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.

Jambo (hello)! A field trip to Tanzania

Just ended an interesting two-week field trip to Tanzania. Me and the one eyed professor Trond, named so after a lost battle with his contact lens in the flight over, have been travelling around the Tanzanian country side, together with our Tanzanian colleague Dr. Neema Moori.

Bumpy road
Bumpy road

Like three explorers we have travelled on bumpy “roads” in a 4wd jeep meeting many small businesses around Tanzania and also presented and discussed research at the University of Dar Business School, the leading business school in Tanzania, on micro entrepreneurship and microfinance.

University of Dar es Salam Business School
University of Dar es Salaam Business School

Driving on the left hand side was an experience. When we changed from driving on the left hand side to the right during a weekend in the 1960s, the Swedes allegedly first started with busses and trucks on day one, and on day two allowed cars to switch side (a Norwegian joke..…)..  In Dar es Salam we experienced some of this when driving in the “mixed lane” in the middle…

Stockholm 1967 or Dar es Salaam mixed lane 2014?
Stockholm 1967 or Dar es Salaam mixed lane 2014?

We have met many innovative entrepreneurs, discussing gold mining operations and suggested alternative methods instead of their dangerous usage of mercury and cyanide, seen farming, visited a dairy production, a security business, a honey business, a power plant in Burundi, solar-power companies, coffee and fruit juice operations, construction companies and much more.

Young men seeking gold in the small Tanzanian mines.
Young men seeking gold in the small Tanzanian mines.
500 chicken
500 chicken

We also met Statoil and learnt about the current status and plans for the country. They have found gas 100 km out in the sea outside the Tanzania coastline. Drilling for gas in depths of 2000 meters is new to Statoil and the transportation of the gas once recovered is not the easiest thing. One of the biggest obstacles to Statoil is getting the bureaucratic permits and reaping any revenues from the drilling lies years ahead, but the government of Tanzania is already busy setting up a “welfare fund”.

In terms of the small businesses, there is no shortage of ideas and opportunities and the future of Tanzania is promising, although some major challenges and risks are ahead, such as road infrastructure, schooling, health and housing, and of course access to finance and an efficient government. A day at a pig and poultry farm was encouraging with environmentally friendly production methods, and good treatment of the animals, but we smelled like pigs back at the hotel afterwards….

Small baby pigs at a farm start-up
Small baby pigs at a farm start-up

Over the weekend we took a small, Indiana Jones inspired, plane to Stone Town, Zanzibar, see blog. When sitting just behind the pilots we noticed how the co-pilot fell asleep and awoke when we landed…. The other pilot was a short fellow who had to stand up while landing the plane, quite the scene, but we landed safely. Tanzania and not the least Zanzibar is blessed with some amazing shorelines and beautiful scenery. Islam is the dominant religion at Zanzibar, whereas Tanzania is more mixed between Islam and Christianity.

Beach at Zanzibar
Beach at Zanzibar

While travelling we were pulled over 4 times by different cops for various reasons, such as crossing the double-lines in the middle of the road, which of course we had not done. All this was part of the daily revenue generation strategy by the police force. The revenues from the first 150 pulled over go to the government, while the rest go to the police force… If they stopped you, it was better to pay the 20 dollars than to spend 30 minutes discussing with them, which they knew. But they were very nice, typically dressed in white.

Victoria lake, stone structures, near Mwanza
Victoria lake, stone structures, near Mwanza

Today, coming home to celebrate my “insanely great” first born and oldest daughter Ella, turning 13 years old. <3<3<3<3

Asante sana (thank you)!

Status – One year into the program

Efter nästan ett år känner jag att det är dags att återkoppla till er hur det gått och hur jag ligger till. Det känns rätt hoppfullt, även om tiden är knapp.

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(english follows below)

För att ta en PhD krävs att man kan skriva 4 stycken välskrivna akademiska artiklar som ska vara publicerbara, och helst publicerade, i en högt rankad sk “journal”, och självfallet ska artiklarna vävas ihop i en enhetlig avhandling som ska godkännas av en oberoende internationell grupp. Jag har påbörjat cirka 7 artiklar, men enbart 1 av dessa bedömer jag vara i ett skick som på sikt kan bli en publicerbar artikel. Den handlar omEntrepreneurship and Microfinance: Do poor microentrepreneurs need microfinance?” Här är en kopia på artikeln i nuvarande form (citera ej):

Do poor entrepreneurs need microfinance – draft do not cite!

oikoperu

Source: http://oikocreditusa.org/blog-detail-page?newsCat1=2448

Som nästa artikel jobbar jag med data från Ecuador där jag ser på vad som leder till entrepreneurial success hos olika mikroentreprenörer. Hur spelar utbildning och erfarenhet in, finansiellt kapital, nätverk, kön, handikapp, personlighet etc. Den artikeln är än så länge i ett mycket tidigt skede men jag ska om en månad presentera ett utkast (draft) till mina handledare.

ecuador

Source: http://www.microfinanceresearch.org/index.php?page=cv

Jag har avverkat en rad kurser (courses completed so far):

1 Qualitative Research Methods (Professor Arent Greve) — PASS

2 Quantitative Research Methods (Professor Dale Duhan) — PASS

3 Theory of Science (Professor Otto Anderson) — PASS

4 International Marketing (Professor Andreas Falkenberg and Dr. Rotem Sneor) — PASS

5 International Management (Professor Harald Knutsen and Dr. Bjørn Tore Flåten) — PASS

6 International Strategy and Structure (Professor Joyce Falkenberg) — PASS

7 Publication Course (Dr. Roy Mersland) — PASS

8 M&A Course (Professor Jakob Weber) — paper due end of this semester

(in english)

After almost a year, I feel it is time to reconnect to all of you were I stand. I feel quite hopeful, even though being pressed for time.

To obtain a PhD I am required to write four well written academic articles which can be published (are publishable), in preferably a high ranked journal. In the dissertation the four articles will obviously be combined in a coherent format, and approved by an independent international jury. I have started about 7 articles, but only one of these I consider to be in a condition which may eventually become a publishable article. It is about “Entrepreneurship and Microfinance: Do poor microentrepreneurs need microfinance?” Here is a copy of the article in the present form:

Do poor entrepreneurs need microfinance – draft do not cite

In the next article I’m working with data from Ecuador where I look at what leads to entrepreneurial success in various micro-enterprises. How do education and experience in, financial capital, networks, gender, disability, personality, etc affect profitability? This article is still in a very early stage but I will next month introduce a draft (draft) to my supervisor.

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Source: Jorge Cham