Commentary  Capitalism with a conscience

Let’s get real about microfinance

While I am heartened that Ted Sprague is speaking out against the exploitation of the poor (“Small loans (to the poor), big results (for the rich),” Commentary, October 7), his well-meaning commentary nonetheless uses a straw-man fallacy. The definition of microcredit among the social enterprise community is that microcredit is a group of non-collateral, interest-bearing loans that reinvest their profits to expand the accessibility of credit among the poor. In other words, the performance of microfinance institutions (MFIs) is judged by their attainment of their social mission within the confines of fiscal responsibility, rather than sheer profitability. Notably, in echoing concerns parallel to Ted Sprague’s, Muhammad Yunus during his Beatty Memorial Lecture at McGill urged that the term “microcredit” be reserved for social enterprises alone.

Ted Sprague’s insinuation that microfinance stories “have been recounted, repackaged, and retold to convince the whole world of their success” is evidently unfounded when one factors in how MFIs organized as social enterprises define and collect data on poverty eradication. The social enterprise community does not cherry-pick the success of outliers to deceive the public. Social enterprises and various impartial academic groups subject the efficacy of microfinance to rigorous statistical tests and to a multidimensional poverty index that reflects quality of life. Therefore, when speaking on the borrowers’ graduation from poverty, it means that the borrowers and their family can now afford a more secure quality of life, freer from malnourishment and financed by their income-generating activities. The miracle of microfinance is not the success of outliers, but a statistically significant and large sample group.

For social enterprise MFIs, the seemingly high interest rates are justified. First, it is costly to extend loans in rural areas. It is also important to note that alternative credit suppliers like loan sharks operate on these peripheral economies and charge significantly higher rates. From a credit standpoint, then, the poor can at least benefit from the crowding out of illicit and potentially dangerous creditors.

There are also empirical data suggesting that even with high interest rates, the poor benefit from microcredit. A World Bank research paper (“Returns to Capital in Microenterprises: Evidence from a Field Experiment,” by Suresh de Mel, David McKenzie and Christopher Woodruff), the authors show that returns to capital are higher than the market rate for loan interest, even in a randomized controlled trial where entrepreneurial ability and exogenous shocks are taken into account.

It is true that microfinance is not a magic bullet for poverty. MFIs have failed and the poor were harmed by recklessly extended loans. Post-mortems of such failures have yielded significant insights in the academic literature concerning poverty and microfinance. We now recognize that governments mandating loan and capital requirements, interest-rate caps, and the integration of MFIs into the mainstream financial sector are the causes of MFIs’ failure. Markets do fail, but no market failure is insurmountable. On the one hand, we need to provide a viable framework for the operation of MFIs that isolates risk, limits the potential systemic risks they have on the financial sector, and enhances their efficacy and accessibility. On the other hand, we have to subject our success to healthy scepticism, driven by empirical data rather than pontification.

In an age as polarized as one that we live in now, it is easy to turn any single issue into a proxy war among contrasting economic or political ideals. True, the excessive greed of capitalism is truly repulsive and no one can reasonably support the exploitation of their fellow people. Social enterprise (and in this case, microfinance) is the manifestation of the “thinking beyond capitalism” that Sprague asks for. This is the advent of a conscientious capitalistic system.

Koay Keat Yang is a U0 Arts student who believes that no problem in the world cannot be solved over muffins, cookies and coffee. You can write to him at