appendix
A Sampling of Blog Posts
Here are a dozen of my favorite posts from my Microfinance Open Book Blog (blogs.cgdev.org/open_book). You can still post comments there.
Help Me Write This Book
February 16, 2009
I am using this blog to share the process of writing my book about microfinance (the mass production of small-scale financial services for the poor). The book asks and attempts to answer bottom-line questions about what we know about the impacts of microfinance and what that implies for how governments, foundations, and investors should support it.
For, oh, the last millennium, the standard way to write a book has been to hide the text from all but a few people until it is frozen, then unleash it and await a reaction. As I drafted chapter 5 last December, I realized that from the point of view of interacting with the audience, you can't get much more stilted than that. Why work that way in the Internet age? Why not share drafts online, and start conversations between writer and readers while the text is still in play? One of CGD's technology gurus, Dave Witzel, pointed me to the blog as a natural vehicle. (Down the road, CGD may use more Talmudic mechanisms that let you annotate paragraph-by-paragraph. See twobits.net.) Through this blog, I will share and seek feedback on chapters I have drafted, documents I have found, and burning questions on my mind.
This blog will not keep you up-to-the-minute on microfinance with a fire hose of news—see the blogroll down on the right side of the blog home page for channels more like that. But by the same token, it will give you an opportunity to talk back to the content and influence the final product: a book that should help us all see deeper. I hope you will take that opportunity. Some books are written by experts wanting to share their expertise. In contrast, I am writing this book in order to become an expert. Writing it is a voyage of discovery.
We at CGD are inventing our “open book” blog process as we go. I will upload chapter drafts in Microsoft Word (.doc) and Adobe Acrobat (.pdf) formats. I will create a main blog post for each chapter, with the idea that commenting on these posts will be the best way for you to comment on the drafts they announce. You can also send me marked up files by e-mail, which we might post publicly. (I don't want to commit since this is all so new.) The “Contents” list on the right margin of the blog home page will help you navigate the book's content.
This “open book” blog marries an old writing form with a new one. Although books predate the printing press, that technology of mass production endowed books with a new and transformative power. An author could ponder the world—filter information, weigh competing views, test ideas against data—then broadcast his or her conclusions more quickly, to more people, and across greater distances than ever before. Much the same can be said of the Internet and bloggers today, even if this time around the technology predated the medium. Blogs will never drive books into extinction, but the two might interbreed. I suspect this blog is part of that historical development, whose full consequences will take time to unfold.
The Anti-Bono: Microfinance Is Not Aid
February 22, 2009
Zambian-born economist Dambisa Moyo has a new book coming out called Dead Aid. In the lead-up to the launch, she is doing interviews with outlets such as the New York Times and Financial Times. She appears to make an old and serious argument, going back at least to P.T. Bauer's 1971 Dissent on Development, that foreign aid does harm by reducing the accountability of government to the governed. The potential harm is especially great in Africa, where many states get large percentages of their budgets from aid. (For a couple of CGD works on this theme see Moss, Pettersson, and van de Walle's Aid-Institutions Paradox and Birdsall's Do No Harm.)
In case you hadn't noticed, one thing that distinguishes Moyo from Bono, Geldof, Sachs, and Easterly is that she is not a white guy. She is African. So she is powerfully positioned to shoulder her way into that constellation of figures, each of whom has to some extent gained fame by becoming a caricature of an extreme position in the grand debate over whether aid “works.” (OK, some of those guys also wrote some good songs.)
Unclear to me is whether it is her goal to join them or forge a more nuanced image.
Her NYT interview did raise my eyebrows. I would hate to have my comments to reporters taken too literally, so I will try not to do that to her, and await the book before judging statements like these:
What do you think has held back Africans?
I believe it's largely aid. You get the corruption—historically, leaders have stolen the money without penalty—and you get the dependency, which kills entrepreneurship. You also disenfranchise African citizens, because the government is beholden to foreign donors and not accountable to its people.
If people want to help out, what do you think they should do with
their money if not make donations?
Microfinance. Give people jobs.
But what if you just want to donate, say, $25?
Go to the Internet and type in Kiva.org, where you can make a loan to
an African entrepreneur.
If you'll forgive a little math geekiness, this yields a system of two equations:
(1) Aid ≠ Microfinance
(2) Microfinance = Jobs
As for equation (1): In fact, a lot of foreign aid, as grants and loans, has supported microfinance in Africa and elsewhere. That includes (in my mind) a lot of official-agency investment, which occurs on below-commercial terms, accepting low returns for the perceived risk, and so contains a subsidy element. So is this good aid? If so, what distinguishes it from bad aid? Is aid for microfinance, just by virtue of being for microfinance, better than aid for education or health or roads? Or is the key that the microfinance support she likes goes around the government? Or that microfinance charges for what it provides?…in which case would education and health and road-building aid be equally meritorious if they did the same?
As for equation (2), I am aware of no credible evidence that microfinance creates jobs, on average. Of course it has in some cases, but we don't know how representative they are, nor how many jobs are destroyed at enterprises out-competed by micro-financed ones. To the extent that borrowers use microfinance for microenterprise, as opposed to, say, paying school fees, they tend to invest it in small, self-employing ventures—corner stores, vegetable trade—that do not hire. That's not to knock Kiva or suggest that financial services are useless to the poor.
I look forward to reading her book, where perhaps she recognizes these complexities.
Review of Portfolios of the Poor: How the World's Poor Live on $2 a Day
May 23, 2009
If you want to understand how poor people in poor countries manage money, invest in Portfolios of the Poor. The new book's four authors—Daryl Collins, Jonathan Morduch, Stuart Rutherford, and Orlanda Ruthven—took up an idea of David Hulme, to compile financial diaries of poor households. A researcher visits a poor household repeatedly, say, every fortnight for a year, and gathers detailed information on what its members earned, spent, borrowed, and saved since the last visit. Through the data collection and the associated conversations she pieces together an intimate portrait of the household's financial life. “[F]inance is the relationship between time and money…to understand it fully, time and money must be observed together.” (Disclosure: I am coauthoring a CGD paper with Morduch.)
Much glory in the social sciences goes to those who study causality, who (seem to) show that A causes B. Yet the most enlightening work is often just plain descriptive, coming from a good, long stare at A or B. Of course, to do good descriptive science, you have to know what to ask and how to ask it:
The intensity of getting to know the characters in the financial diaries informed our perspective on financial behavior as much as our scrutiny of the data we collected. We and our field team got to know not only which respondents were using what financial devices, but also gained a deeper and more personal understanding of who these people were: who was often confused about their finances, who had family disagreements that guided their decisions, who was not coping with the circumstances they found themselves in. Money is powerful, particularly when you don't have a lot of it, and it was only by going to the “coal face” of financial interactions between the people themselves that we felt we could understand how and why the poor managed money the way they did.
Rutherford and a small team he led compiled the first diaries, from 42 Bangladeshi households in 1999–2000. Ruthven did it in India in 2000, with 48 households. And in 2004, Collins collected diaries from some 94 families in South Africa.
Some themes of Portfolios of the Poor will be familiar to readers of Rutherford's The Poor and Their Money (free early version). Rutherford is not the sole author of the new volume of course, but might be said to be its soul author, his influence being clear. (For more on Rutherford and his earlier book, see the draft chapter 2 on my own “open book” blog, where I am writing a book about microfinance in public.) In the earlier book, Rutherford showed how poor people look to all financial services—savings, credit, insurance—to turn small, frequent pay-ins into occasional, large pay-outs. The pay-ins can be weekly savings deposits, loan payments, even insurance premia, while the pay-outs can be large withdrawals, loan disbursements, and insurance indemnities. People deploy lump sums so assembled for investing in enterprise, yes, but also for doctor's bills, school fees, funerals, weddings, even dowry. The poor's use of financial services involves much more than microcredit for microenterprise.
The new book builds on these ideas. It emphasizes that being poor in a poor country means having an income that is not just low but variable and unpredictable. At least as much as a family's average level of income (such as $2/person/day), the volatility around the average drives how the poor manage money. If you make $1 today, $4 tomorrow, and nothing the day after, but need to put food on the table every day, you will engage in complex patterns of borrowing and saving to smooth the mismatch between your income and outflows. Thus out of necessity poor people deploy more complex financial strategies than do the rich. The book tells stories of families who are constantly juggling small loans to and from friends and family; saving with local “moneyguards”; participating in savings and insurance clubs (such as burial clubs in South Africa); buying groceries from the local shopkeeper on credit; and otherwise patching together an extraordinary diversity of financial devices in order to get by.
Portfolios of the Poor also shows the embedding of these informal financial relationships in social relationships, which is both a blessing and a curse. The blessing is flexibility: an interesting discussion of moneylenders’ interest rates, for example, shows how often late payments, defaults, and wrangled interest forgiveness effectively reduce rates that might otherwise seem usurious. When out of social obligation a lender forgives the debt of a woman who has just lost her husband, the lender absorbs some of the risk of the woman's life in a way that formal bankers are less wont to. The curse of socially embedded informal finance is the tincture of precariousness. Will your brother pay back? Will the “merry-go-round” savings club, in which one person takes the pot each week, keep rotating till your turn comes around? Will the moneyguard abscond?
