Learning from Failures in Microfinance

 Learning from failures in microfinance: what unsuccessful cases tell us about how group-based programs work

            American Journal of Economics and Sociology, The, Jan, 1999

            By Michael J.V. Wollcock

“Money, says the proverb, makes money. When you have got a little, it is often easy to get more. The great difficulty is to get that little.” –Adam Smith

To me this quote really summarizes the goal of Microfinance. So many people really just need a small stock of money to get themselves going- to get out of the cycle of having money lords holding loans over their heads, or to buy themselves a small amount of capital to start their own business.  Micro-loans are helpful to the poor because they “give them a hand up, not a handout” (Sampson, 1989). This process of giving those in need small loans so they can make more money with it has been quite successful over the years- as many of my entries have noted, but what about the failures and areas where the method of microfinance has struggled?

The article goes on to argue that despite clear developmental progress as a results of MF, there are “several methodological weaknesses in the literature documenting their impact and replication that should give pause to uncritical, wholesale endorsement.” I don’t doubt that microfinance institutions are reporting on a bias of support for their methods and it is important to know both the successes and failures of any project in order to move forward. It is especially important for the US to know what did not work in third world countries as we develop the best model for our own country, which has a very different make up than third world countries.

The main arguments of the article include the following:

-how to we know these results wouldn’t have occurred anyway?

-to what extent are outcomes attributable to noncredit and/or nonprogram variables?

-does it matter that villages and borrowers are nonrandomly selected?

In my opinion, selection bias is important when offering loans to those who are credit-less, especially if you are trying to build a successful base. Until a bank has developed success and a reputation, they must select the best and safest borrowers to guarentee returns. As the banks capital and abilities grow they can help more and more borrowers who may be riskier investments. If a microfinance bank begins by loaning to anyone and everyone who is creditless and wants a loan, they will lose too much money to continue their work. I understand that the point of microfinance is to help those without credit, but within that group there are still borrowers more qualified than others. A credit-less qualified borrow might be one that has a specific skill to market (ie. the ability to produce a desirable good) and a little capital to get that business started would appear to have good returns.

            The article also believes that there is a systematic bias to only report favorable outcomes, but is that not true of all businesses trying to promote their services? The article discusses specific case studies of microfinance failure that will be helpful for me to read through while thinking about an ideal model for the US, in particular the refugee women.