Outside View: Betting on the Band-Aid?

By STEPHEN DALEY and BRIAN HOOKS, Outside View Commentator

FAIRFAX, Va., Feb. 15 (UPI) -- Welcome to 2005, the International Year of Microfinance. At least, that's how the United Nations is billing it. That's right. This is the year that all eyes and all checkbooks will be focused on beefing up microfinance programs around the world. And why not?

Microfinance has and continues to help many of the poor in the developing world by allowing borrowers to obtain small amounts of cash to start or expand their small businesses. They can buy more and better things -- like food -- and the benefits of their enterprise spill over to others in their communities.


Why not provide access to this sort of capital and enterprise opportunity to billions who still live on less than -- the always distressing figure of -- $2 a day? We absolutely should continue to support the type of microfinance programs that work to provide credit to those who do not have the option of walking into a bank and acquiring a more traditional loan. But if we stop there, we should be ashamed of ourselves.


You see, microfinance is a Band-Aid solution. It is not a poverty solving panacea. If the United Nations was serious about creating global prosperity, it would have dubbed 2005 the "International Year of the Entrepreneur," and encouraged policy changes that would better support the budding small-business owner.

Back in 1997, Mohammed Yunus, a.k.a. the father of microfinance, called on governments and microfinance providers to reach 100 million borrowers by the end of 2005. The U.S. Congress passed legislation increasing its funding (up to $200 million) for microfinance lending in developing countries.

Ever since and in all the excitement, an important notion has been lost.

The reason some of the poorest countries in the world need microfinance is because deep-rooted institutional problems make the general financial sector unworkable. And until these problems are addressed, we are reduced to celebrating an appallingly small-scale solution to the biggest problem facing humanity today: abject poverty. For the poorest of the poor to make real progress on a global scale, more fundamental changes must be made.

Consider Elvira Carino, who lives in Manila and whom we encountered while studying the effectiveness of microfinance in the Philippines over the past two years. Ten years ago Elvira opened a small store from her home. For a few years Elvira sold sugar, salt, coffee, and some canned goods. She joined a microfinance program and was able to use this injection of money to buy soft drinks and beer by the case. The influx of capital enabled her to dramatically expand her business, and over time she established herself as a distributor to other small stores in her area.


Today she owns two motorbike-driven tricycles and recently acquired a truck. Elvira and her family are doing very well: her husband left his minimum-wage job to work in the business and they also have three full-time employees.

Elvira's is the sort of success story that microfinance supporters love to share. She pulled herself out of abject poverty, beginning with a loan of less than the equivalent of $60, and left her microfinance provider in 2003.

But then what? Was she welcomed into the broader financial sector and offered an open line of credit based on her substantial assets and demonstrated business acumen? No.

Despite her success she is unwilling to use the local banks. She believes that formal institutions, like banks, are all a part of the pervasive corruption of her country. And even if she was willing to deal with a commercial bank, it would most likely be unwilling to deal with her. The land on which she resides and works is not hers. She has paid for the right to live there, but she is unable to acquire title to the land or sell this right, meaning the bank would be unwilling to accept it as collateral, reducing the likelihood of a loan. So when Elvira needs money now, she happily pays the much higher interest rate that her local informal money lender charges.


In Elvira's case, microfinance has not been a bridge to the global economy, but rather has simply been a band-aid -- a successful Band-Aid, but a Band-Aid nevertheless.

Unless we put the success of microfinance in perspective, and continue to work toward fixing the deeper problems, our excitement is shameful. The United Nations and the rest of us involved in the fight for development are reduced to advocating an inherently limited level of prosperity for the world's poor, in effect saying, "It's not great. I certainly wouldn't settle for it. But it's as good as you can expect to do."

The poor can't access the larger financial sector because they don't have title to the land on which they live and work. Imagine walking into a bank and asking for a loan and trying to put up your landlord's home as collateral. This is a legal problem in many countries and requires a legal solution.

The poor can't access the larger financial sector because banks in many countries are rewarded for making loans based on political ties, not demonstrated business savvy. And worse, many countries, the Philippines among them, restrict ownership of land and businesses based on membership in racial and ethnic groups. These laws and corrupt practices need to be targeted and a line needs to be drawn in the sand. At the very least big aid donors like the United States need to stop showering millions of dollars on countries that refuse to address these fundamental concerns.


Elvira's story emphasizes that microfinance will not, by itself, produce sustainable development. Increasing the amount of money made available to the poor, through microfinance programs does not fix the problems holding Elvira and so many others like her back. Make no mistake, microfinance does put food on the table which is no small accomplishment. Some of the excitement expressed by the U.N. declaration is very well deserved. But if we're betting on the band-aid to be the ultimate solution, we're doing ourselves a disservice and condemning the poor to a world of second bests.

We can do better.


-- Stephen Daley is a research fellow and Brian Hooks is director of the Global Prosperity Initiative at the Mercatus Center at George Mason University. Daley is the lead researcher of the Mercatus's Philippines microfinance research team studying the effects of microfinance on the Philippine economy.

-- United Press International's "Outside View" commentaries are written by outside contributors who specialize in a variety of issues. The views expressed do not necessarily reflect those of United Press International. In the interests of creating an open forum, original submissions are invited.

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