance has been much debated, their assessment of the ‘Social Performance Indicators’ of 230 MFIs since 2002 confirms that in fact “social performance and financial performance are compatible.” Specifically, although “targeting the poor clearly implies higher costs for MFIs, other aspects of social performance —participatory models, well-adapted loan technologies and social responsibility— are positively correlated with good operational and financial performance.” In effect, microfinance goes beyond the traditional notion of social responsibility –“do no harm”— and has a genuine and attainable mandate to “do good.”
Thus, donating to a microfinance institution has the dual benefit of economically empowering and improving the social well being of the borrowing client. A small, individual donation has the power to attain the important double bottom line of financial sustainability and positive social impact. Kiva concludes that private donations to microfinance programs connect people, create relationships beyond financial transactions and build a “global community expressing support and encouragement of one another.” Ultimately, donating to a MFI is not some faceless onetime act of charity, but rather a “person to person lending” strategy that empowers lender and borrower alike and has a tremendous multiplier effect on the financial, economic and social realities of the lives it touches. In this regard, making a donation to a microfinance institution is the most versatile and impactful way to invigorate the development process and address the devastating effects of poverty.
NO. In “Microfinance Misses Its Mark,” Karnani (2007) warns that “we should not romanticize the poor as entrepreneurs” and thus overstate the effectiveness of microfinance. Karnani contends that “in fact, most microcredit clients are not microentrepreurs by choice but would gladly take a factory job at reasonable wages if it were available.” Put into context, this statement speaks to a broader argument about the limited utility of microfinance vis-à-vis other alternative methods –namely investing in social, education and health services— to lift people out of poverty and ignite sustainable economic growth. Microfinance is not a cure all, and, according to Rosenberg (2010) in “Does Microcredit Really Help Poor People?,” microfinance’s success in expanding the income, consumption and the health, education and social empowerment of its borrowers is mostly anecdotal. There is no clear evidence to show that the hundreds of millions of microfinance clients throughout the developing world actually realize microfinance’s purported goals of economic and social empower. In sum, making a private donation to a microfinance institution (MFI) is neither an effective nor an efficient way to alleviate poverty or to empower people. Private donors and poor borrowers alike would be better served if donations were channeled to more fundamentally systemic development and poverty reduction schemes such as improved educational systems and job creation.
In itself, the reality of direct person-to-person lending which MFIs promote when soliciting private donations is dubious at best and raises transparency and accountability issues. Testimonials of why individuals from the developed world decide to donate are paired next to photographs of enterprising individuals from the developing world who have used their newfound line of credit to improve their lot. However, the question must be asked whether or not a donor’s contribution actually goes to the stated projects and people shown on the website. In the words of Kiva’s own Co-founder and CEO Mathew Flannery, there exists an “historic tension between the donor/lender desire to ‘know where my money goes’ and the recipient organization’s need for efficiency.” Private donations frequently end up ‘backstopping’ a MFI’s overhead costs. Although this is essential to a MFI’s operation, this is not the stated reasons for soliciting private donations. More than a case of “donor beware,” this is an issue for full disclosure.
Often times, microfinance is touted as the key to unlock the potential of the poor: with access to credit, the working poor will unleash an entrepreneurial spirit that will lead to economic engagement, personal prosperity and community cohesion. Karnani (2007) argues however that “the vast majority of microcredit clients are stuck in subsistence activities where a lack of skills, vision, creativity and persistence to be entrepreneurs” ultimately causes their microenterprises to fail. Investment in education, job creation and improvements in labor productivity is a better way to create long-term success. Moreover, there is a darker side to microfinance that must be given due consideration. Credit, no matter how ‘micro’ or well intentioned, is still a form of debt. For the donor, the private monetary donation may be viewed as a one-time act with no intention for repayment or return on investment. For the borrower however, no matter how poor she is, once the loan is taken out, the principle of the loan plus interest must always be repaid. This is finance, not charity.
In addition, the formal, rigid requirements of group lending or intense communal peer pressure that microfinance uses to ensure timely loan repayment can trap borrowers in a state of ‘loan recycling’ where new loans are taken out to repay outstanding ones. Rather than empowerment, microfinance has caused further economic indebtedness. Finally, although contrary to its intentions, microfinance can actually disempower women. Female borrowers may be granted access to credit but it is their husbands who retain control of the loans.
Beyond microfinance’s stated but frequently unmet empowerment goals, there are two economic realities that often go overlooked. (1) Donor driven external funding is intrinsically unsustainable. It is highly susceptible to donor fatigue and exogenous shocks which could shift donor attention away from their microfinance pledges (i.e. the call for donations after a devastating natural disaster). Rather than rely on private donations, MFIs should seek financial self-sustainability through strategic government subsidies or for profit business models. (2) The quintessential microfinance success story is one of a woman taking out a small microfinance loan to buy a sewing machine. From there she embroiders her way out of poverty. However, what happens if her sewing machine is stolen or damaged? Her engine of income generation is gone, yet her loan remains. In short, there is real risk associated with microfinance lending and borrowing. In comparison, investment in education, particularly literacy, produces fully transferable, lifelong skills that cannot be stolen.
Although microfinance can play a strategic role in extending credit to those without and thus help develop a formal system of financial services, it is not the appropriate tool to generate broadly felt, reliable economic growth across the community that it claims to be. When deciding to make a private donation, do not donate with the intention to lend but rather donate with the intention to promote and to invest in social services. Education not credit. Employment not credit. To address the root causes of poverty, private donations geared towards these indispensable services will provide a far greater return on investment than a small microfinance loan ever could.
Señora Ana Maria Villalba, I am now well informed yet still indecisive….
The promise and mechanics of microfinance seem sound, but the risks are all too real. I would love to pull up a stool in you your stall, buy a tortilla or two as you pluck them off the skillet and talk it over. But here I am thousands of miles away forced to make a decision.
