Challenging the Claim that Microfinance Loans Result in Poverty Reduction

“Confessions of a Microfinance Heretic” challenges the hype of microfinance loans as a solution to poverty.

| May 2013

  • Confessions of a Microfinance Heretic
    Author of “Confessions of a Microfinance Heretic,” Hugh Sinclair dares to challenge the idea that microfinance loans could promote an end to poverty.
    Cover Courtesy Berrett-Koehler Publishers
  • Money-Challenges
    Microfinancing was thought to be a solution to poverty, but industry experts may have been too optimistic.
    Photo By Fotolia/tiero

  • Confessions of a Microfinance Heretic
  • Money-Challenges

Author and microfinance consultant Hugh Sinclair reveals the dark side of microfinancing in Confessions of a Microfinance Heretic (Berrett-Koehler Publishers, 2012). After a decade in the industry Sinclair began to realize that microloans do not help the poor as they were so fervently promised to do. In this excerpt taken from chapter one, “Thou Shalt Not Criticize Microfinance,” Sinclair lists just a few of his challenges to the claim that microfinance loans will bring an end to poverty. 

“I’m a dodgy moneylender, exploiting the poor with useless, overpriced loans, ideally obliging their children into forced labor in the process.” This did not go down well. I had been introduced to yet another gathering of bright-eyed microfinance experts at yet another microfinance conference, and I had incorrectly assumed that irony and sarcasm were within their grasp. They were not. I attempted to redeem myself. “Guys, I’m joking . . . it was a joke. I’m a microfinance consultant, we’re all cool . . . sorry.”

I had broken the golden rule of microfinance, the unwritten code that bonds its practitioners together. I had criticized microfinance and, perhaps worse, I had implicitly challenged the developmental claims the sector proclaims so vehemently. This is unacceptable from an insider. But none of the experts offered a defense or rebuked my confession. Such comments cut a little too close to the nerve to warrant further conversation. It is usually better to discuss the weather or the palatial décor of the conference rooms instead.

Lack of tact had once again led me into an awkward situation, but it could have been worse. Twice I have narrowly avoided being punched in conferences for daring to suggest that microfinance was in fact falling a little short of miraculous.

There is actually surprisingly little evidence supporting microfinance as a practical tool of poverty reduction, but this rather critical detail is ignored within the microfinance sector for one simple reason. Microfinance does not apparently require evidence to prove it works—since, on the face of it, it seems to work. It works because the poor repay loans, and this is all the proof the sector requires. Some 200 million people now receive microfinance loans, most of whom repay the loans. Therefore they miraculously became better off in the process. So the argument goes.

The majority of credit card holders in the U.S. and Europe pay their bills eventually, so therefore they too are becoming wealthier by the day thanks to Visa, MasterCard, and American Express. The argument is no more complex than this. The fact that a large proportion of these microloans are used for consumption, or to repay other loans, or to pay off the evil village moneylender, is irrelevant.

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