Confessions of a Microfinance Heretic

Inside the Microfinance Industry

The goals of microfinance are clear, but the ways in which microfinance institutions (MFIs) operate isn’t so transparent. Their glossy brochures and glitzy websites would have you believe that you can help eliminate poverty. In theory, with even a $25 donation, you can lend money to the needy to fuel their entrepreneurial spirit, fund their small-business acquisitions and, in the process, help them out of hardship. In practice, however, MFIs’ usurious interest rates keep the poor engulfed in penury.

Microfinance is the practice of lending small sums at low cost to impoverished people so they can improve their lot by, say, purchasing a “productive asset,” such as a child’s school tuition, a farm animal or a piece of equipment. The idea is that being able to buy a “goat or a sewing machine” could enable a family to produce more goods to sell, thus helping them help themselves so that with diligent effort, they can build a “small business that receives successively larger loans” and eventually conquer poverty.

The sad truth is that only a small fraction of the 200 million people worldwide using microcredit actually achieves results...