Credit is a useful lever for helping businesses grow. Many poor people in the developing world are self-employed farmers or petty traders, so technically they can be conceived of as businesspeople. But most farmers are actually subsistence farmers, working not for the market but for their own family’s meals, and many traders are simply traders for lack of a better alternative of stable, paid employment. They resiliently eke a meagre living out of their harsh surroundings, and truly deserve admiration by comfortable Westerners. But does that necessarily warrant them being treated as Schumpeterian entrepreneurs, willing and able to “creatively destroy” their traditional economic environments, if only they were lent the necessary finance?

We should keep in mind that people are incredibly diverse, and this must be taken into account and respected when formulating development policies. One-size-fits-all approaches have repeatedly failed in development history, and serve as a warning.

Various studies working with rigorous empirical data have found that microcredit helps the “not-so poor” increase their incomes far more than those actually below the poverty line (Morduch, 1999), and that very poor borrowers on average are even worse-off after the loan-cycle (Mosley & Hulme, 1998). This is because the poorest are least financially literate, more risk-averse, more exposed to risks, and tend to use their loans for sheer survival, not investment. Microcredit can “make an already slippery slope more slippery.” (Dichter, 2007)

But doesn’t microfinance also help the poor to save? The industry realised quite late – in the 90s, but better late than never – that poor people lacked secure opportunities for saving money. Many programmes have rectified that problem, but most still offer savings facilities only to people who also take out loans, thus increasing their liabilities but not assets. If interest is paid at all, rates are normally a mere fraction of what is charged on loans (Harper, 2007). Savings for the poor would be helpful, but only without loan strings attached (Allen, 2007). The microfinance industry would do well to drop its current obsession with getting people into debt, and rather focus on reducing poor peoples’ vulnerability by helping them build up reserves. Savings accumulation should be viewed as a key purpose, possibly as the single most important service; not just as a cheap source of capital.

(phil)

Complete references of the sources used above are gladly provided on request.