Microfinance -- The Backlash Begins

02/09/2011 01:28 pm 13:28:50 | Updated May 25, 2011

International aid work is always coming up with new models to end world poverty. ("It's so simple! Why didn't we think of it before?!") Simple mechanisms for water purification or cleaner latrines, to odd sounding notions like child-centered schools, and cash-for-work schemes have all been touted as ways to turn desperation into dignity.

Much of the same hope and excitement was invested in microfinancing when it first began being hailed as the solution du jour. A $10 loan to an illiterate village woman could be turned into a mini empire, female emancipation and regional security. It wasn't a hand out, it was a power tool! Thumbs up! And here, Mr. Mohammed Yunus of the Grameen Bank -- take this Nobel Peace Prize for your efforts.

The benefit of microfinance, is is said, lies in the small sums loaned, then paid back with interest in order to loan money onto other worthy borrowers (usually women), while enabling the lender to expand their tiny businesses into sustainable enterprises. But as time has gone on, many development wonks and economists are unable to pin down the long term benefits of microfinance.

The backlash started a few years ago when it became evident that even a $10 loan was crippling for some. Some women, some men, some villages became mired in debt, continually borrowing to extend their businesses and defaulting on loans. Commercial for-profit lenders became involved -- attaching the word 'microfinancing' to inflated loans and revenue raising practices (one noted African micro-lender charged 120% interest).

The new magic carpet of the development gurus has begun to look a little tatty around the edges. A Danish documentary has alleged Mr Yunus's Bangladesh based operation has been involved in complicated and multifaceted financial transactions that lead up one road and then disappear down another. (Mr Yunus has strongly defended himself).

One former microfinance project officer told me she was deeply disillusioned with the schemes -- as she saw people getting into debt they began using microfinance as an easy way to pay for their every day family expenses (and therefore not creating an income which would enable the loan to be paid back).

If the model is flawed, is there hope for microfinance with some re-tweeking? Or have the sharks and the commercial lenders destroyed what once seemed so promising, and yet again those least able to rise to the challenges they face, are left to manage with handouts, restrictive financing and the circle of desperation.