“Microfinance Doesn’t Work”

Those may be harsh words from someone who runs a microfinance company in India. But Tara Thiagarajan is hell-bent on changing that.
Betsy Wiesendanger |  June 26, 2012
Print this page

The idea behind microfinance seems so pure and altruistic: provide modest loans to entrepreneurs in poor countries. In a perfect world, these businesses would grow, become self-sustaining, and eventually generate jobs, helping others break out of the cycle of dependence and poverty.

And then there’s what really happens.

“Let me give you the reality of how microfinance works,” said Tara Thiagarajan chairman of Madura Micro Finance, based in Chennai, India. “Over the past decade, the microfinance industry has grown enormously. Basically, anyone who put their hand out, they’d get money.” But the bulk of the funds — 75 percent, by her estimation — was used as consumer finance to buy items such as groceries, clothing, school tuition, or electronic gadgets. If the money did actually reach a bona fide business, “those businesses weren’t very successful, and neither did they scale very efficiently,” she said.

It’s a tough problem to crack. Much ink has been spilled on the role microfinance might play in stemming poverty, yet the gap between theory and practice remains vast. To cite just one example: In their book The Aid Trap Glenn Hubbard, dean of Columbia Business School, and William Duggan argue that foreign aid which now goes to governments and NGOs should be redirected to local businesses that can become self-sustaining. Yet that aid is often misappropriated and misspent: In her book Behind the Beautiful Forevers, Katherine Boo, winner of a Macarthur “genius” grant, detailed the story of a woman in a Mumbai slum who happily pocketed grant money meant to establish an elementary school.

Staying Put

None of this is news to Thiagarajan, who spoke at the recent Nand and Jeet Khemka Distinguished Speakers Forum at Columbia Business School, sponsored by the Chazen Institute.

“Essentially, when you give someone money, you have no idea whether they’re a true entrepreneur or not,” she said. “Maybe they’re just growing some vegetables and selling them on the street.” How, she wondered, could she find the people who are true agents of growth and who would focus on creating value up and down the supply chain?

Lately, she’s been putting that question to the test. Over the past two years she has surveyed more than 2,000 business owners in Tamil Nadu, a state in southern India, to find out which personality traits are most predictive of entrepreneurial success. The questions — originally 500 of them, now whittled down to a somewhat more manageable 190 — touch on basic demographics, business behaviors, reasoning abilities, communication patterns, and mindset: how determined is a person to succeed?

The findings have been nothing short of astounding. “You’ll see a lot of microfinance organization focus on financial literacy: can they keep their accounts?” she said. But in fact, her data show that his has little effect on a business’s viability.

Instead, travel patterns and social networks matter more. “Most of India’s economy is rural, consisting of villages of a few thousand people,” she said. “If you’re going to be an entrepreneur but not leave your village, you can be smart as anything but you’re not going to succeed. If you’re not mobile, there’s nobody to buy anything from you. The business is not going to scale.”

And surprisingly, the communities she studied were extraordinarily static. Despite bus service that is widespread, frequent, and affordable, only 8 to 10 percent of survey respondents ever left the village in any given year. Even fewer transacted business beyond its radius.

Moving On

Thiagarajan is now using that data to create a battery of simple questions that measure mobility and four other predictive traits (she’s mum about what they are, citing competitive advantage). She’ll use the questions to screen for people who are likely to use funding as a springboard, not a sinkhole.

In the meantime, her organization has been putting into practice its scalability mantra with an ongoing program of self-help groups. Madura Micro Finance has produced a DVD training program that, says Thiagarajan, “is not about financial literacy but focuses on how to think about business in terms of value creation and how to get out of your village and find a market.” Group leaders show the DVDs to 15 or 20 of their neighbors (televisions are plentiful in India, says Thiagarajan, because politicians often give them away to sway voters before elections). Participants discuss the concepts shown and, at the end of the course, complete an exam that tests not only their knowledge but their ability to apply it to their own small enterprises. Those who pass receive an “MBE” certificate, for “microbusiness entrepreneur” and are eligible to receive a loan.

“The problem we are trying to solve is how to cost-effectively and reliably identify the few potential superstar entrepreneurs from among the many,” she said. If she can do that, helping poor people build businesses may no longer be an endeavor filled with broken promises and squandered money. Instead, it could become an idea that actually works.

Add new comment

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.


* Required fields

Thank you for your subscription.