S2 EP29 The Microfinance Myth with David Whitehouse

So if you had to sum up what's your major systemic criticism of microcredit, what would be the top three to five things you would list?

Basically, it doesn't work.

I'm not hostile to the profit motive.

I'm not even hostile to people taking loans with rather high interest rates.

If it works.

But my number one objection is that it just doesn't work.

And yet we are constantly fed a stream of cherry-picked success stories, whereas the overall evidence is that there is no overall impact.

And even that is being rather kind because how do you ethically measure the successes against the failures where people have lost their land or even committed suicide? I'm very glad that it's not my problem to make that ethical trade-off.

My number one objection is that it doesn't work.

If it worked, yeah, sure.

There's nothing wrong with lenders making money or even funders making money, but the evidence is just not there to support it.

And the second, I suppose if there's a second criticism following from that, it's the idea that everyone can or should be an entrepreneur.

Most people want jobs and are not qualified to be entrepreneurs and never will be.

Yeah, entrepreneurial life is not for everyone, that's for sure.

Definitely.

Okay, so we've spent this episode covering the critical, adverse, negative impact of microcredit and microfinance institutions.

But I do want to finish on a positive note.

So if there's an international development bank, government policy team, ethical impact investor that actually wants to build financial inclusion that works, how could it be done to get it right?

We defined financial inclusion at the start.

I don't see financial inclusion as actually having the potential to achieve anything.

But what I would say is that If we think that there are lots of promising high growth businesses across some sectors and some countries in the global south, and I'm sure there are in some places and in some industries, why is there not more finance going into equity? Why do the funders not come to the table as equity investors in SMEs in the global south rather than trying to sell them expensive debt?

Yeah, I think that's a fair point.

And that's something I hope to invite someone from the other side to discuss with why they're choosing one business model over the other.

Well, I think probably because it's more profitable and less risky to sell people expensive debt than it is to make equity investments, which they take a lot of researching and you might get it wrong.

But of course, you can do it on a diversified basis.