four

Background Check

When new ideas spring up out of precarious beginnings, the important details of who did what and why in those early stages are rarely recorded and easily forgotten: for winners, growth comes at a gallop, original records seem irrelevant, and young managers are unaware of the past; for losers, there is even less motivation or capacity to preserve records. History ignores the 99 seeds that fell on stony ground, or were washed out by a storm, and it forgets the insignificant details that decided the fate of one seed that succeeded.

—LUCY CONGER, PATRICIA INGA, AND RICHARD WEBB, 20091

When biographer Thomas Sheridan likened Jonathan Swift's lending to a spring that “watered and enriched the humble vale through which it ran, still extending and widening its course,” he probably did not foresee the spring tumbling on for two centuries, extending into the mighty rivers of South America, the deltas of South Asia, and the plains of Africa.² But so it did, intermingling with like streams from Priscilla Wakefield's Benefit Club and the German credit cooperatives. As we continue to follow the water's many courses, we arrive at the subject of this book, the financial services for the poor that took form in the 1970s and early 1980s. Though Muhammad Yunus's Grameen Bank most represents the movement, microfinance remains diverse as ever. Fingers branch apart and probe new courses, rejoin, and intermix. To prepare for the main work of this book, the chapter tells the stories of the latest generation of thinkers, tinkerers, and promoters who made the microfinance we observe today.

The modern microfinance movement links to history in a couple of ways. We glimpsed in the last chapter how, as the West grew rich, the popular ways of bringing financial services to the masses, including savings banks and credit cooperatives, moved upmarket. Modern microfinance derives from those same original forms, especially the cooperatives, and returns to the original spirit of reaching the poor by sacrificing flexibility to cut costs. Microfinance can also be seen as a reaction against a more recent phenomenon. Starting in the 1960s, many aid donors and developing-country governments subsidized loans targeted at poor farmers and other deserving groups. That strategy roundly failed as local elites hijacked the cheap credit for themselves. In contrast, microfinance succeeded by taking a more businesslike approach. The low subsidies embedded in microfinance, along with its inconvenience, helped it screen out the elite and reach the poor more effectively.

As in previous historical waves, microfinance arose in many places and many forms. Key breakthroughs took place in Bangladesh, Bolivia, the Dominican Republic, India, Indonesia, and Niger. Some of the more popular approaches connect to people in groups, others to individuals. Some proffer loans, others savings accounts or insurance policies. The institutions that manufacture these services vary, too, in size and form. Many are nonprofit. The Grameen Bank is for-profit but member owned. Other for-profits have outside investors.

One break with the past is that foreign aid agencies, notably of the United States and Germany, have funded and advised the tinkerers and promoters who developed ideas and spread them. The other novelty—a truly historic departure—is the focus on women. Many microfinance institutions report that 95 percent or more of their clients are female. The closest precedent I have seen is the Irish loan funds, which only got as high as 20 percent.3

As in the last chapter, I do not analyze what microfinance does or ought to do. Rather, I describe the varieties of microfinance that are popular today through short histories that bring the survey alive. Just as in the older history, the unifying theme in the modern history is that the winners—the ones whose models touched the lives of millions—succeeded by trial and error in devising ways to deliver useful services to poor people in bulk. That, more than scientifically demonstrated transformation of clients' lives, is the emergent virtue of microfinance.

Microfinance and Its Living Cousins

As we approach the present in our historical journey, we come to a puzzle. What happened to savings banks and credit cooperatives for poor people? Born out of the grinding poverty of the early English industrial revolution and the German famines of the 1840s, both models overspread the globe. In modern times, credit unions—cooperatives with formal legal status and democratic governance—were even tapped to fight poverty in developing countries. In the mid-1950s, the U.S. government funded the World Extension Department of the U.S. Credit Union National Association; the department's director proclaimed in 1959 that “credit unions have proven themselves adaptable to all economic levels anywhere in the world and have become a definite factor in the raising of the standards of living in developing countries.”4 With 4,000 credit unions in Latin America by 1969, 1,200 in Africa, and 26,000 in Asia and Europe, the movement appeared robust and promising.⁵ Meanwhile, many developing countries had established private as well as postal savings banks that followed the British model. So why today does microfinance get all the attention? Why does it even exist?

The question is even more perplexing when you realize that in fact, credit cooperatives and savings banks are alive and well. At the end of 2009, 38,000 credit cooperatives operated in developing countries, claiming 67 million members.⁶ And those figures exclude China, whose government sponsors some 30,000 rural cooperatives.⁷ Savings banks are even more prevalent, stunningly so.

