Microfinance: a panacea for development?

One of the most hotly debated issues over the last 30 years has been the impact of globalization on the increased well-being of populations and poverty reduction. The data shows that the results are encouraging, although clearly insufficient.

While in 1980 there were 2,200 million people in the world who lived on less than two dollars a day, today the figure stands at 3,200 people. The dramatic reality is that 0.001% of the homes concentrate 20% of the world’s wealth. The situation is also aggravated as a result of the current global economic and human crisis, which added more than 100 million “new” poor worldwide in late 2009, according to World Bank estimates, and an additional 30 million unemployed in the same period, according to the ILO.

A devastating reality that may provoke an extreme situation for those at the base of the pyramid. People who already live in a situation of maximum vulnerability, being deprived of recurring income and basic needs such as food, education, healthcare and access to financial services and products, an essential tool that is often overlooked in the fight against poverty.

This situation has become a real vicious circle for these people. Finance is needed for development and essential to reduce poverty, since people are sick because they are poor, children do not go to school because they are poor, people do not eat, and consequently fall ill, because they are poor.

Hence the importance of microfinance in the fight against poverty, because in the developed world all actions carried out are related to public welfare, except for microfinance, which is the single self-sustainable mechanism available, despite the criticism and, on occasions, prejudice that exists around this financial instrument.

We can therefore assert that finance is absolutely inseparable from development. However, we start from an erroneous concept, or from problems with the concept.

On the one hand, there is a sort of prejudice: it is believed that finance for the poor is bad, while finance for the non-poor is good. It would be worth asking ourselves, the people who live in the developed world, whether we could subsist without finance. The answer is simple. So, what characteristics make the poor unsuitable for finance?

Another common error is to consider that finance is associated with wealth. Access to finance or financing is a necessary, but insufficient condition, since there is no direct correlation between microfinance and wealth. Finance is a means for generating wealth, but does not guarantee wealth. It is without doubt an erroneous approach.

If we really want to fight poverty, we need to generate wealth, and the only condition needed to do so is for poor people to have access to finance. And the conditions under which finance generates wealth are:

Productive business.
Capitalization.
Financing at market prices, unsubsidized. Subsidies generate false efficiency, unfair competition, market distortion and infantilization of the economy.
Competitive product and service after paying all real costs.

The right approach is simply the development of the concept of productive microfinance. Seeking the generation of value in people. Starting from their dignity, their natural abilities and skills, and the enterprising spirit that many poor people have, so that they can achieve a real profit that does not depend on subsidies, and which under market conditions is sustainable over time for them and their families.

Certainly, microfinance is no panacea for turning the poor into non-poor. However, without finance at the base of the pyramid, economic and social development would be impossible, as has happened in the developed world we live in.

Mariola Arlandis, BBVA Microfinance Foundation