In the view of the book's authors, “semiformal” microfinance—the kind you've heard of—stands out in the financial lives of the poor for its rulebound reliability. If the Grameen Bank says you will be eligible for a new loan in 17 weeks if you maintain your payment record, you can bank on it. In the spirit of diversification, poor people welcome this distinctive style of finance into their portfolios, along with informal services. The book's emphasis on this point helped me appreciate that the essence of formality is abstraction from social context. In the ideal, participants in a formal financial arrangement are legal persons, parties to a contract that precisely stipulates obligations. Whether the persons are rich or poor, giant corporations or tiny families, should not matter.
That great strength is also, as so often, a great weakness: in this case, rigidity. Classic microcredit disburses once a year, but husbands do not fall sick on such a neat schedule, which is why other forms of finance must still fill in. Yet the authors are optimistic that microfinance can become more flexible, mainly because it already has at the Grameen Bank, whose “Grameen II” reforms in the early 2000's transformed it more than most realize. Savings can now be withdrawn at any time…except from a popular new “pension” savings plan through which clients bind themselves to contributing a sum such as $1/month for 5 or 10 years in return for 12%/annum interest at maturity. Loans can now be “topped up”: halfway into a one-year loan repayment, you can borrow back to the full amount. The book closes by calling for more such reforms in Bangladesh and beyond, so that reliable microfinance can cater to the true financial needs of the poor. Even as they laud the changes at Grameen, they ask for more:
The interface with the microfinance institutions remains the weekly village meeting, a breakthrough of the 1970s that is now looking somewhat stale: meetings consume too much precious time, there is no privacy, individual needs go unrecognized, the male workers tend to patronize the women members, and more and more members skip the meeting if they can, preferring just to show up and pay their dues as quickly as possible. Working almost exclusively with women may well have started as a commendable attempt to right a gender imbalance, but…more and more critics point to the failure to find ways to serve men. Many microfinance institutions say that they have abandoned joint liability, but field staff, fearful of loan arrears, continue to impose some forms of it. Similarly, despite attempts to make repayment terms and schedules more flexible, most loans are still for one year with equal invariable weekly payments that cannot be prepaid…. Most clients are still routinely pressured into taking out a fresh loan as soon they have repaid an earlier one.
For me, this quote highlights two major lacunae in the book. The first is a full-bore discussion of gender. The authors make explicit that their unit of analysis is the household not the individual. Yet surely they gained insight into how men and women within a household cooperate and vie in managing money. Microfinance's long-time focus on women is predicated on the belief that women are more likely to invest extra resources in the health and education of the family, and repay loans more reliably. Did Collins et al. see that in their microscope? Or have men gotten a bad rap?
The second gap, more understandable since it lies farther from the core contribution of the book, concerns the business imperatives of microfinance. These I came to appreciate in writing Microfinance as Business. If microfinance officers still pressure people to borrow, they probably do so out of an institutional need to maintain the flow of business. Historically, the focus on women arose in part because they proved more pliable to the peer pressure of credit groups, which made them cheaper to lend to. The need to keep costs in line with the small transactions of the poor limits how far microfinance groups can go in providing quality service. Grameen II pushed the frontier in Asia beyond where most might have guessed it could go, and new technologies may push it farther, but the principle seems essential for understanding how much microfinance can help the poor manage their money. The gulf between what the poor need and what they get will always be with us.
Read this book somewhat backwards. The authors make great use of other people's stories, but hide their own story till Appendix 1. That plus the conceit, which seems quaint in the blog age, that four authorial voices are one gives the main text a slightly ethereal quality. Read the story of the financial diaries themselves and peruse diarists’ stories in Appendix 2, in order to appreciate the lessons in the main text.
I close with my favorite display in the book. It shows the average recorded discrepancy between total inflows and total outflows for each household in South Africa on each biweekly visit. It typically took 6 visits—three months—to get the discrepancy close to zero and convince researchers they were seeing the whole picture. Lots got left out early on. That is a cautionary tale for those who study data from one-shot surveys of households. The truth is an elusive thing. Portfolios of the Poor shows the power of financial diaries to pursue it.
Debt = Rope
May 26, 2009
Strong stuff from anthropologist Parker Shipton:
Juloo, “rope” to a Mandinko, means several things at once. It can refer to a small-scale trader, or to credit or debt. Every Mandinko knows the meanings are related. Traders are also lenders, and their loans, while sometimes useful like a rope ladder, also tie down a farmer like a rope around the neck. When rural people in The Gambia speak of juloo, in any of these uses, they consciously or unconsciously connote slavery. The Mandinko and other peoples of this small and impoverished West African river nation, an ancient trade route winding thinly through southern Senegal, have had occasion in history to learn quite a bit about ropes and involuntary servitude, and about debt. The linked images and overtones are not empty of emotion.
The source is a 1990 World Bank working paper, How Gambians Save, which commenter Kim Wilson pointed me to. For the book What's Wrong with Microfinance, Kim contributed a provocative piece called “The moneylender's dilemma” about rise and fall of Catholic Relief Services’ involvement in microcredit.
Shipton's point is not that all debt is bad, but that poor people are often wisely wary of it and like to save too. I'm confronting the dual nature of credit/debt now as I think about usury and the ethics of lending.
The rope metaphor is linked to the Jubilee 2000 movement's call to “break the chains” of third world debt.
Hammer Blows or Pinpricks? Stories vs. Statistics in Microfinance
July 22, 2009
It's been a tough season for the proposition that “microfinance is a proven and cost-effective tool to help the very poor lift themselves out of poverty and improve the lives of their families.” In May came a randomized trial of microcredit in Hyderabad finding no impacts on poverty 15–18 months out. In June came a paper challenging the leading older-generation studies that seemed to show that microcredit had cut poverty in Bangladesh in the 1990s. Now in July we have another randomized trial, of microcredit in Manila, also finding no impact on bottom-line measures of household welfare.
A couple of people, including Tim Ogden, have raised a good question with me in the last few days: What does this mean for microfinance? Has a myth been debunked? Is the whole movement about to implode in a ball of fire? More precisely, will this research perturb the dominant narrative about microfinance in the public mind, about microenterprise as a reliable ladder out of poverty?
I'm reminded of two Mark Twain saws—the one about lies, damned lies, and statistics; and the one about the reports of his death being greatly exaggerated.
Reasons this isn't quite a David (ahem) and Goliath story:
In other words, the challenge to microfinance per se is far from mortal.
But I do think the new studies pose a test for the story that microfinance promoters have so effectively constructed. Are we approaching a tipping point, the precipice of a sort of Kuhnian revolution in public perception? Will the new research combine with the recent and dramatic demonstrations of the dangers of debt to depose one image of microfinance and seat another in its place? I of course don't know. But I am launched in this book project in the belief that such change is possible and healthy.
Kiva Is Not Quite What It Seems
October 2, 2009
This post is so long it needs an:
Executive summary/long story short
Kiva is the path-breaking, fast-growing person-to-person microlending site. It works this way: Kiva posts pictures and stories of people needing loans. You give your money to Kiva. Kiva sends it to a microlender. The lender makes the loan to a person you choose. He or she ordinarily repays. You get your money back with no interest. It's like eBay for microcredit.
You knew that, right? Well guess what: you're wrong, and so is Kiva's diagram. Less that 5% of Kiva loans are disbursed after they are listed and funded on Kiva's site. Just today, for example, Kiva listed a loan for Phong Mut in Cambodia and at this writing only $25 of the needed $800 has been raised. But you needn't worry about whether Phong Mut will get the loan because it was disbursed last month. And if she defaults, you might not hear about it: the intermediating microlender MAXIMA might cover for her in order to keep its Kiva-listed repayment rate high.
In short, the person-to-person donor-to-borrower connections created by Kiva are partly fictional. I suspect that most Kiva users do not realize this. Yet Kiva prides itself on transparency.
I hasten to temper this criticism. What Kiva does behind the scenes is what it should do. Imagine if Kiva actually worked the way people think it does. Phong Mut approaches a MAXIMA loan officer and clears all the approval hurdles, making the case that she has a good plan for the loan, has good references, etc. The MAXIMA officer says, “I think you deserve a loan, and MAXIMA has the capital to make it. But instead of giving you one, I'm going to take your picture, write down your story, get it translated and posted on an American web site, and then we'll see over the next month whether the Americans think you should get a loan. Check back with me from time to time.” That would be inefficient, which is to say, immorally wasteful of charitable dollars. And it would be demeaning for Phong Mut. So instead MAXIMA took her picture and story, gave her the loan, and then uploaded the information to Kiva. MAXIMA will lend the money it gets from Kiva to someone else, who may never appear on kiva.org.
Moreover, the way Kiva actually works is hidden in plain sight. On the right of Phong Mut's page, you can see that MAXIMA lent her the money on September 8 and listed her on Kiva on September 21. So while Kiva is feeding a misunderstanding, it isn't technically hiding anything.
And finally in Kiva's defense, its behavior is emblematic of fund-raising in microfinance and charity generally, and is ultimately traceable to human foibles. People donate in part because it makes them feel good. Giving the beneficiary a face and constructing a story for her in which the donor helps write the next chapter opens purses.
