Thursday, January 28, 2010

Finding Fault with Microfinance; Finding Fault with Fault Finders

What’s Wrong with MICROFINANCE

Edited by Thomas Dichter and Malcolm Harper

Rawat Booksellers/Practical Action Publishing, 2007

pp.271. Price Rs.795.


Malcolm Harper is a well known figure in the Indian microfinance circles. He is known for being enthusiastic, ever willing to go to field, break the language barrier and interact with the poor, and return to the host organizations to ask some probing questions. He is also known for his rather sarcastic humour and therefore it was indeed surprising that all his earlier writings about Indian Microfinance were in such a positive spirit. However, the current book edited by Harper and Thomas Dichter [who also asks tough questions as a consultant] is asking the right questions and bringing to the fore the questions that we always brushed under the carpet in the hope that the euphoria of the so called success will numb all valid criticism about the much hyped microfinance industry.

The book is divided into three broad parts – the first talking about clients, the second about institutions and the third about expectations from microfinance. It has a large number of authors and papers, mostly from the practitioners of microfinance who are giving an ‘inside’ view of the negatives of microfinance. There are also a few papers by academics. I shall discuss the book in a thematic format.

Savings and Credit: The Chicken and Egg of Microfinance

Thomas Dichter basically comes from the school that has been arguing consistently that the starting point of microfinance is possibly not debt, but savings and therefore raises the basic question on how the global microfinance industry is organized. If we look the world over, what we know today as microfinance is basically debt based – be it the Grameen model, the Latin American model or the programmes undertaken in the African continent. In a way it is only the Indian self-help group [SHG] model that fits into Dichter’s argument of savings first.

Hugh Allen also argues about the need for savings products in the same spirit as Dichter, citing instances where the poor are even willing to pay for the services of safe-keeping of their savings and thereby pay a reverse interest. While this service is not available, one wonders if it is a valid criticism against the microfinance [or microcredit] industry – particularly in the sections pertaining to clients and institutions. This argument largely belongs to the “expectations” we have of these institutions. The point is simple – we need to ask the question as to whether the existing microfinance models are performing a function that is sorely needed by the poor; whether they are doing the function in a manner that is efficient while giving dignity to the poor. If so, why are we hanging the microfinance institutions for what they are not doing – just because it is important to have savings and we expect institutions to deliver that product? The problem possibly does not lie with the microfinance institutions, but rather in the policy and the legal framework of the respective countries that do not allow savings products to be launched. Therefore, this aspect needs to be highlighted and brought to focus in a manner that it attracts the attention at an appropriate place – an instance of bad structuring and editing of the book!

Where does microcredit take the poor?

This question is like the protagonist in the film “Gods Must be Crazy” looking for the end of the world to throw the Coke bottle in order to protect his tribe! Dichter’s question is on the growth of the microcredit model itself. Does the growth of microfinance put the ‘poor’ into a debt trap? It is indeed an interesting conundrum. Dichter citing the evolution of the sequence of growth and credit in economic development, argues that credit has usually followed growth and not spurred growth. While one could take up issues on this line of argument, it might be useful to look at the dichotomy of what credit does with a small illustration:

A few years ago, Spandana a microfinance institution – then operating out of Guntur, Andhra Pradesh introduced a product called a dream loan. This loan was to help the borrowers to buy a consumer durable product at prices less than the market price [because Spandana would source them in bulk]. The first product introduced under this was a water filter which was followed by items like a pressure cooker and a gas stove. Spandana was hailed as an innovative organization for being creative in thinking. The argument was that water filter gives the families clean drinking water, reducing the incidence of disease and possibly increasing the number of working days and income days. The pressure cooker reduced drudgery and released the women to do more productive income generating work. The gas stove had similar arguments coupled with LPG being touted as a ‘clean’ fuel. Dichter does not deal with this constructive side of ‘consumption credit’. However, having started this line in a year Spandana went several steps ahead and had [possibly] the largest super store in Guntur with around 3000 stock keeping units ranging from soaps to refrigerators, cots to cement, bicycles to jewellery. Now, questions were being raised as to whether the organization was actually promoting consumerism and driving the clients down on the ‘slippery path’ of debt that Dichter is worried about.