In 2004, Robert Peck Christen and Richard Rosenberg of CGAP, a microfinance research body in Washington, D.C., collected data on “alternative financial institutions” around the world, which they defined as ones attempting to reach a clientele normally unconnected to conventional commercial banks.⁸ They included microfinance institutions (MFIs), credit cooperatives and unions, state-run agricultural banks, and postal savings banks. A year later, Stephen Peachey and Alan Roe of Oxford Policy Management added data on non-postal savings banks.⁹ Table 4-1 summarizes the data—and comes with many caveats. The numbers are about ten years old because the exercise has never been repeated. Microfinance has grown a lot since then. The survey of credit cooperatives and unions was probably less complete than that underlying the much larger figures for 2009 just cited. For many of the institutions, we cannot tell how many of the loan accounts truly were active, as opposed to being de facto grants. Nor can we tell how many were held by “poor people,” however defined—even at microfinance institutions. And because many people have more than one account, we don't know how many people these totals represent.

Nevertheless, the texture of the numbers is striking: microfinance institutions are but one major source of financial service for those outside the conventional financial system. State development banks, predominantly in India and China, provided more loans than MFIs, at 85.7 million accounts. Postal savings banks were estimated to hold 243 million savings accounts, the lion's share in China and India. And that total is tiny next to the 838 million accounts estimated for other kinds of savings banks—including private institutions and public ones run outside postal systems. It bears repeating that we know little about these accounts. One report suggests that many in Asia are dormant.10

Despite this rich “alternative finance” landscape, Yunus and other pioneers felt compelled to devise yet more forms. Evidently, the dominant approaches either were not reaching many poor people or were not serving them well. As chapter 3 noted, transplants of Western models did not always take as hoped in poor countries. Yes, the United Kingdom was a developing country by today's standards when it opened postal savings banks in 1861, and that would seem to bode well for postal banks in today's developing countries. But the United Kingdom was also the preeminent world power, had a long history as a nation-state, was run by a strong and competent government, and had achieved a per-capita income at least four times that of India or Bangladesh in 1973, the eve of the microcredit revolution.¹¹ The relative wealth of Britain probably meant a higher volume of mail (the financial foundation of the postal system), a denser postal network with branches closer to the average person, and a bureaucracy that was more accountable and aboveboard. In contrast, a 2006 report on postal savings in developing countries delicately noted corruption: “In some countries, mainly in Africa,…deposits have not been managed with transparency and are transformed into substantial unfunded liabilities.”¹²

Another problem was that as western Europe and North America climbed out of poverty in the twentieth century, their savings banks and credit cooperatives became more formal, elaborately structured, and oriented to serving individuals rather than groups. Some evangelists for these models forgot their roots. For example, in rich countries today, credit unions cater to salaried people working for big organizations. They seem suited to their context, with 100 million members just in North America.¹³ But credit unions involve and depend on much more legal structure than credit cooperatives. Once a credit group grows beyond 40 or 50 people, it becomes impossible for members to monitor all transactions through direct witness—much less to participate in all decisions through plenary meetings. The governance of the cooperatives must then become more complex, with officers and committees elected to track money and make loan decisions. To give members proper recourse against embezzlement, violation of rules, and capture of lending decisions by elites, cooperatives must become formal legal entities, and members must have access to law enforcement. But in poor countries, partly because of mass migration to cities, most people still work in the informal economy, where salaries are rare, the legal system is largely a threat (in the form of the tax man), and enterprises come and go like shadows.

Table 4-1. Active Loan and Savings Accounts at Alternative Financial Institutions, circa 2000

Million

Source: Author's calculations, based on data from CGA P (2004), Peachey and Roe (2005), and Honohan (2008).

 

 

The upmarket drift of the old traditions created an opening by the 1970s for a new movement—an opening whose true dimensions were not appreciated until it began to be filled. As in the previous century, private organizations led the way. Unlike in the previous century, this was not for lack of government attempts to lead.

Enter the Developmentistas

In the twentieth century, much more than in the nineteenth, financial services for poor people evolved under the auspices of strong states. Governments of developing countries, including India and Brazil, took an active role in planning and implementing economic development. Governments of rich countries granted and lent billions to help them. For the mid-century U.S. government, providing capital and technology to poor nations was a strategic prong in the grand battle with communism.14 For Britain and France, foreign aid grew as well out of colonial administration, a way to maintain influence in former colonies.¹⁵ Thus within the field of financial services, there was a strong thrust toward public-sector solutions.

