10 Reasons Why Microcredit Will Never Solve World Poverty

Posted Wed, 12/30/2009 - 15:08

By Kirk Magleby

Microcredit is an essential part of the struggle to rid poverty from the globe.  The financial market is vastly geared toward the upper and middle classes making Microcredit one of the only ways that low income individuals can receive loans to grow their businesses.  Like education, Microcredit is a necessary tool but is inadequate to solve poverty.  

One example is Bolivia where Microcredit has reached market saturation.  Bolivia continues to be one of the poorest countries in South and Central America with only marginal growth in per-capita GDP.

The following are 10 reasons why Microcredit has been unable to and will never solve world poverty.1

  1. Only a small percentage of humans have the personality characteristics to be successful entrepreneurs. Most people are better suited to waged employment.
  2. Not all natural entrepreneurs are willing to risk a business loan.2
  3. Not all natural entrepreneurs can competently manage money.
  4. Most Microcredit-enabled businesses are so small they have no employees beyond the owner-operator, and little prospect for growth.3
  5. Most Microcredit-enabled businesses have little market differentiation, resulting in marginal competitive advantage. Copycat enterprises abound.
  6. Many Microcredit clients are playing zero sum games. If A’s sales increase, B’s sales decline. This is particularly true in the informal retail sector.
  7. Microcredit focuses almost exclusively on women, while in most cultures men tend to create larger enterprises with higher growth potential.4
  8. Many older children of Microcredit-enabled mothers languish in idleness. They have been to school and have high expectations, but no formal job prospects.5
  9. In saturated Microcredit markets, many borrowers get caught in debt traps, taking out loans from micro lender 1 to pay off micro lender 2.6
  10. Most Microcredit-enabled enterprises provide subsistence, but little or no profit. Wealth accumulation requires profit.

Is Microcredit vital? Yes. It is the first rung on the development ladder.7 Poverty alleviation across a community or nation, though, requires the second, third and fourth rungs on the ladder. That is why Microfranchising is so critically important.8  Tens of millions of small, profitable, locally-owned businesses in the developing world will solve global poverty. The franchise business model is uniquely adept at creating large numbers of small, profitable, locally-owned businesses that generate employment while providing viable goods and services to the local domestic market.

The combination of Microfinance with Microfranchising holds such promise that many informed observers are calling MicroFranchising “the next generation of Microfinance.”9  I recommend my book, “Ending Global Poverty:  The Microfranchise Solution.”
 
 
Citations
1  "Microfinance (MF) does not eliminate poverty. MF is not a panacea as some thought a few years ago.”
Elizabeth Littlefield, CEO, Consultative Group to Assist the Poor (CGAP), World Bank. December 2004.
2 “The government of the Philippines did a study. 22% of Filipino households have the entrepreneurial
instincts to benefit from Microcredit, but only 60% of those are willing to risk a business loan. So, only
13.2% of Filipino households are actually prospects for a micro loan.” Jovy Guanzon, Executive Director,
Philippines Microenterprise Development Foundation. October 2005.
3 “One audit of 400 Microcredit-enabled businesses in Central America found only 1 enterprise with even a
single employee outside of the owner’s immediate family.” Todd Manwaring, Director, Center for
Economic Self-Reliance, Marriott School of Management, BYU. September 2005.
4 “Worldwide, men tend to create larger enterprises than women.” Kristie Seawright, Professor, Marriott
School of Management, BYU. September 2005.
5 “These young people have finished school. They have no interest in their mother’s tiny business. But
only 1 in 6 can find employment in the formal sector.” John Hatch, Founder, FINCA. October 2005.
6 “Loan shopping” is endemic in saturated Microcredit markets like La Paz, Bolivia; Nairobi, Kenya; and
Manila, Philippines.
7 “Along came the Microcredit movement and started saying ‘let’s put a rung into this ladder, as close as
we can to the ground.’ ” John Hatch, Small Fortunes: Microcredit and the Future of Poverty, PBS
Documentary, October 2005 premiere.
8 John Hatch, Why is MicroFranchising Important to MFIs?, November 2005.
9 Don Terry, Manager, The Multilateral Investment Fund (MIF), Inter American Development Bank,
February 2005.

 

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