Micro-finance: A Silver Bullet?

Micro-finance at one time was considered a silver bullet for jumpstarting economic development in impoverished communities (much in the same way formalizing property rights were championed by Peruvian economist Hernando de Soto in his book The Mystery of Capital).

The reality is that like formalizing title, micro-fiance is one good tool among many that can lead to better outcomes for communities, but it is not a panacea to be applied in all situations. For instance it has been known to fail in artisinal mining situations. It has also created occasional repayment problems leading to community stygmatization and even suicide of borrowers in arrears (source: M. Nazari).

When assessing the value and appropriateness of this tool I would suggest the following process.

Needs assessment: 1) Is there a desire? - expressed interest in small entrepreneurial ventures identified during consultations with the community? 2) Is there a need? - lack of accessible credit

Delivery: 3) Has a reputable partner micro credit organization been identified that provides loan amounts that are small enough for locals to manage and pay back, and with reasonable rates of interest? 4) Will locals receive adequate training? - It is often the case in areas where micro-credit is needed that locals do not possess basic money management skills and experience.

Follow-up: 5) Does loan management include not only repayment monitoring but also business advice and counseling?. 6) Is the program sustainable? - Meaning it will be able to function beyond an initial community investment by the company A succesful case was implemented as part of a community relations program I oversaw in Ecuador. Here local women identified an opportunity to start a small-scale bakery in an extended community of 2100 people. The exploration company I worked for made a small donation in start-up capital for equipment, and a micro-credit organization managed small loans for working capital. The exploration project was abandoned, but to my knowledge, the bakery exists to this day.

What are your experiences with succesful and/or unsuccesful microcredit programs?