Introduction

This book is about one component of the global financial sector – microfinance – that in just thirty years has risen to become one of the most important policy and programme interventions in the international development community. As originally conceived, microfinance is the provision of tiny loans to poor individuals who establish or expand a simple income-generating activity, thereby supposedly facilitating their eventual escape from poverty. Its advocates claim that microfinance has been critical to the fate of the poor in many developing countries, creating jobs and raising incomes in the poorest communities, helping to empower the poor (especially women), and generally kick-starting a 'bottom-up' economic and social development process. The person most associated with the 'discovery' of microfinance in the 1970s is the Bangladeshi economist and 2006 Nobel Peace Prize co-recipient, Dr Muhammad Yunus. With his vision of rapid and affordable poverty reduction being achieved through microfinance, Yunus was able to convince virtually everyone in the international development community to support his efforts. Indeed, the next generation, he famously said in the 1980s, would be able to understand the concept of poverty only after having visited a 'poverty museum'. Here, surely, was the poverty reduction concept that all developing countries had been waiting for.

The central argument that I will develop in this book, however, is that microfinance is largely antagonistic to sustainable economic and social development, and so also to sustainable poverty reduction. Put simply, microfinance does not work. I fully accept that there are some minor benefits to be derived from the widespread provision of microfinance to the poor. An intervention that puts a little extra cash into the hands of the poor in any community – and especially if that cash is brought in from outside the local community in question – could hardly do otherwise. But I argue that these benefits are very minimal indeed, and anyway wholly insignificant when set alongside the huge longer-term downsides and opportunity costs inherent in the operation of the microfinance model. To focus upon these few minor shorter-term benefits is to deliberately focus on the few trees left standing after having helped the entire forest to burn down. In truth, once we go beyond the fabulous 'feel-good' PR and marketing effort undertaken on behalf of the microfinance model, no more so than by Muhammad Yunus himself, we find a completely different reality. Sustainable local economic development trajectories are actually undermined and blocked. Local communities are structurally weakened and destroyed. Important reserves of solidarity, mutuality and cooperation are trashed thanks to the internecine competition between desperate individuals 'poverty-pushed' into establishing the very simplest of microenterprises. Human dignity and self-respect are lost as the poor in developing countries are increasingly forced to accept their permanent engagement with the most primitive, illegal, dangerous and demeaning business activities imaginable. Overall, those developing countries awash with microfinance – and the prime example, of course, is Bangladesh itself – are increasingly being left behind by other developing countries, those that have proved far sighted enough to channel investment into the type of enterprises, infrastructures and institutions that, when combined, have far more potential to produce a substantive and sustainable growth and development payback. All the while the various ways in which the poor have in recent history been able to successfully escape grinding poverty and achieve tolerable living standards and opportunities – by exercising their collective capabilities through pro-poor political parties, social movements, supportive state structures, trade unions, associations, single-issue pressure groups, and the like – are now ruled to be completely off the agenda. The poor are instead increasingly thrown back on to their old, and largely unsuccessful, historical mission; to attempt vainly to rescue themselves from their own poverty and suffering solely through their own individual actions and meagre resources.

Another core argument I make in this book is that the increasing commercialization of microfinance is responsible for greatly amplifying the destructive impact registered by the basic Grameen Bank microfinance model. A central development within the world of microfinance was the schism that took place in the 1990s, when the subsidized Grameen Bank model was effectively abandoned and a completely new commercialized microfinance model – what I term the 'new wave' microfinance model – was ushered in as its replacement. From now on, a microfinance institution was to be a business, and its primary objective was to attain full financial self-sustainability and profits as quickly as possible. Even if the poor would greatly benefit from low interest rates and the additional net income that would then result from any simple income-generating project, an outcome that might in turn necessitate subsidies from the wider (richer) community, tough. Reconstituting microfinance as a for-profit business model, however, has had quite disastrous consequences. Just as on Wall Street, we now find 'new wave' microfinance increasingly defined by unethical profiteering, greed, irresponsible risk-taking, speculation and 'microcredit bubbles'. PR efforts to the contrary notwithstanding, that microfinance largely exists to promote poverty reduction is a concept that lost any traction many years ago.

The arguments made here also have considerable implications for theories of financial systems, and particularly how a financial system influences economic growth, as well as its impact upon the distinct process of sustainable economic development (where growth is based on respect for economic, social and environmental outcomes). If we accept that it is not simply the quantity of finance available which determines the rate of growth and sustainable development, but also how, where, when and in what form financial resources are deployed, then we have here a very useful case study indeed. Many developing-country financial systems have been very significantly restructured towards microfinance, with the corollary being the progressive abandonment of lending to the small and medium-sized enterprise (SME) sector. So how does a microfinance-dominated financial sector work, and is it good for growth and sustainable development? With Bangladesh, the most famous example of a financial system structured around microfinance, later joined by Bolivia, Mexico, Cambodia, Uganda, Mongolia, Bosnia, Peru, Nicaragua, and many parts of southern India, we now have important real-life country and regional examples of microfinance 'saturation' to examine. While we still...