Source: Financial Times
Sir, With reference to Tim Harford’s piece “Conflicts of interest” (FT Weekend Magazine, December 6/7): in nearly 25 years of academic and consulting work in local economic development, my experience is that microfinance programmes most often spell the death of the local economy. Put simply, to the extent that local savings are intermediated through microfinance institutions, the more that country or region or locality will be left behind in a state of poverty and under-development. This is an “iron law of microfinance”. Focusing on isolated cases of microenterprise success simply does not add up to economic development. The reason microfinance is supported is overwhelmingly political/ideological – the economic rationale is simply not there.
I have recently been working as a consultant in Serbia. Here the foreign-owned commercial banks since 2001 have massively discovered microfinance. From almost zero in 2001, the commercial banks now channel 22 per cent of their total loan portfolio through highly profitable microfinance (household microloans) programmes amounting to almost 12 per cent of gross domestic product.
This has had two important results: first, a serious shortage of funds for small and medium-sized enterprises, which is deeply damaging because SMEs have by far the most sustainable growth and development potential. Second, thanks to microfinance there has been an accelerated proliferation of informal-sector microenterprises in Serbia over 2004-08, so the country is now chock-full of traders, kiosks, shops, street-traders and subsistence farms. The base of the economy is quite simply being destroyed.
