THE BLOG
06/26/2010 05:12 am ET | Updated May 25, 2011

Obama Calls Out Microfinance

President Obama has called out the microfinance industry. "A free market was never meant to be a free license to take whatever you can get, however you can get it." (The Independent, April 23, 2010). Speaking this past week to Wall Street bankers, his remarks could as easily apply to the profiteering merchants of microfinance.

Recently the New York Times published "Big Banks Draw Big Profits From Microloans to Poor." (N.Y. Times, April 13, 2010).

Just two weeks earlier, I heard Nobel Prize Laureate Professor Muhammad Yunus, founder of the modern microfinance movement, scold 1500 microfinance leaders from 81 countries at the Global Microcredit Summit in Nairobi, Kenya, "Microfinance is not about making money from the poor. Some have not gotten the memo."

Has microfinance, which proudly boasts financing millions of tiny business loans around the world, lost its way? Are a few bad actors tarnishing the movement? Are there structural flaws fatally at play?

The drumbeat of review, evaluation, critique and criticism is just getting started. Microfinance leaders who think they can continue to hide behind the skirts of hard-working women in the Third World are counseled to reconsider. The critics now smell a whiff of hypocrisy and the odor of malfeasance.

As captured by the NY Times piece, microfinance stands accused of being exploitive and predatory, charging exorbitant microloan interest rates to ignorant, desperate women and amorally misusing marketplace mechanisms to promote economic opportunity without full disclosure to either the poor or to financial donors and investors.

For a summary of the major allegations against microfinance and, for each, my own viewpoint and perspective, see www.I On Poverty.com.

The truth about microfinance undoubtedly lies somewhere between predation and panacea. Authoritative studies are infrequent. To attract donor and investor dollars, over-simplified hype abounds. As with any field experiencing rapid growth, charlatans and carpet-baggers appear along with responsible microfinance practitioners.

Microfinance is not a cure-all, an economic development elixir. Microfinance does not build roads, schools or clinics; it has not stopped a war or cleared a mine field, nor does it preserve pristine rivers, protect endangered species or restore cultural treasures.

The public brand of microfinance is impoverished micro-entrepreneurs, mostly women, valiantly raising families while operating tiny businesses. For a nation whose self-image extols the self-made man, the maverick Western sheriff and the college drop-out who becomes the richest man in the world, the narrative is seductive. It converts the self-employed poor, victimized by the formal economy, into an icon of economic opportunity.

Even with ostensibly high interest rates, microfinance has opened up financial services for the poor and pushed loan sharks out of the slums and isolated hamlets where the poor live. At its best, microfinance means opportunity and hope, providing an impoverished person with choices: the choice to feed a child, pay a medical bill, buy a new metal pot, fix a leaky roof. Not bad for a program that can become wholly or partially self-financing.

To the critic falls an awful burden. Who chooses to tell the next woman waiting in line for her microloan that because microfinance is not yet perfected, or because we think she is over-indebted, or because her chickens died or were stolen, or because she may be a financial front for an abusive husband, "Sorry, the teller is closed."