Microfinance, the Good, the Bad, and the Ugly

Here is a bit from a wonderful post by Maxine Udall on some wonderfully positive aspects of the microfinance world:

A couple years ago I heard Vikram Akula speak at a top graduate business school about his for-profit micro-finance firm in India, SKS. The talk was held in a large lecture hall, probably seating at least 250. The talk was held after the Lehman collapse. One of the remarkable things I remember about the talk was that it was standing room only and many, many future MBAs were standing to hear it. Another remarkable thing I remember was that Akula asserted during his talk that his managers and workers were paid something on the order of 20% less than they could make in more traditional finance firms. I remember him saying that the rationale for this was that he wanted people who were interested in doing good, not just in making money. At least, this is how I remember it.

But the most remarkable thing I remember about his talk was that when it was done, he fielded question after question from different members of the audience, all on a theme of "how do I come work for SKS?" Even at only 80 cents on the MBA starting salary dollar, a lot of the audience wanted to come work for SKS.

I suppose they might have been asking that last question because at the time and for a multitude of reasons traditional finance wasn't looking like an attractive career option. But I think not. Most of the future MBAs phrased their questions in ways that suggested that the draw was putting their skills and talents to work doing some good in the world. And they were willing to work for less to do this.

This is not news. Economist Robert Frank provided evidence some years ago that people are willing to work for less when they believe they are doing some good in the world. (As an aside, I will point out that this phenomenon is entirely consistent with utility maximization, but not with maximization of indirect indicators of utility, such as income).

But, as with much of life, there is a dark side as well:

A couple weeks ago, my friends and readers began sending me links to articles about "beneficiaries" of micro-finance in India resorting to suicide when their indebtedness became overwhelming. More recently, Muhammad Yunus, micro-finance originator and Nobel Peace Prize winner, weighed in with this condemnation of for-profit micro-finance. This was followed by a fairly predictable response from the Philanthrocapitalism blog making the usual arguments in support of for-profit micro-finance and this more nuanced and thoughtful response by Felix Salmon.

Go read Maxine Udall's original post to get all the details and the embedded links.

I'm from that cynical school of thought which says that "if it is too good to be true, then it isn't true". There is a lot to like about microfinance, but it isn't "the solution" that some proponents would like to sell you. Like anything, it can be misused. And, like anything, it works better in some situations and worse in others. In short: there are no easy answers in life. If you want to do good, you have to go in with your eyes open, because even in the world of "doing good" there are sharks, and submerged rocks, and unexpected surprises.

But I'm happy that microfinance exists. I wish there were more of it. And I hope the news is almost always happy. And I wish there were some way to make sure that bad things didn't happen in the world of microfinance. But if wishes were horses, beggars would ride.

Here is a bit from an article by Muhammad Yunus, the originator of microfiancne, about the current state of microfinance for the NY Times:

In the 1970s, when I began working here on what would eventually be called “microcredit,” one of my goals was to eliminate the presence of loan sharks who grow rich by preying on the poor. In 1983, I founded Grameen Bank to provide small loans that people, especially poor women, could use to bring themselves out of poverty. At that time, I never imagined that one day microcredit would give rise to its own breed of loan sharks.

But it has. And as a result, many borrowers in India have been defaulting on their microloans, which could then result in lenders being driven out of business. India’s crisis points to a clear need to get microcredit back on track.

Troubles with microcredit began around 2005, when many lenders started looking for ways to make a profit on the loans by shifting from their status as nonprofit organizations to commercial enterprises. ...

To ensure that the small loans would be profitable for their shareholders, such banks needed to raise interest rates and engage in aggressive marketing and loan collection. The kind of empathy that had once been shown toward borrowers when the lenders were nonprofits disappeared. The people whom microcredit was supposed to help were being harmed. In India, borrowers came to believe lenders were taking advantage of them, and stopped repaying their loans.

Commercialization has been a terrible wrong turn for microfinance, and it indicates a worrying “mission drift” in the motivation of those lending to the poor. Poverty should be eradicated, not seen as a money-making opportunity.

...

Grameen Bank, where I am managing director, has 2,500 branches in Bangladesh. It lends out more than $100 million a month, from loans of less than $10 for beggars in our “Struggling Members” program, to micro-enterprise loans of about $1,000. Most branches are financially self-reliant, dependent only on deposits from ordinary Bangladeshis. When borrowers join the bank, they open a savings account. All borrowers have savings accounts at the bank, many with balances larger than their loans. And every year, the bank’s profits are returned to the borrowers — 97 percent of them poor women — in the form of dividends.

More microcredit institutions should adopt this model. The community needs to reaffirm the original definition of microcredit, abandon commercialization and turn back to serving the poor.

Stricter government regulation could help.

For a different viewpoint, here is Felix Solomon's blog posting on Reuters.

Now... let me add my voice:

My cynical side says that the initial noble impulse is being watered down and diverted as times passes, as the people in charge change, as noble passions cool and greed creeps in. Otherwise, some noble enterprise from 10,000 years ago would have grown into the largest organization in existence today with its shining mission still intact. It didn't. That says that no human institution withstands the corrosion of time.

But that doesn't mean we despair. It just means we get realistic and expect every generation to re-dedicate itself and create the new institutions appropriate for the current historical setting and the current generation.