Yesterday Milford Bateman tried to pop the microfinance bubble. Today Malcolm Harper and Thankom Arun urge us not to throw out the baby with the bathwater (please excuse mixed bubblebath metaphors). After reading this, I urge you to vote in the highly unscientific opinion poll to the right – time to see where the blog-reading public stand on this.
First up, Malcolm Harper:
“Bateman, like many advocates and critics of microfinance, exaggerates its impact, for ill (in his case) or for good (as does ACCION, and far too many others). The growth of microfinance in recent years has perhaps been exceeded only by the even more rapid growth of the parasitic ‘industry’ which surrounds it. And of course I include myself. Commentators, bloggers, researchers, trainers, raters, investors, conference organisers, capacity builders, we are all guilty of grossly exaggerating what it can do, for ourselves, and to, or for, the poor.
Even the best designed randomised control trials cannot ‘accurately’ assess the impact of so modest an intervention in the complex reality of people’s lives, but my own impression is that microfinance does not make a great deal of difference to the majority of its customers, and that it probably does a bit more good than harm. And, that it is certainly not ‘the end of poverty’.
The flood of stories and pictures of happy ladies (often from Bolivia, with bowler hats) and their smiling children, whose lives have been transformed by microfinance, is now being matched by sad tales of indebtedness and even suicides. Case studies, even very short and selective ones, are useful to add ‘flesh’ to statistics, but they should not in themselves persuade anyone that the whole endeavour is a magnificent triumph to end poverty, or a ghastly conspiracy to perpetuate it.
Organisations such as Oxfam are often, and rightly, suspicious of for-profit businesses, but it is odd that we do not usually question whether it is right that essentials such as food or clothing, which the poor need as much as the rest of us, should be provided to them by businesses, rather than by NGOs, or government, or even by ‘social enterprises’ (whatever they are).
We should surely accept that microfinance, whatever its origins, is now a business, it has been effectively main-streamed, or ‘Walmartised’. This does not mean that we should ignore bad practices, or monopolies, but we should surely accept that its providers will make profits, and that some individuals will make very big profits indeed, as they do from other businesses. If we don’t like that, as many of us don’t, we should try to change the whole capitalist system, not merely the tiny and not terribly important part of it called microfinance.
But the current debate has brought microfinance to the attention of many people who had never heard of it before, some I know had never heard of Andhra Pradesh before either, and there is a good opportunity to try to redirect it. My own perhaps unrealistic views as to how this might be done include the following:
• Some MFIs should be allowed to go bankrupt. Unlike sub-prime borrowers who are losing their homes, this would not hurt borrowers much, since they have no savings with the MFIs. Indeed they might get away without repaying their current loans ! It would teach investors and lenders a salutary lesson, and would frighten them away from microfinance, which (see below) might not be a bad thing.
• National regulators, and donors, should certainly not support (and perhaps should not allow) MFIs to operate unless they are also licensed to offer savings, to take demand deposits, that is, they are licensed banks. This does not mean that the requirements for licensing should be less stringent; it means that existing and perhaps some new banks should become directly involved in microfinance, perhaps in some cases starting by buying heavily discounted loan portfolios from bankrupt or troubled MFIs. Governments and donors should push banks in this direction.
• The ideal, perhaps unrealisable, is for microfinance to be community-financed, owned and managed. Cooperatives, credit unions, raiffeisen, Rabobank, call it what you will. This is hard, politicians and local crooks (often the same people) exploit them, incompetent managers mismanage them, eager self-serving NGOs cosset them for ever, but it is surely the best solution, and governments and donors should surely do what they can to move that agenda forward.
Quite an agenda for change, and maybe the juggernaut cannot be that easily moved, but it’s worth a try. And, mobile phones and the like are rapidly making much of the institutional infrastructure redundant, so the ‘legacy’ of today’s MFIs may be limited.
In the meantime, it would be better if much of the intellectual energy, the time and the money which is being poured into microfinance, and into blogging and so on about it, were to be directed towards much more important things, such as primary education and primary health care.”
Malcolm Harper is chair of M-Cril, the India-based international credit and social ratings institution, and author (with Kim Harper and Matthew Griffith) of Microfinance from Below: The Power of Savings Groups in Action
And now over to Thankom Arun
Microfinance – is the pessimism being oversold?
