Good Microfinance Does Good

Our vision undergirds our Economic Empowerment Initiative, where we seek investments that restore dignity and empower the most vulnerable to flourish. One area in which we do this is through microfinance, where we join with global organizations to support local businesses and entrepreneurs who have high potential but limited access to capital. Microfinance is a movement which holds transformative possibilities but has also received scrutiny, as it should, whenever it abandons its core ideals.

In the 1970’s, economist Muhammed Yunus pioneered microfinance by founding Bangladesh’s Grameen Bank which extended opportunities to the poor who had minimal access to traditional banking. Microfinance propelled a tectonic shift, infusing hundreds of billions into small businesses in underdeveloped regions. By 2018, approximately 140 million people worldwide were active borrowers from microcredit institutions, gaining access to small-scale financing that can help entrepreneurs start or expand businesses and build more secure livelihoods.¹

However, in recent years the whole experiment has come under increased scrutiny, with The Wall Street Journal’s Gabrielle Steinhauser concluding numerous microfinance lenders “resemble the loan sharks they were supposed to replace.”² We should never assume an investment does good merely because peddlers use the word microfinance or ask us to naively trust they’re staying true to this ethical framework.

Bad Actors

Microfinance garnered so much attention because of its serious commitment to alleviate poverty, but also because investors began to see the possibility for profit. As opportunities for financial gains emerged, lenders rushed into the market. Some of these lenders were unscrupulous, pushing ever larger loans to an increasing number of unqualified clients and using rapacious tactics to entice borrowers and lock them into onerous terms. In some Latin American countries, interest rates soared to 100%, and a scandal in Mexico revealed lenders charging 400%.² Borrowers targeted by unethical creditors have suffered a disturbing increase in suicides, homelessness, food insecurity, and children leaving school to work and help keep the family solvent. Some economists and policy makers have surveyed the terrain and concluded that microfinance has failed.

In her scathing exposé, Steinhauser shared Sarav’s story and explained grim realities. Today there are roughly 10,000 microfinance institutions (MFI’s), but unfortunately some of these lenders have strayed so far from the original principles that the guiding vision is completely distorted.³ Compelled by quick profit with little regard for the well-being of borrowers or the long-term health of the business ventures they underwrite, some MFI’s have become predatory lenders, accelerating the very corruption they were designed to counteract.

Microfinance, as originally understood, insists on fair and sustainable interest rates, limits how land can be used as collateral, and prioritizes the long-term health of every fledgling business. Tragically, underhanded MFI’s abandon all of this. Whenever money is involved, good ideas always run the risk of being exploited by bad actors angling only for profit. We must safeguard microfinance against those who want to use the vision without adhering to the vision.

A Very Good Vision

But the vision is very good, if we’ll only stick with it, growing and adapting but never destroying the core values. When operating with integrity, microfinance accomplishes immense good for the poorest of the world. Microcredit helps alleviate the insecurity of extreme poverty by infusing resources to manage the most devastating swings of inconsistent income.⁴ For some high-potential entrepreneurs, particularly those with prior business experience, access to microcredit can generate substantial returns and support significant growth in business revenue and assets.⁵ Microfinance empowers women and creates financial freedom for the marginalized and vulnerable.⁶ And though macroeconomic factors are myriad, the overall success is eye-popping: in 1981, 41% of the world’s population suffered from poverty, but 34 years later the number sat at roughly 9%.⁷

Critics of microcredit often miss how the enterprise is not concerned only with tiny retail loans but pursues a more comprehensive goal: building and sustaining an integrated, healthy financial ecosystem, one which takes decades to build. Numerous studies, even the few reports critics typically rely on to conclude microfinance’s failure, consistently confirm how microfinance fuels small business.⁸ Notably, an Indonesian study insisted “financial inclusion significantly reduces both forms of poverty” and identified credit access as “the most influential driver of poverty reduction.”⁹ You can miss the big picture if you look only at loans and only over a short-term.

Of course, we always need improvement. Our most rigorous microfinance advocates are never satisfied with the status quo but push the industry to identify flaws, transform the model, and calibrate to the unique needs and market forces in particular countries and regions. Whatever reckoning microfinance faces, it’s not because the idea is broken, but because too many MFI’s grab the “microfinance” moniker, strip away its morals and purpose, and import big finances’ avaricious features in their greedy efforts to ravage the poor.

We can never simplistically say that everything calling itself microfinance does good. But we can absolutely say good microfinance does good.

Doing Microfinance Right

Eventide is committed to microfinance, with over $110 million invested since 2019 through Microfinance Institutions (VisionFund, Creation, Hope Global Investments, and Calvert Impact). We invest based on shared values alignment. We intend to do better than merely dole out loans but to ensconce ethical practices which serve the poor and safeguard against exploitation and abuse.

For instance, many of the most egregious abuses have concentrated in Cambodia, where we do not currently invest. Foreseeing the dynamics highlighted in the WSJ article, VisionFund exited Cambodia back in 2018, choosing to focus on more underserved regions. Their attunement to the underlying causes of poverty, steadfastness in their mission, and resistance to the allure of near-term profits provided guardrails which served them well and kept them from getting stuck in this problematic environment.

Rather than pushing products, these organizations listen and research to discover what clients genuinely need. Recognizing 77% of their clients had no access to insurance, one organization crafted creative insurance solutions. This close-to-the ground attention has led to our lenders offering a wide array of financial services, multiple forms of banking, small groups for ongoing education, and integrated discipleship.

The results are gratifying. One organization has provided funds to 952,000 people suffering from poverty. One lender had 94% of their clients report improved wellbeing for their children. Another organization had 83% of clients report they are making their loan payments without any problem. We could measure these healthy returns in a myriad of ways.

We must pursue reforms wherever there’s abuse, continue to improve the model, and protect the core values and vision. And we should enthusiastically support microfinance as a potent mechanism for using our resources to confront global poverty. Microfinance has alleviated the suffering of millions, and there are millions more to help. Microfinance, done right, offers one meaningful way we can use our investments to serve our poorest neighbors.