Microfinance does not eradicate poverty

Translated from original article in norwegian found here.

 

This is revealed in the doctoral dissertation of Pontus Engström at the University of Agder (UiA).

– Microfinance provides a little more money in the wallet to the microentrepreneur, but they remain poor. Microfinance does not contribute to business growth or economic growth in society at large, says Engström.

He has just defended his doctoral dissertation on microfinance. Engström has followed 755 microentrepreneurs in Equador over a ten-year period. The findings show that, on average, the entrepreneurs make a little more money on their business, but not enough for the business to grow and fight poverty.

– The intention of micro-loans is to kick-start economic growth from scratch by giving small loans to poor people. Most small contractors want to grow, but that doesn’t happen. Microfinance does not help fight poverty as the scheme is used today, says Engström.

Financial illiteracy

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Engström shows in the doctoral dissertation that experience and general education mean little to the development of micro-entrepreneurs. What matters, on the other hand, is an understanding of basic financial concepts.

– Lack of growth in micro enterprises is often due to financial illiteracy of the business owner. The microentrepreneur is most concerned about getting money in his wallet from day to day and is not concerned about long-term value creation, says Engström.

He believes there is a need for more training in business and finance.

– The actors lack financial skills to grow and must be offered more education in business and finance. We must not stop supporting micro-enterprises, but most preferably we must invest in small and medium-sized enterprises with 10 to 300 employees. There are too few SMEs in poor countries, especially in Africa. The lack of such companies is called “the missing middle,” says Engström.

According to the World Bank, SMEs create four out of five jobs.

– We need to support the slightly larger companies, which have the power to hire people. There is no shortage of access to micro loans, but the loans must be given to the small and medium-sized businesses that have already grown and shown that they have a market position, says Engström.

Norway with a key role
Norway plays a key role when it comes to microfinance in the world. Norad, the Mission Alliance and the Strømme Foundation are among the Norwegian players involved in microfinance in poor countries, and in 2006 the Nobel Peace Prize was awarded to Muhammad Yunus.

– Microfinance became a hype when Muhammad Yunus received the Peace Prize, says Engström.

The Bangladeshi economist received the award for developing microfinance. Yunus believes that all people are potentially entrepreneurs, but that not everyone has access to resources. When he received the Peace Prize, Yunus said that microfinance would create a world without poverty, and that in the future we would go to museums to experience poverty and unemployment.

Criticism of microfinance
Engström was among those who liked the message from the business professor, but the Peace Prize gave a brief cheer in public space before criticism began. Both Yunus and microfinance were criticized for being too big in words and too strong in ambition.

– Critical journalists claim that microfinance led to more poverty. This was partially confirmed by other research showing that microfinance has no or very little effect on the economic development of poor countries, says Engström.

He believes the peace award to Yunus has helped reinforce a romanticized image that it is good that all people are entrepreneurs.

– We have to move away from the naive idea that everyone should be their own entrepreneur. 40 per cent of Uganda’s residents are entrepreneurs, while only 6-7 per cent of the population in the Nordic countries is. Everyone does not want to be entrepreneurs, many just want a job, says Engström.

Assistance with aid
Micro businesses have up to 10 employees, but often only 2-3 employees, including the one running the business.

– Microfinance as it is practiced today simply does not have the socially changing power of Yunus as such. Microfinance is too much of an aid issue. We need to stop thinking about assistance and start thinking about business. We must think about economic growth and development, as we do in the West. Short-term thinking prolongs poverty, says Engström.

– Does this mean that microfinance players today are extending poverty in the countries they operate in?

– Microfinance gives money to the individual, but it does not develop to a small extent.

The local knowledge players that the Strømme Foundation has built up are very important for being able to further develop microfinance. I have faith in the actors working on this, but the method itself is ripe for change, says Engström.

The poorest do not get a loan

Stromme Foundation has been operating with microfinance in poor countries for several years, and is aware that the financing scheme does not always work.

– Microfinance does not work when we talk about micro loans to the very poor, says Bjørn Stian Hellgren, head of Strømme Mikrofinans AS.

– Only when a borrower has a sustainable business plan, some productivity and some values ​​in terms of products and production conditions will it make a positive contribution from a micro loan. Therefore, Stromme Foundation emphasizes that micro-loans should be linked with education and training. The borrower must have some prerequisites for us to provide micro loans, says Hellgren.

– Who gets micro loans from you?

– There are everything from small toy companies with 2-3 employees on the street in Uganda to companies with up to 10 employees.

– You have not considered changing the practice and lending to larger companies?

– So far we have not done so, but we are closely monitoring microfinance research and are constantly assessing what we can do to improve our microfinance, says Hellgren.

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