26 June 2008: Microfinance was once touted as the panacea for poverty; its champion Muhammad Yunus is now a Nobel Laureate whose ideas have irreversibly altered conceptions of how economic development ought to be achieved.  The idea of lending small quantities of money to impoverished people is a striking one; it is hard to properly understand the marginal utility that $25 provides a rural entrepreneur in Bangladesh. For some time, the world couldn’t find fault with the successes of microlending in Yunus’ Bangladesh; World Bank reports on the subject took a laudatory tone. 

The model of microfinance has spread prolifically. Microfinance campaigns are now estimated to have reached 60 million individuals worldwide. But the picture is not entirely rosy; critics point out that despite touching anecdotes about empowering previously marginalized entrepreneurs, macroeconomic development does not necessarily result from distributing small loans to masses of people. Even Matt Flannery, cofounder and CEO of Kiva—a website which serves as the nexus between a donor and a microborrower—agrees that microfinance is “just one factor; it’s not going to cause a country’s GDP to increase.” Microfinance, he says, must work in concert with other more traditional forces of development—“good governance, infrastructure, transparency in economics”—to ensure vibrant macroeconomic growth.

The contentions don’t end there; the very nature of microfinance institutions (MFIs) is called into question by some. Given that the target of microfinance institutions (MFIs) are impoverished people, observers frequently muse about whether or not MFIs classify as charitable organizations or profiteering ones. While the majority of MFIs as of a 2006 survey were only profitable when heavily subsidized, there are stunning examples of for-profit MFIs. The more frequently-cited criticisms of for-profit MFIs are leveled at Banco Azteca, a Mexican firm which takes full advantage of interest-rate freedom in Mexico; issuing loans whose annual rates typically hover from 50% to 120%. Compare this with the 31% average worldwide rate for nonprofit MFIs and the 22-29% leveled against credit-card-debt wielding Americans with troubled financial pasts and a case for usury seems imminent.

Their flaws notwithstanding, MFIs ultimately place money into the hands of those who need it.  And in Iraq, there are plenty of people who need money. With basic goods and services lacking, and the United States having “transitioned out of large-scale infrastructure reconstruction” the Iraqi government is expected to turn its eye towards reconstruction. Since that government will be addressing the larger infrastructure projects which Flannery earlier indicated must accompany any MFI’s campaigns in order to produce sustainable macroeconomic development, it seems that in Iraq there exists precisely the confluence of circumstances necessary to warrant significant MFI participation.

And there has been significant MFI participation. Iraq has been home to a vigorous microfinance campaign since the 2003 ouster of Saddam’s regime. CHF International’s Access to Credit Services Initiative (ACSI) has worked there since June of that year. As of spring 2008, $100 million has been distributed in more than 50,000 loans. The same institution operates a program which addresses the macroeconomic concerns outlined above by microfinance detractors. CHF International’s Community Action Program (CAP) has specifically sought to fill the void created by pumping money to the poor without providing services; their contribution in the areas of youth development, basic services, and conflict resolution has created 2,017 Community Associations involving 23,635 Iraqis while completing 5,906 community infrastructure projects.  It would seem that they’ve taken Flannery’s criticisms to heart.

Iraq might be the perfect opportunity for microfinance. Microfinance is direct, far-reaching, doesn’t require collateral, doesn’t require financial infrastructure, and MFIs usually rely on government funds (which the Iraqi government seems to be having trouble spending). This seems like the perfect fit for a location which contains large numbers of categorically dispossessed people who don’t usually use banks. Certainly, microfinance can be a solution to the problems of Iraq; but not on its own, and definitely not without adapting it to fit the organic requirements of Iraqis. But even with those qualifications, the empirical data for MFIs in Iraq points more towards success than it does towards failure.