Despite being in place for more than 20 years, microfinance has yet to achieve its full potential, some experts suggest.
Microfinance is being used in a variety of ways — from seed funding social enterprises to achieving social objectives at the community and household level. But this form of financial service should be implemented strategically and effectively by well-informed, highly skilled, socially sensitive microfinance players and development practitioners. Else, microfinance could be “a double-edged sword.”
“The effective use of money … is fundamental to achieving development objectives. Without affordable credit and accompanying financial services, offered at the right terms and sizes, sustainable long-term economic expansion at a household and community level cannot occur,” Neal Youngquist, World Vision Myanmar’s microfinance program general manager, told Devex.
But like any other tool, the use of money for development will depend on how one uses and understands its potential. Several established organizations that use microcredit, such as the Grameen Bank and BRAC in Bangladesh, have yielded positive results when it comes to empowering the poor.
But Youngquist argued that if microfinance practitioners and development workers running the programs do not have the necessary skills and background, there may not be airtight guidelines governing the service and may lead to significant setbacks.
“Microfinance can lead to over indebtedness and greater poverty if targeted toward the wrong segments [of society] such as the absolute poor or those without financial discipline,” he explained.
The effectiveness of microfinance for development is also rooted in the way development workers understand its potential. Given recent debate on the good and bad effects of microcredit, several professionals working in international development view it with a fair amount of caution.
“There are instances when development practitioners view microfinance practitioners in the same class as usury and profit-hungry money lenders,” Youngquist said. But this stems mainly from the misperceptions field-level development staff has on microfinance, and the lack of understanding on how the service can bridge the gap between the financial industry and the development community.
So how do you bridge this gap? Youngquist shares four pieces of advice:
1. Erase the misunderstandings, learn the trade
A good first step, according to the World Vision official, is to address the misconceptions so microfinance is viewed as an “integrated social development tool as it should,” while partnering with other established institutions to fast-track the learning process and provide a more integrated approach.
“Implementing microfinance is not for all. Development practitioners partnering with established microfinance providers with a ‘social bottom line’ offers the best avenue for real opportunity and success,” Youngquist said.
2. Be willing to take on a risk/reward mentality
Microfinance, at its very core, is still a financial undertaking, which means a loss-return element is inevitable. This is the case especially in high-risk development programs serving communities where borrowers may not always have the capacity to pay back their loans.
Youngquist, however, shared that microfinance players should not be afraid of failure and settle for a safe but mediocre approach to ensure good results.
“A safe approach does not guarantee depth [and quality] of results and extended outreach to those in need,” he said.
3. Think outside the box
In microfinance, there is no one-size-fits-all approach to promoting development, empowerment and poverty reduction. Microfinance practitioners need to develop a structured approach on how their target beneficiaries may use the service, tailored to the demographic of the community.
“Adopt a creative approach to meeting the financial service needs of the poor and low-income segments of the community,” he said. “Different businesses and income-generation activities benefit from policies that offer the freedom to set payment terms and conditions for different types of borrowers.”
Tailor-fitting a repayment scheme to a specific situation will also help the borrowers become more financially disciplined and empowered. In addition, it reduces the risk of beneficiaries defaulting on their loans.
4. Do not be afraid to say no
Above all else, practitioners and communities should learn the virtue of saying no, especially on terms and conditions that would negatively affect an individual’s capacity to pay, whether in the short or long term.
“Microfinance is not a panacea and a cure-all intervention. Money alone cannot solve the problems within a community or household,” Youngquist concluded. “A realization of the limits of money and its potential dangers is necessary to limit against extending it as a resource where the discipline or the need requires a different approach.
Read more development aid news online, and subscribe to The Development Newswire to receive top international development headlines from the world’s leading donors, news sources and opinion leaders — emailed to you FREE every business day.