Does Microfinance Really Work?

An August 2006 article titled "Fortune at the Bottom of the Pyramid: A Mirage" by Michigan professor of business strategy Aneel Karnani takes the field of microfinance to task for being, in the end, ineffective.

This fervor suggests that microcredit really must help the poor. And many have made grand claims to this effect, including Yunus, who said, “We will make Bangladesh free from poverty by 2030.”⁴ Somewhat less ambitiously, the State of the Microcredit Summit Campaign Report 2006 states that “microcredit is one of the most powerful tools to address global poverty.”

Yet my analysis of the macroeconomic data suggests that although microcredit yields some noneconomic benefits, it does not significantly alleviate poverty. Indeed, in some instances microcredit makes life at the bottom of the pyramid worse. Contrary to the hype about microcredit, the best way to eradicate poverty is to create jobs and to increase worker productivity.

Women's Initiative Business Trainer Nika Quirk thinks Karnani's analysis too one-sided. She comments:

Enjoyable article showing how the modern world gets stuck on singular solutions to complex issues--especially trendy solutions.

The complexity of economy-work-family-community is not honored by either a singular focus on microlending or on increased labor opportunities with large organizations. As we continue to see in the U.S., employment opportunities without accessible/affordable child care and flexible work-family policies are not a total solution for ending women’s poverty.

This work-family dilemma can also be exported to other countries as they move to a Western-style economy.

How about funding a healthy blend of labor employers, small entrepreneurs and worker collectives? Diversity is key in the health of any ecology.

For example, I think many of our clients would benefit from working as a collective in some way, perhaps forming buying clubs to enjoy economies of scale in purchasing supplies, materials, inventory; sharing the cost of services such as a bookkeeper; or sharing facilities like office or storefronts. Saving on these costs could create capacity to spend on labor to increase production. It also extends our model of working as a community.

Capitalism focused on large organizations (as it does in the U.S.) inhibits both small business and collectives (especially since they are still often viewed as socialistic).
-- Nika Quirk

Here's an overview of the debate between Karnani and his colleague, C.K. Prahalad, whose book The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits, called forth Karnani's disparaging response. And here are some other, varied perspectives on Karnani's piece.