The recent investment by IFC, the Netherlands Development Finance Company and Deutsche Bank in Aasishkaar Goodwell, a private equity company supporting microfinance organizations in India, will create of almost 60 greenfield microfinance institutions to serve a potential client base in India of nearly 75 million households.
But is microfinance the right tool for development? Aneel Karnani from the University of Michigan says no:
There is no developed country that has developed on the basis of microenterprises. All developed countries have larger enterprises (which, as I have emphasised, includes small and medium sized enterprises). Scale economies play a critical role in increasing productivity, which is the foundation of economic development.
Rather than lending $200 to 500 women so that each can buy a sowing machine and set up a microenterprise manufacturing garments, it is much better to lend $100,000 to an entrepreneur with managerial capabilities and business acumen and help her to set up a garment manufacturing business employing 500 people.
We should not romanticise entrepreneurship and self-employment. Most clients of microcredit would gladly accept a job on reasonable wages if offered the choice.
The simple fact is that most people (rich or poor, in developed or developing countries) do not have the vision, skills and drive to be really entrepreneurs. We need to cater to this majority and not romanticise the poor as entrepreneurs.
Eric Thurman, co-author of "A Billion Bootstraps: Microcredit, Barefoot Banking, and the Business Solution for Ending Poverty" disagrees:
Microfinance is absolutely essential for millions of families who have no other means to advance themselves.
[…]most poor people depend on self-employment whether you call them entrepreneurs or not. The Economist reported that nearly 60 per cent of non-agricultural employment in Latin America and 67 per cent in Africa is in the informal sector. In India, nine out of 10 workers are in the informal sector, contributing 60 per cent of net domestic product and 70 per cent of income. Informal businesses are typically the only viable employment options for the poor. The one positive aspect of this type of business is that all workers can be self-employed provided they are smart enough, work hard, have inventory and a market, and keep their prices competitive. Microcredit to support them is vital!
Follow the entire debate here.
Join the Conversation