Op-Ed: Microfinance revisited and its role in reaching the missing middle

Two weeks ago I wrote about James Surowiecki’s article in the New Yorker that brought forward the inherent limitations of microfinance to actually generate a substantial number of jobs in a developing country. Since then it seems as if I was not the only one (surprise surprise) to take notice of Surowieki’s conclusions and it has even brought pioneers like Acumen Fund‘s CEO

Novogratz gave some credit to Surowiecki’s argument that not everyone in society is an entrepreneur and that in fact most people simply want a predictable, stable job with defined roles. Novogratz, however, distinguished her stance through her anectdotal experience with women’s access to credit and how throughout her experience they have overwhelmingly been favorable towards it. She says that this desire for credit provides the rest of us with critical lessons on how to address poverty.

However, the desire for credit on its own in no way makes someone an entrepreneur. Every teenager in America has an affinity for credit, but just because they are willing to spend that money somewhere does not make them some sort of innovator. Likewise, Surowieki’s argument highlights that for the most part microloans are not utilized for business expansion, but rather they help tide businesses over during rougher times, a la a bridge financing round. These funds like simple credit cards are used to cover funds that someone has already spent before — not towards future capital investments. It is that ability to reinvest ones funds towards scalability and expansion that is truly entrepreneurial.

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Op-Ed: Microeffect of Microfinance

A recent article in the New Yorker echoed sentiments expressed by many venture capitalists that have begun to shift their focus on the developing world and BoP markets that microfinance, while an amazing concept for enable entrepreneurs, cannot in itself lift countries out of poverty. James Surowiecki writes:

Microloans are often used to “smooth consumption”—tiding a borrower over in times of crisis. They’re also, as Karol Boudreaux and Tyler Cowen point out in a recent paper, often used for non-business expenses, such as a child’s education. It’s less common to find them used to fund major business expansions or to hire new employees … [I]t’s also because most microbusinesses aren’t looking to take on more workers. The vast majority have only one paid employee: the owner.

I agree with this opinion, particularly because I think that the current obsession with the ‘globalizationally’ sexy structure of microfinance tends to ignore the need for the creation of domestic consumption demand in struggling nations to jumpstart development.

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