Our sensitivity to stories and faces distorts how we give, thus what charities do and how they sell themselves. What if the best way to help in some places is to support communities rather than individuals? To make roads rather than make loans? To contribute to a disaster preparedness fund rather than just respond to the latest earthquake? And how far should nonprofits go in misrepresenting what they do in order to fund it? It is not an easy question: what if honesty reduces funding?
The big lesson is that the charities we observe, the ones whose pitches reach our retinas, are survivors of a Darwinian selection process driven by our own minds. An actual eBay venture called MicroPlace competes with Kiva; but MicroPlace is more up-front about the real deal. Its page for sample borrower Filadelfo Sotelo invites you to “invest in the organization that helped Filadelfo Sotelo: Fondo de Desarrollo Local” (FDL). This honesty is probably one reason MicroPlace has badly lagged Kiva. Who wants to click on the FDL icon when you can click on a human face?
Nicholas Kristof once tweeted that he “Just made a new microloan on www.kiva.org to a Nicaraguan woman. Great therapy: always makes me feel good.” We should not feel guilty about the pleasure of giving. It should not just be eating your brussels sprouts. Indeed, Kristof might argue that Kiva.org's ability to make the user feel good is its greatest strength, for it draws people into an experience that stretches their horizons, educates them about global poverty, and entices them to contribute money they might otherwise spend on potato chips.
Still, we should take responsibility for how our pursuit of that pleasure plays out. Surely it is better to invest in an institution such as FDL without requiring it to incur the expense of posting pictures and stories of every borrower. Historically microcreditors have scaled to reach millions of people by cutting costs to the bone. Surely it would be better for us to give in a way that allows the microfinance institutions to put more of their limited energies into helping poor people manage their difficult lot and less into making us feel good.
I do not know the full answer to this conundrum, this tension between the need to draw donors and operate efficiently. Still, subtle dissembling makes me uneasy, perhaps because good intentions so often go awry. If a charity obscures how it operates, should we trust its claims about its impacts?
Long version
My wife Mai heard someone say that the world needs both playwrights and critics—if more playwrights. I treasure this observation because, as this blog must make obvious, I'm a critic. I can testify that being a critic can be bruising, especially when the playwrights you critique are alive. It's solace to think that the world needs me.
But the observation also helps me appreciate playwrights. They are the people who create things that weren't there, the people who are a tad insane in the sense that they confuse fantasy and reality. They see something in their mind's eye and believe they can make it real. Precisely because I am not like them, I hold playwrights—visionaries—in some awe. The most skillful, passionate, and lucky of them “put a dent in the universe” as Steve Jobs said. (An early employee described Jobs's uncanny ability to create a reality distortion field that altered bystanders’ perceptions of the technologically possible.) Without playwrights, we might be still living in caves. At least, we wouldn't have iPhones.
We also probably wouldn't have the Grameen Bank, BRAC, and dozens of other successful microfinance institutions (MFIs) made by driven visionaries. And we wouldn't have Kiva, the person-to-person microcredit web site founded by Matt Flannery and Jessica Jackley.
On the other hand, without critics—analysts driven to understand the world rather than change it—we might not have mastered electricity. So we needed them too to get to iPhones. Critics and playwrights are yin and yang. Of course the two essences exist within all of us.
Critics seem to parse matters into quantities and concepts while playwrights seem to speak, and perhaps think, more in pictures and stories. (Or am I over-reaching here?)
The Kiva story
Like most innovations, Kiva is not entirely new. Rather, it is an ingenious fusion of older ideas. One is child sponsorship, which Save the Children pioneered in 1940. A family in a rich country sends $10 or $20 each month to a designated child in a poor country via a charity. In return, the family receives a photo and an update at least once a year. When I was perhaps eight, my family sponsored Constance, a Greek girl about my age, through Save the Children. I remember looking at her solemn face in two successive black and white portraits, trying to judge how much she had grown in a year.
Child sponsorship grew explosively in the United States in the 1990s, thanks mainly to groups with names like the Christian Children's Fund, Children International, and Childreach (now Plan International). Then an exposé in the Chicago Tribune in March 1998 brought it crashing down (hat tip to Tim Ogden). Starting in 1995, editors and reporters at the paper sponsored a dozen children in such countries as Guatemala and Mali. Then the reporters tracked down the children:
The Tribune's yearlong examination of four leading sponsorship organizations…found that several children sponsored…received few or no promised benefits. A few others received a hodgepodge of occasional handouts, such as toothpaste, soap and cooking pots. Some got clothing and shoes that frequently did not fit.
Sick children were sometimes given checkups and medicine, but not always.
One child, a 12-year-old Malian girl sponsored through Save the Children, died soon after being sponsored, although the charity continued to accept money on her behalf for nearly two years after her death. A subsequent investigation by Save the Children found that at least two dozen other sponsors had sent the charity money on behalf of dead children in Mali for varying periods of time, in two cases as long as five years.
There was more to the story. Clover and John Dixon of Bellingham, Washington, received faked New Year's letters from a West African child who had died in a donkey cart accident. Sponsorship peddlers sent heartstring-tugging appeals for extra $25 contributions on birthdays, Christmas, Easter, and the purpose-built International Hug Day. Childreach ran a disastrous experiment in Ecuador with a novel intervention called “microcredit.” Local workers embezzled funds; in protest, borrowers burned loan documents.
Undoubtedly some hard-sell charlatanry was at work. But the problem was deeper than that: a tension between creating the psychological experience of connection that raised money and the realities of fighting poverty. Often the fairest and most effective way to help poor children is by building assets for the whole community such as schools, clinics, and wells. Often charities contract with locals to build these things. Often things go wrong because of corruption, bad luck, or arrogance among outsiders thinking they know what will work. In the best cases, charities learn from failure. All these factors break the connection between giving and benefit, sponsor and child. But admitting that would have threatened the funding base:
“For a segment of the public, there will be nothing else that will reach those people the way that child sponsorship does,” says Charles MacCormack, the president of Westport, Conn.-based Save the Children, the nation's oldest and best-known sponsorship agency.
…
As MacCormack puts it, “An awful lot of people who sign on to a personal human being will not sign on to a well.”
…
“[The charities] are addicted to it, because if they stop, they lose their identity as Save the Children,” says Michael Maren, a veteran aid-agency worker in Africa and author of “The Road to Hell,” a book critical of private foreign assistance organizations including Save the Children.
“That's their thing,” Maren says. “They invented it. That's their problem. The Catch-22 is that the only way to raise money is sponsorship, but that is not the way to development. The show is the biggest part of what they do. So, they say, let's keep the show going, but try to find ways to make it better.”
Within a year of the Tribune series, the Missouri attorney general had slapped restrictions on Children International while the nonprofit umbrella group InterAction committed to developing a set of voluntary industry standards. Many of the rule changes related to how clearly the charities disclosed how they operated.
Matt Flannery penned a history of Kiva's first two years for MIT's innovations journal in 2007. Two years later, he wrote a second installment in the same periodical. Flannery's authentic, conversational voice makes both articles readable and engaging. As he tells his own story, he comes across as an approachable man of vision, passion, and action.
Flannery tells how another Kiva ingredient, microcredit, first mixed in his mind with child sponsorship. Fittingly, it happened through hearing a story:
One night, [Jessica] invited me to come hear a guest speaker on the topic of microfinance, Dr. Mohammed [sic] Yunus. Dr. Yunus spoke to a classroom of thirty people and shared his story of starting the Grameen Bank. It was my first exposure to the topic and I thought it was a great story from an inspiring person. For Jessica, it was more of a call to action that focused her life goals.
Some months later, Jessica went off to East Africa to perform “impact evaluations” for the Village Enterprise Fund, which works intensively with poor farmers, providing grants (not loans) and training to help them start business activities. Jessica's work gathered data on indicators of poverty among participants, asking “questions like ‘Do you take sugar with your tea?’ and ‘Do you sleep on a mattress?’” The couple kept in touch by phone. Then came the epiphany:
When the words “Sponsor a Business” entered our phone conversation, it set off a chain of ideas. We had both grown up sponsoring children in Africa through our church and families. Why not extend the core of that idea to business? However, instead of donations, we could focus on loans. This seemed like a dignified, intellectual, and equitable extension that appealed to us at this point in our lives. Instead of benefactor relationships, we could explore partnership relationships. Instead of poverty, we could focus on progress.
Soon after, Matt joined Jessica in Africa. He brought his video camera, which embodied the third key ingredient in Kiva, information technology. “I planned to spend most of my time making a short documentary of small business stories. I was also intent on investigating the viability of our newidea.”
Back in the United States Matt and Jessica began their impressive passage across the desert in pursuit of their vision. She networked for advice and support. He built the website after-hours, and eventually quit his job. Together they wrote the business plan.
Once the site was ready, we needed loan applications in Africa to post on the site. That's where our friend Moses came in. Moses Onyango is a pastor in Tororo, Uganda, whom Jessica had stayed with after I left. Moses is a community leader in Tororo and is highly connected to the Internet. We had been in close contact over the past year and Moses was ready to post and administer the loans of seven entrepreneurs in his community….
