Why the poor are poor, is perhaps the correct question to ask before anyone jump into microfinance and sail the unknown territory without knowing why and how.
Many people seems to like and find microfinance as exotic and the conversation to talk in intellectual circles or conferences. Anyone who started a conversation on microfinance will easily find a circle of listeners and get through the coffee break quite comfortably.
The ‘success’ and inevitable rise of Grameen Bank to the world scene has also elevated the role of microfinance in poverty eradication movement, as well as its image as a front-runner in global development program. Microfinance also partly save the face of conventional global finance, which was hurt by series of global crises and the many antics its members are displaying, including the case of Maddoff or the impossible lifestyle of many Wall Street executives.
The ‘why poor’ question is important to ask, because it is common sense and finance is not necessarily the only solution to poverty.
The euphoria of microfinance, I notice, has created a misguided perception that poverty can only be reduced by microfinance. It is a sort of illusion portrayed by microfinance and amplified by its coverage in many mainstream media. But the reality is far from it; Bangladesh today is still a relatively poor country, despite the success of Grameen Bank and many similar institutions in the country.
It might be a promising tool, as many other initiatives such as foreign aid and development assistance have failed, but it is a not a stand alone and universal cure to poverty.
The euphoria of microfinance has also created a false conclusion that the poor are poor because they have little access to financing or can not get the loan. While this is true for some, the whole picture is much more complex.
Hernando de Soto in The Mystery of Capital, for instance, argues that the lack of capital among the poor is not about lack of access, rather lack of entitlement to the assets most poor already have. He argues that their land’s true value is locked and not able to be converted into useable capital or cash. So, if de Soto is right, the solution that may be applicable is certainly not (only) microfinance, rather a land reform or similar reform in assets titling.
In Asian context, Asian Development Bank (ADB) in a 2006 report suggests that the causes of poverty are largely due to deficiency in five types of capitals, namely human, natural, physical, financial and social capital.
- Human capital deficiency relates to lack of access to quality and affordable food, health and education by the poor.
- Natural capital involves the lack of access by the poor to land rights (similar to de Soto’s argument) and natural resources amidst depleting environmental quality.
- Physical capital reflects the lack of access to clean water, sanitation and safe housing.
- Financial capital deals with lack of access to employment and business opportunities.
- Social capital indicates lack of participation of the poor in the economy and lack of security (ie. the presence of violent conflict in their community).
I believe the above do not only apply exclusively to Asia, but might also be applicable to other regions elsewhere like the Sub-Saharan Africa or South Asia.
It is obvious that the core reason why the poor are poor lies in the absence of sustainable, secure and sufficient source of income or means of living. In other words, the problem of poverty must be addressed with a comprehensive solution or action through the creation of sufficient, sustainable and secure sources of income for the poor. In essence, creating jobs and business opportunities.
To me, these are the main focus for poverty reduction program. Microfinance too must look at how it can complement and contribute to the creation of jobs and open access for the poor to start their businesses. How microfinance plays along this broad brush solution is perhaps the better question to ask, and act, for anyone wanting to become a centre of attention and emerge as tres chic in intellectual circles.****
Originally published on luqyantamanni.wordpress.com, May 12, 2012: view original.