On the same lines there is an interesting and introspective piece by Kim Wilson on how Catholic Relief Services moved away from the seemingly attractive poverty solution of microcredit towards more direct intervention like school programmes for children. Wilson brings out in the limitations of microfinance in providing an overall solution to the poverty problem and also the limitations on the impacts. While Wilson argues that savings based microfinance models are better, she possibly does not see a huge role for external agencies to peddle credit if the savings based models indeed existed. She is on the one hand arguing for community based models that challenge the role of a traditional as well as a new age moneylender and at the same time highlighting the limitations in the impact that the credit based moneylending can provide.

Managing Expectations

These limitations are the ones that Frances Sinha also highlights in her chapter on impacts. While there is overwhelming evidence [including that of Sinha] that the impacts of microfinance could be limited on other aspects of the lives of the poor, we continue to examine as to what microfinance could do to end domestic violence, prevent bigamy, end sexual harassment [p.79] and so on… Looking for these relationships, and lamenting about them could be as far-fetched as looking for a box office hit on a Friday morning following a particular team’s victory in a Twenty-20 match!

In similar vein Paul Rippey reflects the constant syndrome of a solution chasing a problem – applying the models that have been touted as successful to new environments. An interesting fall out of one such approach is caricatured in his paper where he talks to a loan officer who argues that the clients should get no more than three loans, because he believes that “after three loans the clients are so poor that it’s really not fair to lend them more money” [p.110].

Structuring of Microfinance Products

Harper has two papers, one that discusses the groups in microfinance and the other that talks about farmers. Group methodology has turned out to be quite attractive in microfinance and is fairly widespread at least in the Asian context. It is not that groups are a necessity. The African and the Latin American models have individual lending and even when they are joint liability groups, the way they operate is only by providing a social collateral rather than meeting at a place for transaction aggregation. While Harper goes into how much it might cost for a person to transact through a group; and whether at higher levels groups are needed and argues for a laddered approach he does not ask the obvious. Why are groups focused on women? Why is it that when microfinance deals with men usually it is at an individual level or as a joint liability group? Similarly when Harper talks about microfinance and farmers, he talks about the intrinsic return on farming and whether farming can service microfinance interest rates in a sustainable manner. He talks about microfinance being focused on women without meaningfully engaging with the question as to why men/farmers are on the fringes of microfinance.

A possible explanation for group-based microfinance being women oriented might have something to do with the slack time that the women might have, the opportunity cost being with a group rather than at home might be negligible and it might have something to do with the gender equations in the traditional rural family systems. Unfortunately neither Harper, nor Frances Sinha who deals with the issue of limited ‘empowerment’ impacts talk about such a possibility. Similarly Harper does not seem to see the point that the existing microfinance models [Surely there could be exceptions that prove the rule] are generally about one bullet outflow in the form of loan disbursement, frequency of meeting which includes regular weekly/monthly repayments, regular financial transactions [savings, insurance] and no moratoriums. Farming is about multiple outflows in lumps – preparing, sowing, fertilizing, transplantation, pest and weed management and harvesting and a bullet lumpy inflow at the harvest time. Clearly microfinance as is understood and farming are moving in different directions and therefore there is little surprise that farmers go to traditional lending institutions that understand agriculture. Therefore, instead of asking the question as to whether microfinance has not understood the logic of lending to farming, Harper seems to ask the question about profitability.

Harper talking about profitability of the client seems to make immense sense. However as we read Harper, it is clear that he has somehow crossed the line to talk about livelihood finance. It is a very thin line that divides the world of “consumption credit” and livelihood finance. Harper actually does not seem to observe this line, while in a later paper in the “Expectations” section Vijay Mahajan seems to bring this out more sharply by looking at the limitations of the microfinance models as is practiced today. While Harper is looking at whether the underlying economic activity is in a position to service the loans while talking about farmers, Mahajan points out the five major assumptions made by microfinance practitioners that do not help in sorting out certain type of financial services needed by the poor. These are basically the supply side assumptions made that credit [particularly microcredit] will be a silver bullet that solves the poverty problem of the poor, by making them successful micro-entrepreneurs in extremely profitable businesses and thereby the microfinance institutions could also become profitable and all can live happily everafter.