In the earliest days of aid, the late 1940s and 1950s, the intangibility of finance and the dubious economics of delivering services to the poorest made banking for poor people a secondary concern. Officials tended to view the challenge of economic development as constructing what writer Catherine Caufield called the “talismans of change”: the roads and dams, power plants and canals that are the bulky building blocks of industrialization.16 Roughly speaking, western Europe undertook this effort under the Marshall Plan, and the Western powers had emphasized it in “developing” their colonies. The trend-setting development institution, the World Bank, prided itself on its engineering and financial rigor. In effect, it took pride in filtering out countries so destitute as to be uncreditworthy and projects so soft-headed as to favor short-term welfare of poor people over productive investment in industrial capacity. After all, only industrial projects could generate the tax revenues needed to repay the loans.

But then poor people as objects of direct aid began a long rise on the priority lists of development institutions. The post–World War II economic recovery in industrialized countries gave their governments bigger budgets, with more room for compassion for those least fortunate. And as colonies in Asia and Africa gained independence, they became impoverished fronts in the Cold War. In 1960, following an Eisenhower administration proposal, the World Bank opened the International Development Association to lend money at almost no interest to the poorest nations.¹⁷ Investing in the productivity of poor people—their health, education, and ability to grow food—had been hard to justify in the cold financial calculations accompanying traditional development loans with commercial interest rates. How exactly would vaccinating children help a government service a World Bank loan at 7 or 10 percent? But after rates fell below 1 percent and repayment terms stretched to forty years, education, health, and support for small farmers came to seem more aid-worthy. Over decades, investing in people could well increase economic growth and government revenue.

It was through agriculture that foreign aid first intersected in a big way with finance for poor people. One trigger was the specter of famine in India in the 1960s. The “developmentistas”—rich-country economic aid professionals—responded by calling for comprehensive government support for farmers. After Robert McNamara jumped ship from the U.S. Department of Defense and assumed the presidency of the World Bank in 1968, he expanded this line of work. His ambition: bring Lyndon Johnson's Great Society policy style to the entire developing world. Just a few years before, Norman Borlaug and other prominent agronomists had begun breeding varieties of wheat and rice that produced radically more food per hectare but also required modern inputs such as artificial fertilizer, pesticides, and irrigation. Poor farmers could not invest in these “Green Revolution” technologies without credit, so meeting this need became a centerpiece of aid for agriculture.

The donors' push for credit to farmers coincided with the rise of state-led economic development philosophies in many countries, which appealed to leaders striving to consolidate their young nations or advance the equitable ideals of socialism. The state-led approach generally extended to finance; India was the foremost example. In 1969, a couple of decades after independence, it took control (but not ownership) of the country's banking system. Eight years later, it required any commercial bank opening a branch in an already-serviced area, such as a middle-class neighborhood, to open four in unbanked areas, such as remote villages. In so doing, the government elevated concerns about poverty and equity over traditional financial logic: presumably, many of the previously unbanked places were unbanked because they were unprofitable. The lending operations of these banks typically ran up losses, which were ultimately cross-subsidized by the banks' profitable operations or subsidized by the government. According to economists Robin Burgess and Rohini Pande, over the thirteen years the rule stayed in place, 30,000 rural towns and villages gained bank branches for the first time. It was the largest banking expansion in the world, ever.18

To dole out small loans to farmers, India and many other countries also set up dedicated public agricultural banks. Here, too, losses and subsidies were the rule. Doling out small loans to millions of small farmers was expensive and risky, which argued for charging them high interest rates to cover administration and default losses. But high rates would deter farmers from making the leap to a new way of growing food, especially if they perceived even a modest chance that the new way would lead to starvation and unpayable debts. So governments charged famers much less for the loans than it cost to deliver them. Over the decades, for example, Brazil, India, and Mexico each borrowed more than $2 billion from the World Bank to finance subsidized loans to farmers.¹⁹ One consequence of subsidy was that programs were designed to give loans on the basis of need rather than ability to repay.

