Pundits and the powerful have spoken! Microfinance is the new penicillin. If you’re desperately poor, it can put you through school, or in a home, or better yet, make you a successful entrepreneur. UN Habitat, the World Bank and growing numbers of governments see it as a game changer in wars against poverty from Dharavi to Queens. Will it have much effect? I don’t think so. Microfinance undoubtedly helps out some successful borrowers, and may enliven communities in need of small business diversity, but it won’t significantly alter the social fabric.
Some background: Microlending agencies offer loans for people too poor to qualify with conventional banks. Microlenders boast payback rates well over ninety-percent by using social pressure. If someone in a community of borrowers defaults, the whole group gets cut off. The system ideally brings badly needed investment capital to places where regular banks won’t go. It offers opportunities to those who don’t usually have them. This is especially the case for women, who comprise the large majority of the market. Microlending also imposes debt at high interest rates (the average is nearly 30 percent) and provides banks with opportunities to profit off the poor. Hardly progressive.
Yet this model has been so well accepted by the mainstream that microfinance magnate Muhammad Yunus got a Nobel Prize for it. The New York Times’s Nicholas Kristof calls it “an important tool against poverty.” CNN warns us, without bias or bull, not to count out Yunus in his quest to eliminate poverty because “this is a man who has done much of the impossible.” The baptismal water even landed on disgraced former World Bank chief Paul Wolfowitz, who extolled the “transforming power” of microfinance. The International Monetary Fund sees microfinance as a “potential vehicle for poverty reduction.” Bill Clinton, for his part, praised small scale lenders for partaking in the “real economy.” And so on.
It sounds like a nice model to build communities on, but it isn’t. Without a doubt, cities need answers to the poverty question, especially as the worldwide migration out of rural areas forces them to carry more of the load. The cities of the future look increasingly like the cities of Dickens. Even in the wealthy U.S., urban poverty has seen dreadful increases in recent years. The problem is that microfinance does not have a strong record of reducing poverty, even where it has been used widely. True, microlending agencies boast endless anecdotal success stories, but this doesn’t make much of a large-scale difference.
Take Bangladesh, the Graceland of microfinance. The UN Development Program reports that for all the microfinance activity there, the effects on overall growth have been minimal. “This is explained,” the report says, “by the fact that the average size of a loan disbursed by microcredit is rather modest, which limits the possibility of a big push.” In Bangladesh the average microloan is $130, not at all commensurate to that country’s problems. Bangladesh’s progress doesn’t resemble that of real economic success stories like South Korea, Taiwan or coastal China. These countries took state-led, quasi-protectionist paths to development that many proponents of microfinance abhor.
Unlike that model, microfinance is ideologically palatable for true believers in the neoliberal gospel. I suspect this is why elites show so much unanimity about it. As The Nation’s Alexander Cockburn put it, “Governments like microloans because they allow them to abdicate their most basic responsibilities to poor citizens. Microloans make the market a god.” Instead of demanding a living wage, strong job market, or a modicum of government-provided safety nets, the world’s poor can pull themselves up by small bootstraps manufactured from the growing for-profit microfinance industry. It’s capitalism’s boutique solution to a wholesale problem.
What, then, can microfinance do for cities? I would say there are two potential positives to hang on. Now that the Grameen Bank is rapidly expanding around the U.S., microfinance might undermine the parasitic payday lending agencies that thrive in poor areas. It might also create a pro-poor business environment. More small businesses run by and for the poor could bring badly needed cross-class commercial diversity to neighborhoods (To read about several such businesses, click here). Maybe Grameen’s placement in Queens will spur a de-Bloomberging of gentrified New York. Other places are altogether lacking in commercial activity and could use microfinanced services. None of this is world-changing, but it’s something.