Since the beginning, proponents of microcredit have argued that they have found a self-sustaining, profitable route to reducing poverty: borrowers repay loans with enough interest to cover the costs plus an increase in the bank’s capital base, plus a payout for its owners. Sceptics of this story point to the fact that most microcredit programmes are still subsidised by donors. They argue that this is because many borrowers cannot afford to repay so dearly, and that the cost of capital should be lower in order to help more and poorer people.
Welcome to the ‘sustainability versus outreach’ debate. At the core, it is about the question whether incentives or impact matter more. Time to examine the arguments.
First we may ask: are most microcredit programmes actually working profitably? Authors such as Balkenhol (2007) found that two-thirds of the sampled MFIs had achieved “full financial sustainability”. But this was calculated as whether they would be able to cover full costs of capital at commercial rates if forced to do so, not that they were actually covering costs.
Another author found that only half of those programmes with a “commitment to financial sustainability” were profitable, but there are hundreds more worldwide without such a commitment (Morduch, 1999). A further common finding is that those programmes focussed on the poorest sections of the population fare worse financially, and many cover only 70 percent of costs (Mosley/Hulme, 1998). Thus, whether microcredit is profitable is far from clear.
We ask then, theoretically, should programmes cover costs? What’s wrong with subsidies if, after all, microfinance really is an effective solution for addressing poverty? Why should it be made wholly dependent on private-sector funding?
If it is true that millions more households still require microfinance for a better living then it would be false, indeed immoral, to wait for the private sector to step in to fill the gap. Yet precisely this is what the World Bank and other international, public-sector financial institutions are preaching now: let the market take care of it.
A certain ideology underlies the argument. It is the belief that all aspects of the economy are best run by the market and that state interference will distort and harm the market. One could reasonably respond that if the self-regulating market did function as envisioned by the Washington Consensus, then private enterprise would already be meeting the demand for microfinance; current attempts to ‘privatise’ microfinance would be wholly unnecessary.
But my critique is a different one. Not only is microcredit, if it wants to keep its poverty focus, incompatible with the demands of private-sector finance; but it also should not be made to conform with these rules.
Microfinance rogrammes are finding that people at the lower end of the income scale can not afford to repay loans with interest rates high enough to cover all costs. And all borrowers will be more likely to work their way out of poverty if they can retain a larger proportion of their income for themselves; rather than repay at interest rates which satisfy the financial demands of Northern financiers and the ideological convictions of free-market economists.
If microfinance really produces the benefits adduced to it, then it is a public good and should be treated as such. After all, very few people in rich countries would be happy to leave family planning, sexual health, poverty relief and women’s rights to private enterprise initiatives; most people don’t believe that public hospitals, schools, and other government/donor-funded undertakings are “a priori unsustainable” (Comim, 2007) just because they are not run with private gains in mind.
If helping the poor is really what microcredit is about, then public funding should be increased, not abhorred.
Complete references of the sources used above are gladly provided on request.