Once Moses had posted the seven businesses, the site was ready to go. We sent out an email to our wedding invite list and waited to see what would happen. We emailed about 300 people, and all seven businesses were funded in a weekend. That was April 2005, and we raised $3,500 in a few days. We were blown away; everything worked.
Right there, Kiva hit the tension in the sponsorship—more currently, “person-to-person” (P2P)—model: the need to find and post enough stories to keep up with demand. It led instantly to fraud, though Matt Flannery didn't know it when he wrote the two-year history. As he recounts in the four-year history, a Kiva Fellow (volunteer) sent to Uganda discovered that Moses was producing many stories about individual borrowers the easy way, from whole cloth. Flannery flew to Uganda:
I spent two weeks organizing a clean-up operation. We hired accountants and lawyers. I spent hours with Moses, trying to figure out exactly what happened. He was very apologetic, but our conversations didn't go anywhere. The money had vanished into a series of bad investments and a new house. Moses had a growing family. His new son was named for me: Matthew Flannery Onyango.
Admirably, Kiva went public with the information:
…we alerted our users that not all of their funds made it to the intended recipients…. The reaction from our user base was telling. Overwhelmingly, they thanked us for our honesty and poured their refunds back into loans to other MFIs on the site. They reinforced an important lesson: whenever possible, be completely transparent. Transparency pays huge long-term dividends.
…
If you are running an organization and are considering withholding valuable information from your customers, just don't. There are a million reasons to withhold information. Lawyers will warn you about liabilities. Marketing people will preach about tarnishing the brand. Investors will encourage you to look bigger and better than you are. Most of this is just tired and outdated thinking.
Operating transparently is a great way to keep an organization accountable for its actions. Before you act, ask yourself: would you be OK doing this if you had to tell your entire user base about it? Would you be proud if your actions were described on the front page of the New York Times? These are great tests that I often use to vet a decision.
Flannery describes the “story factory.” Running one—collecting and posting stories—imposes a significant expense on MFIs but is evidently offset by the low 2% 0% (hat tip Ben Elberger) interest rate that Kiva charges on capital:
Out in Cambodia, I got to watch firsthand how a sophisticated MFI gets content on the site. It is quite an operation….
In the field, loan officers carry Kiva questionnaires along with a host of other loan documents. When they visit a village, they gather women and tell them about the opportunity to apply for a loan. If a woman decides to apply, the loan officer takes down information on paper—some for the Kiva site and some for other business purposes. The Kiva questionnaire asks for information that interests lenders. For instance, how many children do you have? And how will the loan make an impact on your family? This is all done in the local language—Khmer. They also take photos of the applicants.
Returning to the branch, the loan officer enters the data into a computer and sends the information—via Yahoo! Messenger—to the Kiva coordinators at the headquarters in a major city. Kiva coordinators are typically young, Internet-savvy males who get paid a few thousand dollars a year. It is a desirable job and about ten of them are now working in Phnom Penh. We train them in the art of synthesizing the Kiva questionnaire into a readable narrative; then they spend their days writing stories and uploading pictures.
…
As a kid, I would write letters to [sponsored] children a few years younger than me in Africa and South America. I imagined my letters being delivered to a thatched-roof hut halfway around the planet. It sparked my imagination and gave me a sense of connectedness. Through Kiva, we can provide some of that to a new generation of kids.
Looking back now, I imagine that the transaction wasn't as simple as I had thought. A lot of intermediaries were involved, lending a certain production quality to the experience. Plus, it was expensive. Delivering the child sponsorship experience was often as expensive as the child sponsorship itself. At Kiva, it's not as simple as it seems, either…
The back-story
Innovations invited Sam Daley-Harris, who was central to teaching Americans about microfinance and serves on Kiva's advisory board, to comment on Flannery's four-year retrospective. While praising Kiva's “profound contribution to the field of microfinance and international development,” he worried about the transaction costs, and noted one other concern:
…there is still a bit of deception in the notion that the moment that a loan is funded, the client in Kenya or Cambodia receives his or her microloan with those particular dollars. Indeed, there are real people receiving real loans to start or grow real enterprises, but if a client in a remote village qualifies for a loan, the MFI will not likely make that client wait for the Kiva lenders to put up that last $25. Said another way, loan funds are fungible, and a larger MFI on Kiva's website will use Kiva's loans as one important source of their lending pool, but it's not actually those precise dollars going to that precise client.
As I noted at the top, Sam is right. In fact, I wrote a little program in Excel to extract data from kiva.org. It shows that for September 2009, only 4.3% of loans were disbursed after Kiva users had fully funded them through the site. And probably some of those the local lender had already committed to make before Kiva users had funded them. And in a new report on what happens to investors when microfinance institutions collapse, Daniel Rozas computed from data on kiva.org that the failure of just three lending institutions caused 93% of all Kiva defaults to date. No doubt many of those institutions’ borrowers were faithfully repaying at the time of collapse. Conversely, if a borrower defaults, the lender will often cover for him in order to maintain a good reputation on Kiva. So whether you get your money back as a Kiva user depends overwhelmingly on the solvency of the lenders, not the borrowers.
Kiva deserves kudos for being transparent enough for Rozas and myself to extract such data. But I wondered whether Kiva might become the Save the Children of P2P microcredit, the reasonably responsible pioneer who is imitated and overtaken by less scrupulous actors who pull the whole industry down a muddy slope into hucksterism. So I checked out MYC4, Wokai, and Babyloan (motto: “micro credits, great stories”; and no, it doesn't make loans to babies: it's French). To my surprise they were more honest about the P2P relationships they (seem to) forge. Here's Babyloan in enjoyably imperfect English:
Note: Babyloan works as a REfinancing platform and not as a direct financing system. It can happen that the MFI already “advanced”the microcredit to the entrepreneur when you make the online social micro loan. Indeed, as we are still in a launching phase and particularly for seasonal projects , we did not want to make the realisation of the project “dependant” on the Internet users’ good will and click. Babyloan is no microfinance reality show of ! However, we limit the funding time of the project not to create too much time discrepancy between the project and your micro loan, so your money is really used to finance the project. After the delay of 3 months maximum, we send all the money even if the funding has not been completed by the Internet users. The MFI will complete the funding.
So these sites are refinancing mechanisms. Kiva-linked microlenders make loans, then “sell” them to Kiva and its users. Might we rescue the P2P conception by observing that the lenders make their loans anticipating refinancing on Kiva? Yes, but only partly. Kiva limits itself to providing at most 30% of any lender's capital. So a lender will make at least three loans for every one it chooses to post on Kiva (hat tip to Molly's dad).
The end
Kiva brings microcredit and microchips to child sponsorship. Like sponsorship charities, it is all about stories: it was inspired by them and it succeeds by telling them. As a result, it operates in a pincers between the giver's desire for personal connection and the costs and constraints that imposes on business of serving poor people. In fact Kiva can be seen as an ingenious finessing of this old tension. Technology has brought down the cost of transmitting stories and images.
Indeed, Kiva's P2P connections are more solid than those of child sponsorship 15 years ago. The people in the pictures, we can assume, really do get microcredit. Following in the Tribune 's footsteps, Nicholas Kristof tracked down one of his borrowers, a Kabul baker, with little difficulty.
On the other hand, the P2P connection comes at a cost, is one-way, and is partly synthetic. The baker was surprised by the encounter because he had never heard of Kristof. For his part, Kristof might be surprised to learn that most of the Kiva loans he helped fund were disbursed before he saw them on Kiva. And the cost of collecting the baker's story, translating it into English, taking his picture, and uploading it over a balky Internet connection may still be significant relative to the small loans and the great needs in Afghanistan.
Is it so terrible that Kiva modestly misleads in order to raise money for a cause about which it is passionate? No. But as a critic I offer these points:
Is Microfinance a Schumpeterian Dead End?
May 15, 2010
Last month, Lant Pritchett, the invariably instructive scholar of development, had to sit twice through my spiel about the different notions of “development” I employ in my book to evaluate microfinance and my curiosity about extending this analytical thread beyond microfinance. Lant serves on both our Advisory Group, a group of leading academics, and our Board of Directors (ex officio).
The thing bothered him. If you've ever seen him in action, you know what I mean, and I mean that in the best way. I had a good but truncated conversation with him during a break in the Board meeting. I'll represent his skepticism, or what I gleaned from it, as well as I can.
First, the whole development as freedom riff rubbed him wrong. I think he sees the emphasis on outcomes such as health and education as ends of development as having led to muddy thinking: the Millennium Development Goals, the idea that development can be bought with more aid ($50 for each child in school, say), and the obscuring of the importance of industrialization in reducing poverty. I reply (or replied) by arguing with none of that, but saying that an intervention that is giving millions of people an increment of control over their financial lives is doing something right, not bad by the standards of foreign aid. Perhaps he would say that he holds aid to a higher standard: it is wasting its potential if it does not contribute to economic transformation—industrialization—which promises to not merely ameliorate poverty but reduce it. Of course, accelerating transformation with aid is easier said than done.