Subsidized credit had just one problem: it didn't work. As evidence of failings became impossible to ignore, a counterrevolution commenced within the aid world. Its beginning was, in the words of three World Bank historians, “smaller than a man's hand”:²⁰ an article published in the American Journal of Agricultural Economics in 1971 by a junior economist at Ohio State University named Dale Adams.21 Over the course of the 1970s, with backing from the U.S. Agency for International Development (USAID), Adams and a coterie of colleagues mounted an ultimately successful attack on subsidized, directed credit.²²

Among the problems they pointed out was that top-level program managers in Washington or New Delhi could not control who actually received loans within villages. All too often, big landholders used connections and bribes to capture the cheap loans. Worse, because the employees at the government-controlled banks were rewarded more for getting loans out the door than protecting the bottom line, they relaxed about repayment. In other words, loans in practice were given neither on the basis of need nor responsible lending practices. One review of subsidized credit programs in Africa, Asia, and Latin America found that almost all had default rates between 40 and 95 percent.²³ Many of the loans were little more than disguised grants that only a fool would pay back. This laxity drained government coffers and destabilized lending institutions. Worse, it corroded the rest of the rural financial system, such as it was. No unsubsidized financial provider could compete with “credit” on such easy terms or, therefore, pay reasonable interest to depositors. In a Ph.D. dissertation, one anthropology student at the University of Hawaii described the pattern she witnessed in Indonesia:

There is always the danger that TPLs [government field workers], who are young, will form patron-client relationships with powerful village entrepreneurs or village officials. The entrepreneur or official, being an older and wealthier man, may come to dominate the TPL and try to dictate certain aspects of the implementation of a project. This is particularly evident in the selection of project participants. If the TPL has consciously or unconsciously relinquished control over the selection of participants, there is little hope that the owners of smaller and weaker enterprises will be included in the project. Experience shows that powerful entrepreneurs and village officials usually try to use credit and other resources distributed through development projects as personal patronage, steering them toward political allies, friends, and relatives.²⁴

The student's name was Ann Dunham Sutoro. Haven't heard of her? During much of her fieldwork in the late 1970s, her son lived with her parents in Hawaii, attending high school. His name was Barack.

In sum, the critics said, subsidized and directed credit damaged the financial systems when it ought to be doing the opposite. Adams and others called for interventions that operated in a more businesslike way, charging clients prices much closer to the cost of delivery, holding borrowers accountable for repayment, and holding banks and other financial entities responsible for their own bottom lines. Roughly, what was good for the financial business was good for the customers.

The rise of this “financial systems” view assisted microfinance in two ways. First, it directly influenced the key players. Notable among these were the German and American aid establishments, which contributed behind the scenes to blockbuster successes in India and Indonesia. (Obama's mama played a role in Indonesia.) Second, the new view created a receptive audience among donors for experimenters, including Muhammad Yunus, who were perhaps largely unaware of the Western debates and had independently found their own way toward businesslike methods.

The Making of Microfinance

Having constructed a backdrop—the deep history of the last chapter, the more recent developments in this one—it is time to describe today's microfinance scene. This section does so with a series of thumbnail histories. Before I start, I should head off two misimpressions. First, one might conclude that the pioneers highlighted were the first of their generation to aid the poor through financial services. Not so. Four years before Yunus made his first loan, for example, the U.S. nonprofit Acción International began lending to what it would label “microenterprises” in Recife, Brazil.²⁵ The Bangladeshi nonprofit BRAC—now the largest in the developing world—lent to the poor in Bangladesh before Yunus, too.²⁶ What distinguishes the efforts I spotlight is that they produced formulas for delivering these services in businesslike ways, minimizing subsidy and maximizing the scope for serving more people. These efforts took off.

The second potential misimpression comes from my focus on a handful of individuals. Many people unnamed also contributed. Still, I hope that by telling half a dozen origin “myths” rather than one, I will bring the history to life while conveying the diversity of a movement that indeed comprises the labor of thousands.

Whatever the technique, the first thing to do in mapping a patch of territory is set the boundaries. Defining the boundaries of microfinance turns out to be surprisingly difficult. Breaking the word in two and taking its parts literally would equate it to “very small money management services.” But the word is rarely taken to encompass loans from family or the sorts of informal credit and savings services Stuart Rutherford found in Vijayawada, India (discussed in chapter 2). Restricting the concept to services provided by formal institutions, ones with legal identities, helps bring it in line with what people usually mean by the word. But that does not suffice because it includes credit cooperatives, postal banks, other savings banks, and those agricultural banks that directed subsidized loans to farmers—none of which “microfinance” normally brings to mind. The derivation of “microfinance” and “microcredit” from the earlier “microenterprise credit” suggests that the purpose—investment in productive activities—is the key. But as we saw in chapter 2, the true reason for a poor person's borrowing or saving or insuring is often elusive, and any form of credit or savings can finance investment in microenterprise. Nor can we find recourse in stipulating the use of groups because some microfinance is individual (as we will soon see). Organization and ownership type do not seem to draw the line either: microfinance has been delivered by government-owned banks, nonprofits, for-profits owned by members, and for-profits owned by outside investors.²⁷ Perhaps because of all this ambiguity, in the 2004 statistical survey that inspired my table 4-1, Christen and Rosenberg defined microfinance in historical terms, no more precisely than “financial services designed for lower-income clients using the new delivery methodologies developed during the last twenty-five years.”²⁸

