The Darkside of Microfinance

Is the current practice of microfinance appropriate?
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This paper reviews the discussion on the main drawbacks of microfinance, demystifies it and proposes recommendations to improve its contribution to poverty alleviation.

The paper argues that there are diverging principles among organizations supporting microfinance:

  • Some defend subsidized microfinance institutions (MFIs) that reach the poorest people;
  • Others support financially sustainable MFIs with large coverage;
  • Both views share many general principles and have their own advantages.

It states that emphasizing both these views and best practices has:

  • Unnerved alternative models and has led to misconceptions;
  • Hindered innovations and activities that can jointly better contribute to the alleviation of poverty.

The paper suggests that policy makers should understand the structural and operational restrictions of microfinance and devise strategies to avoid perpetuating mistakes. It discusses:

  • The third world rhetoric and development intervention;
  • Microfinance and microcredit;
  • Financial sustainability versus poverty alleviation;
  • Commoditization, politics and the maintenance of the social order;
  • Non-government microfinance, impact assessment and sustainability.

The paper concludes that:

  • It is important for NGOs to recognize the advantages and disadvantages of fashionable intervention measures and avoid promoting case-careless development recipes;
  • However, the need for funds may drive many to follow best practices blindly;
  • Many important issues may be regarded as side issues despite the fact that they might contribute much more towards developing countries and poverty alleviation.

In conclusion, the author states that microfinance, as currently practiced, might be neglecting the root causes of poverty in favor of palliative remedies.

About this Publication

By Ferreira, E.