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Microfinance charity

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Summary

  • Microfinance is the practice of providing loans and other financial services (such as savings accounts or insurance) to poor individuals (largely) in the developing world.
  • The common story of microfinance is that it provides individuals with the capital they need to expand their businesses, ultimately enabling them to rise out of poverty. In reality, the story is more complex and the effects on lives are often modest.
  • Microfinance may help people manage unstable incomes. But, it may also harm them if they over-borrow. (More) For the vast majority of microfinance charities, there is surprisingly little information available to adequately assess if clients are benefiting from their programs.
  • We would guess that microfinance as a whole has done a great deal of good, but has also probably done some harm. We have reviewed many microfinance organizations including most of the largest ones. Unfortunately, we have not yet identified a microfinance charity we can confidently recommend. (More)

How can microfinance help people?

Microfinance is often presented as a way to help people escape poverty by giving them the capital to start or expand small businesses. But, this isn't consistent with the reality of how microfinance actually works. (For more, see our blog post, 6 myths about microfinance charity.)

There isn’t much reliable information on how people are using loans, but the evidence there is suggests that “microloans” are often used for consumption purposes: food, visits to the doctor, etc. This isn’t a bad thing - the poorest people in the world face considerable financial uncertainty, and loans can empower them to manage their own lives.1

Does microfinance help people?

It depends on many factors. (Clicking on the links below will direct you to longer discussions of each issue on our blog.)

  • If loans are constantly and heavily subsidized, they can be thought of as similar to giving out cash, in which case our primary concern is that benefits reach the right people.
  • On the other hand, if loans are not subsidized, a microfinance institution's profits could be taken as a sign that it has paying customers. This in turn could be a sign that it is providing empowerment.

With the latter goal (which seems to be the more common one), there is a big question about what role donations can and should play. We have expressed serious concerns about mixing donations with for-profit enterprises, with the possible result that donations end up padding profits (concept; example). In addition, we worry that there are too many donations blindly chasing the microfinance "story," with the result that donations end up disappearing into nebulous activities.

There is also a question about the extent to which loans are truly providing empowerment. There is evidence that borrowing is bad for at least some borrowers.

We have developed a set of critical questions both about microlending and microsavings, to get at the question of whether an institution is helping people. We've looked hard for organizations that can answer our questions.

Microfinance charities

In trying to answer the above questions, we've become fairly pessimistic about the area of charitable microfinance in general.

Where should you give?

We would guess that microfinance as a whole has done a great deal of good, but has also probably done some harm. We are more pessimistic specifically about microfinance donations in the current environment. For the reasons outlined above, we believe that giving to an "average" or "typical" microfinance charity – or giving with an illusory "peer to peer" relationship as the extent of your due diligence – is a fairly bad bet. At the very least, it will deliver far less good, and far more potential harm, than the typical microfinance narrative suggests.

Yet we still find the basic idea of providing financial services to people with low and volatile incomes very appealing as a way to help people ... if it is done in a way that stresses social impact and uses donations responsibly.

We believe that microsavings is a particularly promising area, although we haven't found a microsavings charity we can be confident in.

We have not yet found a microfinance charity whose impact we can be confident in.

We are currently researching microfinance charities and plan to update this page and our charity reviews in the next few months. Sign up to receive updates on our progress.

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