Lant also disputed my characterization of microfinance as a Schumpeterian success, an example of aid building a thriving, disruptive industry that enriches the institutional fabric of nations. Rather, I think he argued, microfinance should be seen as an unfortunate work-around for the failure of mainstream financial systems to serve the poor. It's like the private water industry in New Delhi that sells water to slumdwellers at far higher prices than the rich pay for piped supply. I said, “So it's a Schumpeterian dead end?” He said, “Yes!” He told a story of visiting a self-help group (an example of a distinctively Indian microfinance) while working for the World Bank. After he and other visitors had finished asking questions of the members, all women, someone asked them if they had questions too. One member asked, “So how do self-help groups work where you come from?” The answer: we don't have them.
It's an interesting idea, microfinance as a Schumpeterian dead end. It strikes me that the claim imposes a pretty high burden of evidence though. Economic developments often takes circuitous routes. I recall Jane Jacobs's thumbnail history of Detroit, I think in The Economy of Cities (I can't check my bookshelf because I am travelling). It began as a tiny copper mining town; then moved into flour milling; then, using its accumulated expertise in machinery, boat repair (it being on the shore, connected to America's internal maritime transport network); then boat manufacturer; then, in time, almost inevitably, the hub of the American auto industry. Only when it became a single-industry town, seemingly extraordinarily successful, did it economically stagnate. So the question is, how can you tell with reasonable confidence whether a new industry represents a dead end? Several big financial institutions today—Bank of America, Metropolitan Life, the Prudential (in the U.K. and its namesake in the U.S.)—started by serving the poor, arguably the microfinance institutions of their day. It's not clear to me that work-around-for-deviation-from-the-ideal is a useful criterion for Schumpeterian dead end. Maybe Lant or others can chime in to continue the debate.
Update May 21: I just returned from Kenya, where I saw M-PESA, the mobile phone–based money transfer system with 9 million customers. It began as an idea: to use phones as an add-on to microcredit. Thus did a great new business start with a spark from an old one. More to come.
Akula v. Yunus: Commercial Microcredit = Just Profit or Unjust Profiteering?
September 28, 2010
Did you catch the microcredit debate at the Clinton Global Initiative conference last Tuesday? OK, I wasn't invited to the ex-president's annual gathering either. But, rather amazingly, I watched the debate live on my Droid while being a soccer dad. You can watch the whole thing at the bottom of this post. It was a good show. It put on one stage the two leading (disagreeing) voices in the hottest controversy in microfinance. And it helped me think through some of the ideas in my Development as Industry Building chapter…but that chapter's still in draft, so I'd be interested in your thoughts.
Vikram Akula reignited the debate over commercialization and profit in microfinance when he took SKS Microfinance public this summer. SKS is on track to surpass Bangladesh's Grameen Bank as the world's largest microcreditor, measured in number of loans outstanding—if it hasn't already. SKS got big fast by going for-profit in 2005. It raised several rounds of investment from venture capitalists, which allowed it to quickly open thousands of branches implementing its streamlined version of the Grameen's traditional microcredit system. The SKS initial public offering (IPO) this July allowed those early investors to sell their shares at high multiples of original cost. In fact, even before the IPO, Akula sold enough shares to other investors to become a microcredit millionaire and India's 9th-largest taxpayer.
As I blogged, Muhammad Yunus, famed founder of the Grameen Bank, has criticized the SKS IPO as he did the Compartamos IPO in 2007. “This is pushing microfinance in the loansharking direction. It's not mission drift. It's endangering the whole mission.”
Last Tuesday in New York, NPR's Adam Davidson moderated a panel that included Akula and Yunus, as well as Mary Ellen Iskendarian, head of Women's World Banking. I was at once delighted by the subtleties that emerged in the debate, especially in Yunus's position, and disappointed about an issue left unmentioned. Here, I offer you two quotes (more or less), a pointer on how bank finances work, then three thoughts.
(Some of the transactions affecting ownership of SKS even before the IPO have been controversial too, not to mention complicated—I don't understand them and don't approach them here. CGAP has just begun a new stream of work that I suspect will become the definitive analysis of SKS's journey to the capital market.)
At 14:32 in the video, Akula tells a story about how he concluded that microcredit needed to bring in big investors:
Before starting SKS Microfinance I actually worked for one of these small NGO microfinance institutions, basically as a loan officer. I would give out these small loans and see this tremendous impact that Professor Yunus has written about and shown the world. And what would happen is, women from more remote villages would come to us and say, “Can you start in our village?” And we'd always have to say no, it's grant-run, so we don't have funds, and we'd have to turn them away, and they'd walk away disappointed. Now, on one particular day, a very poor woman—emaciated, torn sari, no chappals—she had clearly walked quite a distance to ask me the same question. And again I said, “We don't have funds. We can't come into your village.” But unlike the other women who simply walked away disappointed, she looked me in the eye and said something that I'll never forget. She said, “Am I not poor too? Do I not deserve a chance to get my family out of poverty?” Now, for me this was a jarring question because here I was thinking I'm doing something to help eradicate poverty. But this woman's question basically put me in my place, basically said: Look, what are you doing if you're only doing this in a handful of villages and not doing it in the next set of villages? It's as if you're sending one child to school and holding one back…. How do you design microfinance in a way so that you never have to turn away a poor person who's simply asking for an opportunity?
Akula's answer: Go to the capital markets. Bring in big money in exchange for a share of the profits. Grow fast.
At 18:28, Yunus replies with an interesting distinction:
You imply that I am somehow opposed to profit. I am not. Grameen Bank is a for-profit organization. We want to make profit. So we are not [an] NGO. We are a bank. But: ownership is the question. The Grameen Bank is owned by the borrowers. So we make profit. Profit goes back to them. So we protect that part. So what we are opposed to when you say “profit” or “commercialization” is the money of the poor going out to somebody else. And you may say, “Well what's wrong with taking a small amount of profit?” Then I'll say, “Is it small? Who defines what is ‘small’? Do you have any rule that will keep it restricted to this percentage? You do not.” It's an open thing. So anybody who makes profit can do that. So today you may say well we are only making small profit, but tomorrow because of the system you have, you like to maximize your profit. It's the wrong direction…. The moment you say “profit” the sky's the limit. You saw what happened [in] this financial crisis.
Yunus goes on to emphasize that the Grameen Bank is owned by its clients. And it gets funding not from outside investors, but from the villages it serves, mainly by offering savings accounts:
Grameen Bank is created by the local money. Each branch is created by the local deposits…We live in an ocean of money…We have so much money we don't know what to do with the money.
To which Akula basically answers: that's great, but the Indian government won't let us take savings.
So if I understand right, Yunus is not criticizing commercialized microfinance merely because it makes some people rich. He does not seem to directly begrudge Akula his wealth even though almost every rupee of it came out of the hands of poor Indian women. Rather, Yunus says that outside ownership drives a microcreditor to hurt the customers for the sake of the owners by, say, raising interest rates on loans. I think this is how Yunus links outside ownership to moneylending. A traditional for-profit corporation can be expected to commit usury. Ergo, the customers should be the owners: ownership should be cooperative.
This argument has to be taken seriously: I don't know anything about Indian corporate law, but I'm guessing that SKS now has a legal duty to maximize shareholder returns. There are thus margins at which client and shareholder interests conflict. And in making this argument, Yunus is harking back to the origins of microcredit perhaps more than he realizes. As I've documented in the draft chapter 3, Bangladeshi microcredit traces to German credit cooperatives that began in the 1850s. They were partly inspired by the “first apostle of cooperation in borrowing and finance,” Victor Aimé Huber, who in turn drew inspiration from Robert Owen in England, an originator of the idea that corporations will serve society better when owned by their clients.
So a cooperative bank like Grameen takes two kinds of money from its customers: savings and equity. As for the first, Grameen members have to save some of their borrowings, and many members and non-members voluntarily deposit additional sums with Grameen. (At SKS, loans from big banks take the place of savings, encouraged by a law that requires those banks to lend to “priority sectors.”) Like any bank, Grameen pays interest on these savings according to set formulas and needs to protect the savings at all costs.
As for “equity”: new Grameen members have to buy a 100 taka ($1.44) share in the Bank. And like ordinary shares of stock, the returns to owning these shares are unpredictable. Grameen began paying dividends in 2006 and has paid 30 taka/share the last two years—a good return. On the other hand, if a lot of Grameen loans went bad, the shares could lose all their value. The shares have to tae the hit in order to protect the savings. This would be sad, but not catastrophic: that's what's great about equity. But—to illustrate the difference between savings and equity—if even more loans went bad, Grameen might become insolvent, unable to return all its savers’ money. That could be catastrophic. That's what happened to Adam (Davidson)'s Bank when NPR producer Caitlin Kenney defaulted on her dollhouse mortgage. The job of equity is to cushion savings against loan losses.
Understanding that, I'd make three points:
My prior is to favor commercialization and competition in microcredit as maturation of an industry, as true economic development. Most poverty reduction has been caused by similar processes of economic change repeated a thousand times over in various nations and industries, what we call industrialization. But lending is a special business. Here, without proper restraints, commercialization and competition can do a lot of harm. I wish both sides were more persuasive in their implications that their way will work just fine. I'm not predicting doom, just saying that the debate on ownership structure is distracting from something that matters more, and that at least conceptually puts the two sides in the same boat.
What do you think of this? And what do you think about the question I ducked: when is it just to get rich off the poor?
