Image courtesy of http://www.alliancemicrofinance.no/where-we-work/diaconia-mdi
Authors Banerjee and Duflo, in chapters 8 and 9 of Poor Economics, discuss the growing trend of microfinance and microcredit institutions. The “microfinance and ‘social business’ movement, which starts from the premise that the poor are natural-born entrepreneurs, and we can eradicate poverty by giving them the right environment and a little bit of help getting started” (p. 206). Overall, the authors argue that both institutions can be valuable tools for helping the wellbeing of the poor, but are not going to make a significant difference in eradicating poverty. A lot of this has to do with some factors surrounding the poor’s spending tendencies, as well as the common business model that many of them follow. It is extremely difficult for the poor to save sometimes, especially when their goals seem impossibly far away. It is all too easy for them to succumb to impulsive spending when their stress levels are so high; extreme levels of stress diminish rational decision-making ability. “Most microcredit institutions disapprove of borrowing to buy consumption goods–some actually put a lot of effort into making sure that their money gets spent on some income-earning asset” (p.202). The authors point out that gaining access to microcredit can help reduce spending on goods that the poor would like to give up anyways (cigarettes, tea, snacks, etc) (p. 203). From their research they found that it is sometimes difficult to convince the poor that saving or cutting back on certain items will make a significant difference in their lives. Small business and entrepreneurship are key. The poor who take part in programs where they are give some asset and small financial allowance end up not only saving more, but are also more likely to borrow money and be able to pay it back (p.212). However, the majority of these poor businesses are extremely small and don’t make much money at all. “The low profitability of businesses run by the poor also explains why…microcredit does not seem to lead to a radical transformation in the clients’ lives” a loan to jumpstart a new business may not be the best or even an effective way of making an impactful difference in the welfare of the poor (p. 213). Banerjee and Duflo focus on this concept as the great paradox presented by the poor and the idea of MFIs. “This is the paradox of the poor and their businesses: They are energetic and resourceful and manage to make a lot out of very little. But most of this energy is spent on businesses that are too small and utterly undifferentiated from the many others around them” (p. 218). Such a small scale of businesses explains why overall returns are dismally low while the marginal return are high. What little money the poor can borrow happens to be very expensive, and some poor people choose simply not to take out loans from microcredit institutions, even if they have the ability to (p. 219). Many of the poor people who take out loans or get funding from MFIs don’t pour it all back into their business; oftentimes, they put the remainder towards their home or other items. The authors identify that it all goes back to the business model so many of the poor have. It is not viable to substantially grow the types of businesses they are operating (p. 220). Microcredit and MFI’s can help the poor sustain their business and get by in their everyday lives, but overall, the authors argue that they won’t be the key to eradicate poverty. Effective business models and strategies will make a more significant difference.
According to the Central Bank of Liberia, there are currently 18 registered microfinance institutions operating in the country. These institutions are concentrated mostly in the areas surrounding the Liberian capital of Monrovia. Credit Unions, Village Savings and Loan Associations, along with Rural Community Finance Institutions(RCFIs) are among the various types of microfinance institutions present in Liberia. I found the RCFIs to be an interesting concept and initiative taken by the Liberian government. The Central Bank of Liberia’s website states, “The establishment of these RCFIs is consistent with the Government’s focus on creating an inclusive financial environment through the delivery of financial services to the people of Liberia based on the National Strategy for Financial Inclusion adopted in 2009.” This initiative appears to offer technology-driven services like Western Union and Moneygram. It is clear that the Liberian is taking strides to provide access to banks and saving to the poor, especially in rural areas. The registered MFIs are aiming to mobilize saving and make it easier for the poor to have bank accounts and save money. I think that as they continue to develop, digital technology will play a greater role, specifically for the poor in rural areas. Being able to transfer money through the help of texting and cell phones means that people don’t have to travel far distances to get money to or from others. Overall, I think microcredit and microfinance institutions are a beneficial tool that can provide more immediate, short term solutions for the poor.