In the late 1990s and the 2000s, you could barely move without bumping into a gushing endorsement of microfinance. Bill and Hillary Clinton, Bill Gates, Pierre Omidyar, and others in the liberal establishment enthused over what they trumpeted as a bold new strategy: grant microloans to millions of poor women in the Global South, who can then launch tiny businesses and lift their families out of poverty.
Today, you never hear about microfinance. What happened?
The hard truth is that microfinance has failed to live up to its extravagant promises. Most of its onetime enthusiasts have been intellectually dishonest, letting that failure pass without a postmortem, or even a proper obituary.
The Clintons were microfinance’s most prominent enthusiasts. In 1996, Hillary Clinton gave the keynote address at the huge Microcredit Summit Conference in Washington, D.C., which attracted 3,000 people from 137 nations. She called microfinance “a big idea, an idea with vast potential,” adding that it was “an invaluable tool in alleviating poverty, promoting self-sufficiency, and stimulating economic activity in some of the world’s most destitute and disadvantaged communities.” That became something of a rallying cry for the then first lady. As Lily Geismer, a professor at Claremont McKenna College who has studied the policy’s history, told me, “From that conference onward, Hillary Clinton included an endorsement of microfinance in nearly every speech she gave.”
Microfinance aimed to bypass traditional village moneylenders in poor nations, who charged astronomical interest rates. New organizations would lend women enough money to start small basketmaking enterprises in their homes, for instance, or to invest in dairy cows and market the milk.
The policy’s high point came in the middle 2000s. The United Nations declared 2005 the “Year of Microfinance”; a glowing endorsement in The New Yorker was only one of several; in its first three years, the Clinton Global Initiative funded more than 270 microfinance organizations that allegedly assisted 3 million people. In 2006, Muhammad Yunus, the Bangladeshi economics professor who had pioneered the idea, won the Nobel Peace Prize. In 2009, he was awarded the Presidential Medal of Freedom. Yunus had been widely quoted as promising that microcredit would eventually “abolish poverty” and said that he eventually wanted to set up a “museum of poverty, a building where the children of the future would go and marvel at the phenomenon of poverty.”
But the inefficacy of microfinance is not necessarily a new revelation; doubts had been raised right from the start. In 1991, in Bangladesh, I talked with Mahmood Hasan, the energetic founder of an NGO called Gonoshahajjo Sangstha (“People Helping People”). He was just getting started at the time, but the organization now runs 700 schools all over the country. Hasan was sympathetic about microcredit but already skeptical:
The microloans do go to the poor. Most who get loans are women. But there is no proof that they are able to use microfinance to build genuinely self-sustaining businesses. There is no proof that microfinance has raised the terribly low wage rate in the rural areas. There is not even proof that the schemes are weakening traditional moneylending.
Despite such doubts, microfinance spread widely from Bangladesh to places as far afield as Latin America and Africa. The enthusiasts inside the Washington Beltway ignored the mounting warning signs. Big financial institutions started to butt in and turned Yunus’s original nonprofit model into money-making ventures (over his objections).
Milford Bateman, microfinance’s most penetrating critic, argued that “the global micro-credit industry had effectively been taken over by greedy individuals, opportunistic so-called ‘social entrepreneurs,’ aggressive private banks and hard-nosed investors.” Evidence of failure at the grass roots grew. Debt mounted among the poor borrowers, who had to take out more loans just to keep making payments on what they already owed. Last year, another crisis erupted in Jordan, where a reporter found that indebted women were in hiding to avoid being sent to jail.
Nadine Shaanta Murshid, a Bangladeshi professor of social work and public policy at SUNY Buffalo,analyzed data from 5,000 Bangladeshi households who had taken out microloans and found that violence against women was actually less prevalent among the poorer families. She explained, “For families who are slightly wealthier, the ‘need’ for microfinance is not as great, so their husbands see the fact that the women ‘want’ the loans as a threat.”
Worse yet, the financial statistics barely budged. Case studies from all over the world showed that microfinance was not lifting millions out of poverty. Instead, poor borrowers mainly used the small loans to finance their household consumption over the year. Jonathan Morduch, a professor at New York University and a onetime microfinance sympathizer, acknowledged this in a book chapter he cowrote in 2017: “The hidden burden of living on $1 a day per person (or wherever the global poverty line is set) is that rarely does anyone actually receive $1 per person each and every day. Instead, farmers have high and low seasons, laborers have better and worse months.” In short, Morduch admitted that microcredit was hardly transformative.
So microfinance disappeared as an ideal. Geismer, who was a college student in the early 2000s, told me, “Back then, plenty of idealistic people I knew went on to work for microfinance organizations. My students today who have similar values are not interested.” (Geismer’s research into microcredit and the liberal establishment is part of her new book, Left Behind: The Democrats’ Failed Attempt to Solve Inequality, out next March.)
But even though the world has moved on, the concentration on microfinance has inflicted damage. For years, it dominated the discourse about poverty in the Third World and attracted funding that might have otherwise gone to alternatives.
In retrospect, the appeal of microfinance to the liberal establishment made perfect sense. First, it promised transformation in the Global South—without requiring the rich world to spend vast amounts. “Microfinance was billed as soon to be self-sustaining,” Geismer said. “It was regarded as a win-win.” The approach also incorporated the liberal establishment’s enthusiasm for private-sector, entrepreneurial solutions to social problems. And it seemed to cause little conflict. Microfinance’s only real opponents were traditional village moneylenders, who charged those usurious rates of interest.
In fact, microfinance’s greatest failure is that it ignored the hard truth that the only way to end poverty is through collective action by the poor themselves and their allies—and such collective action does cause conflict. Poverty is not so much a condition as a relationship—people are poor because others, whether local moneylenders and landlords, a corrupt national government, or powerful global corporations, either exploit or ignore them.
Bangladesh offers a perfect example. In recent decades, a huge export garment industry has emerged there, employing 4.5 million people, most of them young women. Even with compulsory overtime, garment workers don’t earn a living wage, and when they try to form labor unions the government cracks down. (Some 10 percent of the members of the Parliament of Bangladesh own garment factories themselves.) And even if workers succeeded in organizing, the giant importers like Walmart, the Gap, and others would simply shift their clothing imports to subcontractors in other low-paid producing countries, like Myanmar or Ethiopia.
Only 2 percent of the cost of an imported garment goes to the young women who sew it. Double that to 4 percent—a few cents extra for a $20 shirt—and you could truly start to raise millions out of the worst poverty. So if your aim is to empower women in the Global South, you could push for the U.S. Congress to pass laws prohibiting the import of garments from nations that don’t guarantee union rights.
But that would mean confronting the big importers like Walmart and the Gap, not village moneylenders in Bangladesh. So far, most of the liberal establishment that first championed microfinance haven’t shown much appetite for that fight.