Microfinance Requires No Donor Money, Says MicroRate Chief Stauffenberg

In his testimony to the US Committee on House Financial Services, Damian von Stauffenberg, Chairman of MicroRate, has argued against the donor money into the sector and negated the theory of MFIs being perceived as a mechanism to transfer wealth to the poor, said a media report quoting his presentation before the panel.

According to Stauffenberg, microfinance is a success, but whether US aid for microfinance has been equally successful is not so obvious. His speech before the House panel was on US aid and its positive impact on poverty alleviation, said the report.

“In our ratings we have seen a fairly consistent link between the degree of dependence on donor support and a general lack of excellence of an MFI,” he said.

Citing an example of parked four-wheelers in front of an MFI, he said, “If there are plenty of expensive four-wheel drive vehicles – a sure sign of too much donor money – then chances are that we will find heavy, complicated procedures, a bloated staff and poor portfolio quality.” Often, the subsidy that was intended to help the poor “ended up creating jobs for middle class MFI employees and hurting those it was intended to help, he said.

However, donor support can do more good than harm when the MFI is blazing new paths, where nobody has dared to walk before, he noted. In the early days of microfinance, in the 80s and early 90s, much of donations that went in microfinance had served this purpose but in the last 10 years most donor support for MFIs would not pass the “no harm” test, he remarked.
“Since MFIs are financial intermediaries and they don’t transfer resources to their clients, to the contrary, borrowers have to pay back much more than they borrowed. If the resource transfer mentality creeps into microfinance, MFIs are doomed and many MFIs have shut their operations mainly owing to this mentality,” said the MicroRate chairman and founder.

“The acid test of microcredit is whether it enables the borrower to create wealth. This wealth-creating characteristic is at the heart of microfinance. Good MFIs can spot among the thousands of people asking for money those who will create enough wealth to be able to pay the loan back with interest and to have enough left over to better their lives,” he added.

Source: Microfinance Focus (http://www.microfinancefocus.com/news/2010/02/02/microfinance-requires-no-donor-money-says-microrate-chief-stauffenberg/)

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