When Indian Elephants Fight
November 25, 2010
I've been pretty oblique in recent posts about my evolving opinions of the Andhra Pradesh (AP) crisis. I've been trying to share my thought process with you. But that seems to have left me open to misinterpretation and criticism for poor construction. Perhaps I have taxed your patience. So let me be clear: in a week of talking to people in India about microfinance, I heard almost no one defend the behavior of the microfinance institutions (MFIs) in the villages and slums. Those actions appear indefensible. Loans were made too easily; interest rates were opaque, as they are in most of the world (though according to Chuck Waterfield, they are among the lowest in the world); collection practices were often aggressive; profits were disturbingly high. And that, I am now confident, is the core story. Whether the government response is ideal (when is it ever?), whether MFI leaders were cartoon tycoons acting on pure greed, the extent of the suicide link, the role of politics and the vested interested of the government-led self-help group (SHG) program—all those are more complex issues on which I think I am increasingly getting a grip.
The story behind the ordinance
On Saturday, my last day there, I had an enlightening interview with B. Rajsekhar, the CEO of the Society for the Elimination of Rural Poverty. SERP, it turns out, was at the center of the Andhra Pradesh government's smackdown of the microcredit juggernaut in the form of that October 14 Ordinance. SERP was created a decade ago to implement the World Bank–financed Velugu program that provides finance and many other services to self-help groups in Andhra Pradesh. Through a hierarchy that mirrors the geographic divisions of the state (district, mandal, village) it bridges between the government and about 1 million SHGs with 10–15 members each. Formally it is non-governmental. But the state government funds it and the Chief Minister chairs its governing board.
Rajsekhar began with a soliloquy on intent. He pointed out that five years ago, before the MFIs had grown large, AP was already home to a huge number of self-help groups that help the poor save and borrow. If MFIs were truly committed to bringing financial services to those who lack, why didn't they go to states with fewer SHGs? Clearly, the MFIs are driven by greed. “Intent is not poverty alleviation. The intent is profit maximization on the MFI side.” It was cheaper for MFIs to piggyback on SERP's years of hard labor organizing a million SHGs: the MFIs could just poach the SHG members, who were already screened for creditworthiness, organized into groups, and accustomed to credit. “It's like SERP have cooked the food; it's ready; MFIs can just come serve themselves and start eating.”
He then told me the story of the Ordinance from his point of view. As early as the spring of 2010, local TV channels were broadcasting reports of microcredit-linked suicides. The coverage was sensational (whether sensationalized, I don't know): women spoke on camera of being pushed into prostitution. In response—and illustrating the key role of the media—SERP constituted task forces in each of AP's 23 districts to investigate such stories and file criminal charges where appropriate. The big MFIs resisted however, arguing that they were regulated under national, not state, law.
The media drumbeat intensified in July and August, focusing the minds of politicians and policymakers. One apparent reason was an unusually strong monsoon (think of the floods in Pakistan and, again, of global weirding). Under the impressive National Rural Employment Guarantee Act of 2005, the national government promises 100 days of paid work to every rural adult in the country. Most of the labor is unskilled and relates to public works, but it appears to have become a valued source of security for the poor. It pays weekly, which is convenient for people with loans requiring weekly payments. Sowmya Kidambi, a former activist now working for the program in AP, praised NREGA for getting cash into the countryside and preventing hunger this year despite higher global food prices. But it's hard to build earth works in a heavy monsoon. So some expected wages did not come. Another factor, which Rajsekhar did not mention but Sowmya did, is political unrest. A flyer into Hyderabad arrives at a huge and beautiful new airport, then rides into town on a divided highway through fallow pastures. On my way back to the airport, I traveled on the still-under-construction ring road. The flip side of all this investment catering to foreigners and the well-to-do, I was told, is the complete starvation of investment for the rest of the state, and that has stirred separatism. Activists want to split the state. Storefronts have been looted and buses set on fire. And political groups have called for bandh's—general strikes that shut down the region. Once more the poor get stomped on: wage laborers lose days of work. (See M. Rajshekhar's Economic Times article on both factors.)
Since intolerance for late payment is in the DNA of MFIs, pressure began to build on borrowers. Probably, in fact, the pressure had been building on many people for months and been held at bay with new borrowings. But that of course had to end.
Also in July, SKS went public. What was once cloaked was now spelled out with numerical precision in the papers: the investors and managers of SKS were making millions off the poor.
In August, the AP government formed the committee that would ultimately draft the Ordinance. It was led by Reddy Subramanyam, principal secretary of the state's rural development ministry, but staff at this nongovernmental entity, SERP, did the bulk of the work. Rajsekhar described the committee as “racing against time.” Despite the rush, they managed to study existing laws, consult their own legal department, and get input from legal luminaries.
Did they consult MFIs? “We didn't feel that we needed to discuss with them.” When I asked why, he first cited lack of time. When I pointed out the inconsistency in this rationale, he referred to some bitter history. In fact, tensions have simmered between SERP and the MFIs for more than five years. In early 2006, they boiled over in the coastal Krishna district. An official seized the records and closed 57 offices of Share and Spandana, then the country's two largest MFIs. In a response to the attacks, and an apparent attempt to fend off regulation, the microcredit industry group Sa-Dhan announced a voluntary code of conduct for its members. Prabu Ghate recounts:
The RBI [Reserve Bank of India, the central bank] expressed its concern to the state government that the action it had taken could have wider repercussions by vitiating the MFI repayment culture in other parts of the state,…It set up a Co-ordination Forum to discuss issues of concern to stakeholders and resolve them as soon as possible. At a meeting of the forum held on April 20 [2006] it was claimed that the MFI movement was “eating into the SHG movement”, MFI practices were “barbaric” and posed a serious law and order problem, and that even the lower interest rates suggested in the March 20 code of conduct of 21–24 per cent were usurious and illegal. Spandana and SHARE announced a reduction in their interest rates, including those on current loans outstanding, to 15 per cent on a declining balance basis. It was left to a respected MFI leader [must be Vijay Mahajan] to state that this rate was unacceptable to other Sa-Dhan members because it was not sustainable, and pointed out that the state government had no business to stipulate rates for [Non-Banking Financial Companies] regulated by RBI.
Having bared their fangs, the state government officials mostly retreated, effectively accepting the MFIs’ promises to behave better and lower interest rates. (And, I am told, taking pay-offs from the MFIs.) So in Rajsekhar's view, the MFIs were given ample chance, five years, to behave themselves. And they blew it. Worse, some of them promised interest rates they could not deliver, making themselves liars. Meanwhile, the MFIs presumably resented the impossible demands for low interest rates and the state's fundamental misunderstanding of the cost-covering, commercial approach to microcredit. Thus by 2010, it seems that neither side respected the other. That's being polite: I suppose they held each other in contempt.
So in 2010 the government chose to ambush the MFIs with the Ordinance. The minister for rural development, of whom many spoke highly, briefed the Congress party's high command in Delhi, as well as the leadership in Hyderabad. A special state cabinet meeting was called on October 14, the first in history, Rajsekhar said, with one agenda item. The proposed Ordinance was approved in an hour. Since the legislature was not in session, the bill went next to the state's Governor (a sort of head of state, as it were) for interim approval on October 15, pending a vote in the legislature. The torpedo was launched.
I don't know that this little story has been aired before.
Critique of the Ordinance
The Ordinance required MFIs to immediately halt operations, to register, and to await processing of their registrations by an obviously hostile government before resuming. A court quickly granted MFIs the right to continue operating. However, through channels I do not understand, word went out to local officials to block all MFI employees from entering villages. The women I met in Yarvaguda, for example, were told two weeks ago to stop paying. This sub-legal directive is perhaps more important than the Ordinance, for it has frozen the MFIs in Andhra Pradesh and could bankrupt many of them.
The Ordinance has some good features: a requirement for clear interest rate disclosure; a “fast track” court system to resolve disputes; and a definition of coercion. Still, it “leaves a lot to be desired,” according to N.Srinivasan, author of the 2010 microfinance State of the Sector report. I concur:
As Srinivasan says, “The objectives of the ordinance are laudable.” But the execution reveals bias, and bias of a particular kind. The law does not merely view SHGs as better. It views MFIs as malevolent. It does not outlaw MFIs but, one wonders, perhaps only because it cannot. The presumption of guilt on the part of MFIs is clear in its draconian requirements.
My bottom line, for now
While the government responded to a real problem, there are real problems in the response. It was hurried because of the media drumbeat (Rajsekhar referred to the TV news several times) and the associated political drumbeat. I believe the government acted in no small part for the best of reasons. Still, India is home to a million small tragedies a day. This is a country where low-level officials routinely steal food coupons meant for the indigent. Solicitousness for the poor does not suffice to explain why microcredit literally came to dominate the government agenda. SERP's list of alleged suicide cases (symbolizing a link I find plausible in principle) were verified, Rajsekhar said, by “third parties”: district revenue agents and certain local non-governmental groups. But causality in suicide cases is delicate, and I don't know enough about these third parties to trust their judgment in such a politicized context.
The main problem in the response, as Vijay Mahajan put it to me, is that the government is an unfair referee. It's a player and a referee. While SERP is not technically part of the government, it is as a matter of political economy an extension of it. SERP felt its interests directly threatened by MFIs.
