Book review:

Milford Bateman, 2010: Why Doesn’t Microfinance Work? The destructive rise of local neoliberalism. London: Zed Books.

Since the inception of this blog, one issue which has been critically explored again and again is the dominant position of microfinance in the field of international development. For instance, a series of blog posts in early 2009 was aimed at unmasking the popular myths spun by microcredit’s advocates, from presumed gender empowerment to the purported win-win situation in which profits would go hand-in-hand with social impacts. More recently, we followed how, in the wake of two high-profile randomised studies which failed to show increases in poor people’s income, even some mainstream media have begun taking a more critical view of microfinance.

Indeed, 2009 and 2010 may have brought some disillusionment to many who believed that small loans would create “a world without poverty”. But still the microfinance industry and its epistemic community remain fiercely defensive of the reputation as a solution to poverty; still the international donor community unquestioningly pours money into a concept with much promise but little proof; and still Muhammad Yunus’ award shelf continues to fill up with precious metal as the hype around microfinance continues to enthrall the socially-concerned masses.

A few full-fledged books critiquing present microfinance practices may have been published to date, but these have addressed themselves mainly to microfinance insiders and development experts. Milford Bateman’s brand-new book (released this summer) however is the first critical book capable of crossing the border between academia and the lay world; it reaches out to convince a wider audience of questioning those accepted wisdoms which underlie the first big development hype of the 21st century.

Now in plain English: “Microfinance does not work.”

Bateman faces the multi-billion Dollar industry head-on, systematically and in simple English debunking the misconceptions about techniques, impacts and politics on which the public image of microfinance is based. The story he tells is as bald and bold as its title, painting as it does a bleak picture of a first world-driven financialisation of the poorest sections which serves the interests of donors rather than those of its intended beneficiaries, and which does – at best – nothing for the poor. As Bateman writes, “put simply, microfinance does not work.”

The British economist, who recently joined the Overseas Development Institute in London and is himself something of an industry insider, starts from the unease about small finance which grew in him during an array of fieldwork and research missions in the 1990s. While the growth success stories of the East Asian economies hinged on intelligent policies for supporting industrial growth and job-creation, the microfinance projects Bateman encountered in his work put money into the simplest no-growth enterprises which were taken up by poor people for pure necessity, not prospect. Worse yet, small loans increasingly were going toward financing consumer lending to the poor, which offered high profits but no promise at all of poverty alleviation.

The book first traces the rise of the modern phenomenon “microfinance” from that oft-told legend of Muhammad Yunus’ near-accidental “discovery” of the creditworthiness of the poor in rural Bangladesh in the 1970s, followed by the growth of the Grameen Bank and its emulators, to the “neoliberalization of microfinance” under the auspices of an ideologically motivated network of academics and international organisations. However, since the eve of the latest global economic crisis, microfinance itself has begun to fall into a crisis of its own, defined by a lack of funds, faltering repayment schedules, and the failure to see its premises confirmed by even the most sympathetic major studies.

Microfinance brings de-industrialisation and de-development

Interestingly very much in line with the series run earlier on this blog, Bateman proceeds to debunk the range of “myths” underlying the “public narrative” of microfinance as a weapon against poverty, from the naive presupposition that business loans will only be used for income-generating activities, to the deliberately deceptive usage of the concept of empowerment. He deals separately with the myths underlying the new-wave (i.e. profit maximising) microfinance model, challenging the “win-win” story of profits and impact and refuting the claim that commercialised microfinance will alter the financial system in favour of the poor.

Instead, as an entire chapter shows, microfinance constitutes a poverty trap rather than an escape route. Not only do most existing impact studies ignore key downside factors; many still fail to show a positive impact. This is because microfinance leads to oversaturation of low-end, low-value added markets where microenterprises systematically fail to reach economies of scale. The net result is that microloans actually bring about de-industrialisation and ‘de-development’.

On the other side of the story, Bateman unveils the push factors behind microfinance. The allure of becoming a “microfinance millionaire”, rich and proud of one’s social investment profile, may attract some investors and ‘philanthrocapitalists’. But with consumer lending at the low end of the market simply a highly profitable (if unethical) investment opportunity was discovered, more difficult to dress up in altruistic language. In his section on the politics underlying microfinance, Bateman finally brings the radical critique of microfinance as a promoter of grassroots neoliberalism (which has until now remained confined to marginal academic circles) within the reach of a mainstream audience. This may be regarded as the most valuable single achievement of his book, and even more space could have been dedicated to this theme. Microfinance is (and always has been) a tool for pushing back the state and for privatising social welfare, and proved a convenient vent for political pressures at a key moment in history by “bringing capitalism to the poor to make capitalism safe for the rich”.

As Bateman’s incisive work shows, there are many alternatives to microfinance, or at least microfinance as it is presently practised. Channeling finance to the poor is not harmful per se, but it must be socially (re-)embedded within developmentalist policy frameworks and/or systems of community management. Perhaps most fundamentally, modern-day microfinance is an undemocratic, even an anti-democratic development project, as it hands the control of development policy over to a small monied (and usually foreign) élite.

Milford Bateman has indeed written the proverbial ‘book’ on why (this) microfinance is not an adequate response to the vast poverty which still underlies the affluence of Western capitalist societies. It would take very surprising new arguments (backed by systematic, not anecdotal, evidence) for the microfinance industry and its supporters to be able to protect their “sacred cow” against his bold, convincing, and ultimately constructive, message.


Milford Bateman will visit the Max Planck Institute for the Study of Societies in Cologne on Monday, 26 July, at 16:00 to speak at a seminar hosted by the research group Institution Building Across Borders. His talk is entitled “Microfinance: creating the illusion of sustainable development and poverty reduction”. To attend, please send an e-mail to Phil Mader.