Both Harper [indirectly] and Mahajan [directly] ask the question of whether microfinance institutions as they grow and deal with diverse needs of the clients actually have to reinvent their delivery models to provide a solution for a possible problem, rather than peddle a solution in search of a problem!

It is in the same spirit that we need to read a rather positive paper by Imran Matin on how to unleash the true potential of microfinance by imagining microfinance more boldly. Matin use the examples of process innovations to look at the issue differently. In a way the paper by Matin is not only looking at what is wrong with the current models, but also has some practical examples on what could happen and thus is on a very positive note.

Prabhu Ghate on the other hand picks up the Andhra crisis to examine the fall out of the inward looking aggressive growth of microfinance. His basic argument is that something that grows out of sync with the rest of the economy might have a honeymoon for a while, but eventually will generate suspicious raised eyebrows. We have seen this happen elsewhere in the dotcom bubble, the stock-market bubble and the various ponzi schemes in the financial circles. But still we are deluded to believe that microfinance is a super innovation that could have a CAGR of 100% or more. The effects of such a growth as Ghate identifies should be seen elsewhere and in this case comes out as a high handed state response.

Susan Johnson and Namrata Sharma have a somewhat positive paper on structuring of microfinance delivery mechanisms and how to ensure that group based microfinance is not hijacked by a few prominent leaders. Given that the tone of the book is in finding fault, this positive paper looks out of the place, though it is indeed an interesting paper and worth a notice.

Big Names, Small Impact

Finally I do not understand why a paper by David Hulme [where the abstract seems to be lengthier than the paper] and another by von Pischke is doing in this compendium, though I can guess. David Hulme is a well known authority on microfinance and had done some cutting edge work on impacts. However, given the chatty nature of the book with hand waving conclusions it would have been difficult to put in a paper of such research intensity. Therefore the solution is possibly was to pick up a small random piece so that you get him on to the author list. Same is the case with von Pischke – his piece is based on a talk picked up for the book where he merely described the institutional typologies of microfinance than actually comment on what is wrong. It appears that both these towering figures are there in the book more for tactical purposes than for the content. Similarly an essay by Ellerman on the fallacious thought processes in the microfinance models and by Rahman on what is wrong with microfinance in Bangladesh are both, an obvious laundry list of what could go wrong with microfinance. Again I believe that these papers are in the book more for tactical reasons of putting the issues in perspective rather than for the intrinsic worth their contents.

In addition to the above there are three other papers in the book including the one by Richard Myer who writes insightfully about methodologies of measuring impact of microfinance and two other pieces which do not thematically fit in.

Final Word[ict]

What is wrong with the book is similar to what is wrong with microfinance. The editors have found a catchy title – it would sell well because it has the potential to bring out all the negatives of something that is being touted as an ultimate solution to poverty. It is motivated writing. However, but for a few exceptions, the book fails to recognize that there is a thin line that divides the positives and negatives of a concept like microfinance. This is because, the stream of argument is generally premeditated – a conclusion in search of an argument.

For instance examine this piece: “The data was collected from 215 microenterprises… the sample is not of course representative of all non-farm microenterprises…. failed businesses were not studied, because they were not there to be studied…[p.88]” “This is only a small non-random sample, and the methods of data collection and analysis were not necessarily consistent. Indian cases predominate, but this many not be unreasonable …. All data were obtained from farmers’ own recollection, rather than from… any other more systematic records…. There are many reasons why the data may be inaccurate, but the errors are equally likely to have been positive or negative, and there is no reason why the returns from farming data would be any less inaccurate, or more understated, than the returns from non-farm enterprises. The orders of magnitude are probably reasonably correct, however, and readers should be able to confirm…..[p.90]” These are the words of not a practitioner but an academic. These are the words of the editor of this volume. I guess more need not be said about where this book is coming from and where it is going.

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