Clearly self-regulation for microfinance failed miserably in Andhra Pradesh. That calls for the government to step in. But this is not how regulation should be done. Regulations should be written and enforced by disinterested parties and published in draft, with a public comment period. I would tentatively suggest (not knowing enough about India to be sure) that this will contribute to the foreign perception of AP as no longer such a good place to do business: the government can slam the private sector at any time. The Ordinance comes off as assuming that MFIs are devils—companies that act out of pure greed rather than a mix of that with the pursuit of growth and genuine commitment to the poor—and assuming that SHGs and district officials to whom MFIs must now pay obeisance are angels. It's parochial.
So, as is my wont as a child of divorce, I see some symmetry in the tragedy: the government people and the MFI people are both imperfect, acting out of a mix of motives. (Let's not forget that greed—the interest in making new opportunities for bribes—could be playing a role in the political economy on the government side too.) Neither side respects the other. One could say that the MFIs deserve what they got, maybe even needed it in order to force them to act more responsibly. They blew their chance at self-regulation while exuding disrespect for the government. So they got smacked.
But what's important is not what's fair to MFIs but what helps the poor most. The Ordinance may be better than nothing because it froze a situation that was spinning out of control for many; it may well have saved lives. But it is far from ideal. Despite Rajsekhar's assertions to the contrary, it is not realistic to expect the SHG system, for all the good it does, to meet all the financial needs of the poor. The private sector can help fill that gap. My hope is that this brutal game will ultimately lead the industry to a better equilibrium than before. But mostly it seems that the government wants to get rid of the MFIs, and is pursuing that goal quite efficiently. I believe the SERP is about as committed to serving the poor as is Vikram Akula, founder of SKS; but that does not mean that SERP, any more than he, is acting perfectly in the interests of the poor.
These events should also be cause for introspection at the World Bank, which has financed both sides, but especially the government and SERP (with $1 billion or so). The SERP-administered SHG program may well be doing much good. But World Bank money has also beefed up a political economy hostile to private sector solutions.
Still, the true bottom line is this: credit, the poor, and business-like insistence on regular repayment are a dangerous combination. Pushed too hard, credit can easily become a buzz saw. Change any one those three elements, and it is safer: savings instead of credit (cf. Gates Foundation), the welloff instead of the poor, the flexible and somewhat subsidized communality of SHGs instead of the hard-nosed efficiency of MFIs. If microcredit is to safely serve the poor, it must soften its edges. There are many ways to do that. But probably all are harder when growth is rapid. Fast growth in credit to the poor is therefore dangerous, and often unworthy of the label “development.”
The Microcredit Attack Documentary
December 5, 2010
I first heard from Danish documentarian Tom Heinemann last January. He was probably drawn to me because I had tweaked Kiva for de facto slight of hand. He told me he was making a film about microfinance—the one that premiered last Tuesday evening on Norwegian television. (An English version is coming early in 2011.) I could tell that while we shared a desire to pierce the publicity veils around microfinance, his drive was more purely critical. Basically, it seemed to me that he wanted to get the goods on microfinance. While feeling that the truth about microfinanced is nuanced, I was curious to see what he would come up with.
Over the year, he checked in with me, as I'm sure he did with others in the film, to share his discoveries. He also asked good questions, such as what the interest rate of the Grameen Bank is, which led me to some blogging.
On a Saturday in August, Tom and his wife came to my house to interview me. I appear in the Norwegian final cut at 36:40 and 40:25. (Background art credit to my wife Mai.)
Overall, Tom seems to have made pretty much the most negative movie he could. As I show just below, the film sensationalizes matters that have more to do with making Muhammad Yunus look bad than whether microcredit is good for the poor; exaggerates the Grameen Bank's interest rates despite my explanations in e-mail to Tom and on this blog; and heavily favors negative voices, depriving viewers of the opportunity to glimpse the complexities of the real world and think for themselves. Talking-head defenders of microcredit do get some airtime. However, as far as I can tell the client voices are all negative. Such voices are important and generally underrepresented, but they are not the whole story. It is easy to find people in Bangladesh who would rather have access to microcredit than not—I know because I met some while tagging along with Stuart Rutherford for a day in 2008. As far as I can tell, such microcredit users were not investigated in the course of this investigative journalism on microcredit use. The documentary is therefore designed to give viewers only half the story.
I can see a few potential motives or rationales for the strong negativity:
By way of making my case that the documentary maxes out on negativity, I'll comment on a few parts:
That said, I am certain that if Tom had wanted video of people talking about how microcredit had helped them manage life a bit better, he could have shot it. For example, he could have asked the authors of Portfolios of the Poor to introduce him to some of their subjects, many of whose stories are told in Appendix 2 of that book. Those stories are neither of ascent out of poverty nor of descent into indigence, but of people getting by by grasping financial tools within reach. The apparently pure negativity of documentary's client footage is therefore a choice—a choice to give viewers only one side of the story. Whether most viewers will realize that, I don't know.
The one ardent defender is Alex Counts, CEO of the Grameen Foundation. To be fair, I should note that Yunus refused to be interviewed. But is it just me, or are the shots of Alex less flattering in angle and frame than of the other talking heads? (I did wince at 42:30, when Alex cited the literature review he commissioned five years ago as showing that microfinance reduces poverty rather than the fine, new update which avoids such claims.)
My sharp measurement of a standard Grameen borrowing pattern, inspired by Tom's queries, yields a rate of about 24%. After I blogged that finding, Tom contacted me to share his puzzlement over Grameen Bank transaction logs he had copied. It turned out that the borrowers were topping up their loans: having repaid at least half the balance, they borrowed it back again. Explaining this to Tom, I realized that the unusual flexibility of Grameen loans raises average balances without raising interest charges. Factoring this in reduces the interest rates to more like 17–20%. And all that is before factoring in Bangladesh's higher inflation rate, which makes 17–20% feel like 13–16% to a Norwegian or American. That is much less than I would pay for an uncollateralized loan from American Express. All the sturm und drang about usury in India notwithstanding, microcredit is generally cheap in South Asia. I told Tom, but he stuck with 30%.
What is revealed is that in 1996 the Grameen Bank transferred some $100 million in aid receipts from Norway, Sweden, and other donors to a separate, nonprofit entity called Grameen Kalyan—without informing those donors. Grameen Kalyan then lent the money back to the Bank at 2% interest. According to the Bank's just-released account, this interest supplied a Social Advancement Fund which was to provide services such as scholarships to Grameen members and employees. A Norwegian official first detected the transaction in a footnote of the Bank's 1996 annual report, which was published in mid-1997. The Norwegian government became alarmed that money it had given to a specific institution for a specific purpose (housing loans) had been transferred to another institution for other purposes without the donor's knowledge. It also pointed out that this gift to Grameen Kalyan reduced the net worth of the Grameen Bank, thus of its shareholder-members. (A good timeline is here.)
The Bank's explanations for this strange transaction were and are disturbingly dubious. One rationale was and is that the Bank gave the money away and borrowed it back because it was afraid that otherwise it would burn a hole in the Bank's pocket. This Bank, entrusted with the serious responsibility of using foreign funds to help the poor, would not entrust itself with the basic function of a bank: holding money safely. Or—more likely—the Bank was and is lying. Another reason given was and is that the deal could reduce Grameen's tax liability. But according to a Norwegian embassy official, Yunus first emphasized this rationale, then deemphasized it months later. (And the Bank disowned the rationale in a letter to Tom this August.) The dissembling raises suspicions: perhaps the move was nefarious, as sensational headlines have insinuated in the last few days. But lacking evidence to the contrary, I am prepared to believe that the real motive was indeed to set up the social fund, and that the Bank got trapped in rationalizing a contract violation. In the end, the disputants compromised: about half the funds (I think) were moved back, after which the Norwegians judged that their interest in the appropriate use of their money was served. On what basis should we second-guess them? [Update: The Norwegian government has, from its point of view, cleared Grameen of all charges.]
The episode does shed light on the parting of ways between the Grameen Bank and donors. Yunus has long taken pride in the Bank's independence since the mid-1990s. Whether he is making a virtue of out of an unhappy divorce, or whether the deep cause of the newly exposed dispute was Yunus's growing restiveness under the yoke of the donors, it seems clear that the Bank had developed the confidence to do things its way, on its own. The documents also debunk Milford Bateman's assertion that “the rejection of subsidies [for the Grameen Bank] was essentially rooted in changing politics: specifically, the rapid ascendance of the neoliberal political project.” There is no sign of Norwegian officials, in their candid moments, planning to neoliberalize the Grameen Bank. Rather, they wanted to subsidize it and have a full say in how their subsidies were used.
Why then make such heavy weather of this dozen-year-old dispute? I suspect the answer lies in the excitement of headlines such as “Grameen founder Muhammad Yunus in Bangladesh aid probe“—as distinct from, say, questions of what helps the poor.
Professor Yunus's Opinion
January 15, 2011
The New York Times has published an opinion piece by Muhammad Yunus on how to keep microcredit on this side of usury:
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.
