The 2013 European Microfinance Week will open with a debate. Dr. Aris Alip, founder of the CARD group of companies in the Philippines and Dr. Michael Chu, Professor at Harvard Business School and former director of Accion will tackle the question: What is the goal of microfinance, lifting the poor out of poverty or financial access for all? As part of this initiative we are launching a blog series that asks longtime microfinance practitioners to share their perspective on this question. In this introductory post we lay out the underlying context for why this question is relevant.
For the past half decade, there have been two major debates raging in the microfinance community. One is about the role of commercialization in the sector – are commercial MFIs, especially those that focus on maximizing profit, simply replacements for yesteryear’s loan sharks, as argued by Muhammad Yunus? Or are they vehicles for leveraging the scale of commercial markets to improve MFI outreach and efficiency? The second argument is on the value of microfinance itself – does it actually improve the lives of the poor, or is it at best a palliative, with downright harmful side-effects of overindebtedness and excessive support for low-productivity enterprises that hold back more productive job growth?
By now, these two debates, if they haven’t been settled outright, have reached a state of equilibrium. With the vast majority of microfinance being provided by commercial MFIs, the question of commercialization is becoming increasingly moot. Meanwhile, recent research suggests that microfinance, or at least microcredit, has limited effect on raising the incomes of most borrowers, though it does help the poor smooth volatile incomes and deal with financial shocks. However, experience with repayment crises and overindebtendess problems in several countries has also clearly shown the negative side-effects of microcredit to be quite real and concerning.
The sector is thus entering a new phase, and the previous arguments have evolved along a new fault-line. On one side, there are those who face head-on the central challenge that microfinance is not an effective anti-poverty tool by further focusing on their original mission to improve the lives of the poor, this time bringing along a host of social performance metrics to prove it. Others have taken the opposite tack, arguing that their task is to expand access to financial services, without suggesting that this will directly raise the incomes of the poor. This camp argues that so long as financial services are delivered in a professional manner, then the financial performance of the MFIs themselves and basic client outreach metrics will be sufficient measures of success.
The two camps don’t necessarily follow the lines drawn by the earlier debates. Both sides feature commercial and non-profit MFIs. And unlike those earlier debates, this is not an argument about which side is right. Instead, it's about what each side finds important and why. What separates an MFI with a strong social orientation from one that pursues entirely financial objectives? Is there a common area of agreement? And how does the sector define itself when both sides lay claim to the term “microfinance” – is it just the provision of financial services to the poor, or is there more to it than that?
Let the debate – and the online discussion – begin!