Microlending: Getting Too Big to Work?

In the three decades since Muhammad Yunus came up with the idea of microloans for women to start businesses as a way of combating poverty in the world's poorest societies, it has attracted widespread support, and even earned Yunus and his Grameen Bank a Nobel Peace Prize in 2006.

There are now roughly 2,000 microfinance institutions around the globe, and, as of 2009, the last time a complete survey was attempted, an estimated 74 million borrowers had $38 billion of the tiny loans outstanding.

But microlending is becoming a victim of its own success. The big money that now flows into this niche has tended to transform microloans into more of a business enterprise than a social one—which, a recent study shows, shifts the focus away from the poor in general and women in particular.

"A lot more money is doing a lot less good," says Tyler Wry, an assistant professor of management at the University of Pennsylvania's Wharton School of Business, who conducted the study with Eric Yanfei Zhao, a doctoral fellow at the University of Alberta School of Business in Canada. They analyzed data from 1,800 microfinance institutions in 121 developing countries.

"There has been a strong pattern over time in many countries of these microloans moving away from targeting the poor, and from focusing on women," Wry says. This is problematic, because, he says, microfinance's original goal of lending to poor women is based on sound principles: women in impoverished societies are generally the most destitute of all, and giving them loans to start small businesses yields a substantial gain in family income and better outcomes for children.

Ironically, the more that developing countries try to create a business-friendly economic climate, the more challenging it can be for microfinance to maintain an emphasis on empowering women, the study shows. Patriarchy is a contributing factor, too.

The dynamic often plays out like so: A country becomes more open to foreign investment. This increases the funding that goes into microfinance, but also leads to more for-profit institutions and greater pressure to earn a return. Loans begin to creep up in size, and more of them go to borrowers who are not quite as risky as the very poorest are. "The extremely impoverished are being increasingly ignored," Wry says.

This dynamic works against women, based on what the study found. Zhao says the number of for-profit microfinance startups has exceeded the number of not-for-profit ones since 2005, and that the average loan size at the for-profits is nearly double that of the not-for-profits.

The trend toward for-profits and their larger loans corresponds with a tendency for money to flow to male borrowers for projects that don't benefit the neediest families—a pattern more pronounced in patriarchal societies, where outreach to women is all the more important.

Overall, 59 percent of borrowers at for-profits are women, versus 67 percent at not-for-profits, the study shows.

"Economic freedom significantly reduces lending to women," Zhao says.

The lesson for lenders is that they need to develop more effective strategies to contend with patriarchy and avoid drifting away from their mission, the two university researchers say.

One of the challenges is outreach to women. As lenders shift to a for-profit model, they tend not to hire women employees, particularly as loan officers, Zhao says. In societies where women are not supposed to be in contact with any men outside the family, it can be nigh impossible for a male employee of a microlender to approach a female, whether to discuss the opportunity to get a loan or to collect a loan payment.