When Muhammad Yunus set up his Grameen Bank for microcredit in Bangladesh in 1976, his aim was to give people at the lowest level of society the chance to rise above the abject poverty in which they were living.

"Banking the unbankable" was the motto: even those without any collateral had the chance to obtain a loan. Thirty years later, micro-finance is a global success story. But are those most in need being left by the wayside?

Microfinance has become big business. Across the world, an estimated 154 million people have received microcredit. The sector is home to over 10,000 institutions with a turnover of around 12 billion dollars. And this is only the beginning: the demand for microcredit appears to be insatiable. Around 2.2 billion adults in Africa, Asia and Latin America do not save with or borrow from a bank.[i]

In recent years, a number of small microcredit banks or MFIs (Micro Finance Institutions) have matured into large commercial banks. Sometimes under their own steam, and sometimes with the aid of wealthy financial institutions more readily associated with Wall Street, such as Morgan Stanley, Citibank and JPChase.

Top-down
Dutch financial companies such as ING, ABN AMRO and Rabobank have also discovered the world of microfinance. This development is top-down: rich companies invest in MFIs in the southern hemisphere. However, they expect their MFIs to make a profit and interest rates are being driven up.

In 2008, the leading Consultative Group to Assist the Poor (CGAP) calculated that around 75 percent of international investment in MFIs was going to Latin America and Eastern Europe, areas with a relatively highly developed economy. And in poorer countries, the CGAP found that profit-seeking MFIs tend to stick to the more profitable strategy of lending money to small and medium-sized enterprises rather than the poorest sections of society.

Abundance
Ylse van der Schoot, a manager at Oikocredit, a major intermediary between investors and local MFIs, has also witnessed explosive growth in the microfinance sector due to an influx of money from Western investors. While she sees it as positive that more people have access to credit, the arrival of serious money is also giving rise to concerns. In some regions this results in an abundance of loans and a triumph of quantity over quality. The monitoring and supervision of the borrower is decreasing and debt problems are looming, she warns.

Empowerment
The founder of microcredit, Muhammad Yunus, wants to see a bottom-up approach: not lending to make a profit, but to give people the chance to escape poverty. His Grameen Bank is a prime example of this approach, spawning many followers and has garnering much praise, culminating in the 2006 Nobel Peace Prize.

People must be given the chance to develop their abilities and skills: a process known in the jargon as "empowerment". The very fact that people can obtain a loan brings with it a sense of self-worth and with a little schooling and access to health care, they can find their own way out of poverty.

Loan shark
Dr Yunus is convinced that his approach has to remain at the heart of microfinance. Profit should never be the motive for investing in microcredit. He recently warned "when you are out to make a profit, you lean towards a loan-shark mentality, while we are all about getting rid of the loan shark." Grameen Bank and like-minded MFIs try to keep applying this principle in practice.

Research
Given its popularity, surprisingly little reputable research has been conducted into microfinance and the impact of small loans. But this year, the results of two large-scale studies were published: one in India and one in the Philippines.[iii] They show that a microloan does not make families less poor. Between 12 and 18 moths after receiving a loan, the level of consumption remains the same. The studies did not look at effects in the longer term.

Far from all loans actually lead to the setting up of a business: in India only one in five loans issued was used for this purpose. Often the loans function as a type of savings scheme in reverse. Instead of saving for a major purchase, people obtain microcredit in order to fund their spending and then pay it back in instalments.

No miracle cure
The research results confirm that microfinance is not a miracle cure for poverty. This is something Dr Yunus and his fellow advocates would not deny: microfinance has to be anchored in development policy. And empowerment is not something that can be achieved from one day to the next; it takes years.

The dilemma remains. Microfinance to help the poorest sections of society improve their lot is an entirely different entity from microfinance as a new investment opportunity for Western banks. Yet the boom is in the latter, more commercial sector: at present 47 percent of microloans are being issued at commercial interest rates and this percentage is rising rapidly. Under these conditions, the poorest of the 2.2 billion potential customers in Africa, Asia and South America will not be able to make better lives for themselves.

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[i] "Half The World is Unbanked", a report by The Financial Access Initiative, October 2009

[ii] "Microfinance and Poverty Reduction" by Susan Johnson and Ben Rogaly, 1997

[iii] "The Miracle of Microfinance? Evidence from a Radomised Evaluation" by Abhijit Banjerjee, Esther Duflo, Rachel Glennerster and Cynthia Kinnan, May 2009. "Expanding Microenterprise Credit Access: Using Randomized Supply Decisions to Estimate the Impacts in Manila" by Dean Karlan and Jonathan Zinman, July 2009.