For close followers of microfinance, Yunus's writing will ring familiar. For the general public, it is a concise statement of his thinking. He makes two concrete points:
Overall, I think Yunus makes a good point about the dangers of commercialization as he defines it. Indeed, events in India have, to a degree, vindicated him. Although I criticized his line of argument before the Indian implosion (this, this) and will do so here, I have come to appreciate a contradiction in my own thinking. On the one hand, I have doubted the value of the Grameen Bank's example of cooperative ownership. Can others really be expected to follow it? On the other, I have blogged in praise of John Bogle for creating a cooperatively owned financial institution, the Vanguard Group. I trust Vanguard with my money because I know it is not trying to rip me off in order to favor outside investor-owners. Why should microcredit clients think any differently? Moreover, Yunus's distinction resonates historically: all forms of group microcredit popular today descend from the credit cooperative movement of 19th-century Germany (which in turn drew inspiration from those English socialists).
So if all the microcreditors could raise all their capital from their clients then, I agree, that is the way to go.
But almost none has—not even the Grameen Bank.
Yunus's achievements should not be slighted. In its pioneer days, the way forward for the Grameen Bank was far tougher and more uncertain than for those that followed. That said, thanks to his pioneering status and his abilities as a salesman, Yunus had help: a couple hundred million dollars from the Ford Foundation, the United Nations, Japan, and Western donors. As Vijay Mahajan, the father of commercial microfinance in India, has pointed out, microcreditors today cannot expect the same help, whether because of limited funds among private and public donors or the donors’ sense that microcredit has graduated from grants. If microcreditors today want such big chunks of capital from outsiders, they will have to buy it.
In particular, while it is true that Grameen members hold legal claim to 97% of the Grameen Bank's net worth, they only contributed about $7.5 million in capital, at 100 taka ($1.40) per member. The Grameen Bank has not shown that microfinance can grow large purely through cooperative ownership.
In fact, as I wrote last summer, an irony in Yunus's criticism of for-profit microlenders for going to the capital markets is that Grameen Bank is itself running low on capital, by which I mean risk-absorbing, profit sharing funds that banks are required to keep on hand in case of losses. And it is not clear (to me at least) how Grameen will get more. Maybe the government will step in…
Also of dubious generalizability is Yunus's 15% spread cap. That limit might work in South Asia, but not very well in the rest of the world. Microcredit is cheaper to do in South Asia because of high population density—meaning that a loan officer can hit more villages in a day, serving more clients—and relative wage equality—which means that the wages of a, say, high-school educated loan officer are not so high compared to the size of the loans the poor can safely manage. That is why Grameen can charge just 20%, and why Chuck Waterfield, citing unreleased analayses, could tell a conference audience that India's microcredit interest rates are among the lowest in the world. Where workers are more expensive relative to the typical loan size, as in much of Latin America and Africa, they must be paid from higher interest charges (or subsidies, which Yunus eschews). Also, such a rate rule discriminates against creditors aiming to serve the poorest, with particularly little, thus costly, loans; and against small, young creditors that have not yet achieved economies of scale or that are trying to earn extra profits to reinvest in their growth. Adrian Gonzalez of the Microfinance Information Exchange (MIX)determined that 75% of microcreditors worldwide are in Yunus's “red zone,” charging spreads of more than 15%. This large group makes smaller loans on average, perhaps serving poorer people. And profiteering does not explain the widespread trespass into the red zone: even if profits were zeroed out, it would thin only to 61% of microcreditors.
So there is a kind of stubborn ignorance of facts and reason in this piece that rubs thinkers like me the wrong way—and probably helped make Yunus such an effective doer. On balance, I think it is fair to say that while Yunus has contributed much by being a pioneer, he should be more gracious in recognizing that not everyone can do microcredit the way he did it, let alone the way he says he does it.
Since I share Yunus's diagnosis that commercial microfinance got out of hand in India yet disagree with his prescription, I should offer an alternative. A sensible proposal I heard from two microfinance leaders in India, Mahajan of BASIX and P.N. Vasudevan of Equitas, was for microcreditors, as distinct from governments, to cap their profit rates, as distinct from interest rates. At his office in Hyderabad last November, Mahajan told me that BASIX, which he founded, used to profit at the rate of 2 cents per dollar of assets (2% ROA), where “assets” are dominated by outstanding loans and “return” is interest and other income net of expenses. After competitors started raking in 5% ROA, BASIX inched up to 3% and used the extra profits to grow faster. So a cap of 2–3% might work. A few days before in a Delhi hotel lobby, Vasudevan told me that Equitas publicly limits its ROA, its Return on Equity (ROE), and the ratio in pay between the highest and lowest employees in the company.
Credit is not an ordinary product. It is weighed down by millennia of baggage, for the good reason that it can do real harm. It is like a drug in that it is potentially healthy in small doses, but also potentially addictive. So it stands to reason that sellers of this product must take unusual steps to counteract its special problems of reputation and risk.
Having taken Yunus's piece on its own terms, I want also to view it within its political context. Remarkably, the piece mentions only the controversy in India, not the one swirling around his own head in Bangladesh. I suppose it is not in Yunus's interest to raise awareness about that. But that does not mean his own awareness of the controversy played no role in the writing. Tom Heinemann's documentary was unfair in only showing the dark side of microcredit, but he still did a service in shining a light on that dark side. Yunus, by focusing on interest rates, an area of relative strength for Grameen, distracts from the fact that the justness and impact of lending to the poor depend on more than rates. The amount of credit matters too, as do the quality of disclosure about program rules, the degree of competition and multiple lending. Even debt at 0% can trap the poor. Focusing on interest rates plays into the Bangladesh government's fixation on that aspect of the credit relationship, as it sets out to investigate Grameen, drawing the investigators toward one of the Bank's strengths. In fact, the Grameen Bank is by many accounts a leader in the flexibility and diversity, cost and transparency, of its offerings. But none of that, certainly not low interest rates by themselves, guarantees that all is well with the Grameen Bank's clients.
In a final and remarkable parry, Yunus reminds his prime minister, who recently accused microcreditors of “sucking blood from the poor in the name of poverty alleviation,” that she once stood side by side with him and the woman who is now the most powerful diplomat of the most powerful nation, pledging to bring microcredit to millions. Prime Minister Hasina's opinion of microcredit may have flipped since 1997, but Secretary Clinton's has not. Perhaps Yunus is signaling to Hasina about how those abroad might take offense if her government goes too far in attacking him…or perhaps words published in New York hold little sway over deeds done in Dhaka.
After the Fall, Resignation Edition
May 12, 2011
The news of Yunus's formal resignation is in a sense not news: the highest court in the land already ruled that he had to go. But it is also a profoundly sad moment, so much so that I did not want to sully this transcendent moment with my perishable thoughts.
But you must be wondering: what next?
I wrote back in March about issues facing the Grameen Bank in the post-Yunus era. Those issues haven't gone away. But the situation has, to external appearances, become more grave.
The obvious successor would be Dipal Barua, the most recently departed Deputy Managing Director. Barua was born in Jobra, where Yunus made his first loans, and worked under Yunus all those years until early 2010. He was central to the Grameen II overhaul. He founded Grameen Shakti, a solar company. The split between Yunus and Barua was evidently bitter, and possibly Barua secretly aided the government in ousting Yunus. He knows where the skeletons are. On the other hand, recently released old letters from another departed deputy, Muzammel Huq, show that in the late 1990s at least, he viewed Barua with scorn; and Huq is now the chairman. So I suppose Huq is the other obvious candidate; and going by Mohsin Rashid's legal arguments, it may be Huq who did more to guide the investigative committee.
Of course, we can't assume that the government would be so rational as to appoint someone with years of experience at the Grameen Bank, someone who could bring a mix of continuity, managerial competence, and fresh thinking, thus at least a prayer of saving the Bank as an independent institution. Rumors are flying that Hasina will appoint her sister or her son. Whether or not accurate, such rumors lower one's expectations.
Whoever is picked will have far less independence than Yunus. The government appears to be moving quickly to amend the law that governs the Grameen Bank, to gain more control. Not surprisingly, the government appears intent on reconstituting the board, so that elected members no longer hold the majority. Those nine women are now the main barrier to government control of the Grameen Bank. I have heard that the government has been pressuring some of them, offering them, shall we say, both carrots and sticks to cajole allegiance. If the women continue to resist, then the government will find it easier to do an end run around them by pushing a new Grameen Bank law through parliament, where it does have a majority.
After calling for “tough agitation if Dr Muhammad Yunus is not made chairman,” Mohammad Sagirur Rashid Chowdhury, a Grameen Bank employee and spokesperson for its employees’ union, was abducted, tortured, and threatened with death if the protests were carried out. Before releasing him at Dhaka University, the perpetrators told him to remain silent about what they had done to him. He did not. They did not leave calling cards, but they reportedly did not take his watch or wallet, indicating that they were professionals. Four days later, Human Rights Watch documented “cases of extrajudicial killings, ‘disappearances,’ and torture that have taken place in and around Dhaka, after the current Awami League government came to power in January 2009.” The force blamed for these atrocities is the government's Rapid Action Battalion. The Awami League, of course, is led by Prime Minister Sheikh Hasina.
The saddest aspect of Yunus's departure is that it says much more about the government of Bangladesh than about microfinance and its leading light.