The continued existence of poverty in ‘microfinance-dominated Bangladesh’ is held up as proof of the failure of an entire paradigm, but that is like dismissing aid because countries are still poor.
In reality, the growth of microfinance had always been ‘challenged’ over its skewed presence, higher interest rates; sustainability etc. and all these challenges have been useful in shaping the contemporary structure of microfinance. However, the impact of microfinance depends on many other factors, such as the quality of institutions, fabric of governance, nature of regulation and most crucially the commitment of the people involved, as in the case of many other social interventions. Without considering these external environments, bluntly suggesting microfinance is just another ‘poverty trap’ are too unkind and too soon. At the very least, we should acknowledge the contribution of microfinance to “democratising global financial markets through new contacts, organisations and technology” (Conning and Morduch, 2011). The entry of commercial banks into the microfinance sector is another example of growing recognition and viability of the concept. That said, there is no sympathy or justification for the unethical practices followed by microfinance institutions in loan recovery and attitudes towards clients, as we have seen recently in Andhra Pradesh and elsewhere.
Over the last 30 years, microfinance institutions have become a magnet for impact evaluations. However, the empirical verdict on the impact of microfinance on poverty is still inconclusive, and policy suggestions are too often based on a selected reading of that evidence. Since MFIs are hybrid organisations (Battilana and Dorado, 2010) that combine the two different logics of development (mission to help poor) and banking (profits to support operations), such evaluations are always likely to be more complex and divergent in terms of their methodologies and findings.
Amusingly, some of these evaluations have generated completely different (and contradictory) findings using the same data. For instance, based on the same data, Pitt and Khandker found a positive association between borrowing and household spending, while Roodman and Morduch (2009) found a negative one. See here for Roodman’s take on the ensuing debate.
In addition to the methodological facets, the impact studies on microfinance need to look beyond the income-based poverty reduction and more into children’s education, improving health benefits for women and children, and the empowerment of women. A recent study (Imai, Arun and Annim, 2010) captured the multidimensional aspect of poverty (basic needs, wealth, type of housing, job security, sanitation and food security), based on a national-level household survey in India, and found positive effects of MFI access on multidimensional welfare, a result which suggests that MFIs play a significant role in poverty reduction.
Finally, alternative models such as cash transfers are extremely positive advances, particularly if they can provide services to the extreme poor. I prefer to see microfinance as complementary to other interventions in the field, which provides access to diverse types of resources. Even in microfinance, there are various models of service delivery and these models have varied impacts on the poor, such as BRAC’s programme on ‘Challenging the Frontiers of Poverty Reduction: Targeting the Ultra Poor’ programme. The main aim of this initiative is to generate opportunities for ultra-poor and then to graduate them to a mainstream microfinance program, through a broad-based and multidimensional approach which involves enterprise development training, asset transfer, social development, and essential health care. In Kerala, India, the well-known Kudumbashree programme, working closely with local institutions in planning and implementing anti-poverty programmes, contributes to building second generation assets (see Moser, 2008 for a detailed discussion on second generation assets), which strengthens and consolidates accumulated assets by shifting away from redistribution and welfare policies (Arun et.al, 2011). This experience suggests that with appropriate types of governance and accountability mechanisms, microfinance institutions can support second-generation asset based policies.
These experiences, among many others, reconfirm that microfinance institutions could still have a greater role in helping the poor, if we understand the needs of the poor better and respond with appropriate instruments and delivery mechanisms. Reflecting on the varied experiences of one of the great social experiments of the last century, one can fairly conclude that the “one size fits all” strategy does not work in relation to microfinance, yet it would be a folly to throw out the baby with the bath water. Therefore, the challenge lies with microfinance practitioners and commentators in understanding the diverse needs of the poor and developing appropriate variations within the mainframe of the concept.
Professor Thankom Arun is Director of the Institute of Global Finance and Development at the University of Central Lancashire. He is also a Honorary Senior Fellow at the Brooks World Poverty Institute of the University of Manchester and a Research Fellow at IZA, Bonn.
And with that, over to you to cast your votes……..