Maybe these definitions are unsatisfying because they are too classical, in the sense of classical physics. They view microfinance as existing independent of us, the observers. Quantum physics teaches that the act of observation changes what is observed, making subject and object inseparable. Just so, the answer to the meaning of microfinance lies partly in the fact that the methods social investors know most about are those working hardest to be known, the ones that seek external support. As a result of this selection process, microfinance is by and large that which connects rich-country donors and investors with poor-country clients.

Still, this characterization, too, is a bit of a dodge—not really a definition. What methods of providing financial services seek outside support and use it well? In general, the methods are provided by formal institutions; chit funds cannot submit grant proposals. The institutions tend to be nongovernmental because public agencies have less need for funds from the foreign public. And because these independent institutions operate under a “hard budget constraint”—unlike state banks, they cannot slough losses onto taxpayers—their operations tend to be businesslike: even if they receive subsidies, they strive to limit costs and charge enough to balance the books. As well, the institutions are characterized by their mission of serving poor people. Ones serving rich people are unlikely to solicit investors and donors with charitable motives. Finally, this mission combines with businesslike operation to favor large institutions that can manage other people's money with probity and mass-produce services in order to realize economies of scale. Microfinance, then, appears to encompass the large-scale, businesslike provision of financial services to the poor. Notice how this definition allows for the possibility (indeed, reality) of governments providing microfinance if in doing so they behave like nongovernmental organizations (NGOs) that must balance the books. And notice that the definition is agnostic about legal form: microfinance institutions can include NGOs, which are usually nonprofit, and for-profit companies, too.

Solidarity Group Lending

The most famous form of microfinance entails making loans to small groups of people, usually women. It arose separately in Bangladesh and in Latin America.

Bangladesh's Big Three. Our survey begins in 1976, in Bangladesh, with a young economist at the University of Chittagong. Educated at Vanderbilt University on a Fulbright, Muhammad Yunus was known in those years as an independent thinker and a brilliant teacher. One student told me that Yunus could explain profound mathematical theorems in ways that made the central ideas shine through.29 He had an unconventional streak, too. “He had long hair, a VW bug, nicely tailored jackets, and colorful ties,” says Asif Dowla, who studied under Yunus and then was effectively Grameen's first bookkeeper.³⁰ In 1971, Bangladeshis had won a bloody war of secession from Pakistan. The early years of Bangladesh's independence were a time of great suffering, new possibilities, and a near-vacuum of government. Yunus became fed up with the incongruence between the Panglossian theories he taught inside the classroom, which spoke of optimal output and economic growth, and the starvation he saw outside. He began working in the nearby village of Jobra with his students to understand and address villagers' problems. After some trial and error with credit for farmers, he decided to try working with the poorest families, the ones who owned no land to grow rice. In his autobiography, Banker to the Poor, he tells how an encounter changed his life:

We stopped at a run-down house with crumbling mud walls and a low thatched roof pocked with holes. We made our way through a crowd of scavenging chickens and beds of vegetables to the front of the house. A woman squatted on the dirt floor of the verandah, a half-finished bamboo stool gripped between her knees. Her fingers moved quickly, plaiting the stubborn strands of cane. She was totally absorbed in her work….

She was in her early twenties, thin, with dark skin and black eyes. She wore a red sari and had the tired eyes of a woman who labored every day from morning to night.

“What is your name?” I asked.

“Sufiyah Begum.”

“How old are you?”

“Twenty-one.”…

“Do you own this bamboo?” I asked.

“Yes.”

“How did you get it?”

“I buy it.”

“How much does the bamboo cost you?”

“Five taka.” At the time this was about twenty-two cents.

“Do you have five taka?”

“No, I borrow it from the paikars.”

“The middlemen? What is your arrangement with them?”

“I must sell my bamboo stools back to them at the end of the day as repayment for my loan.”

“How much do you sell a stool for?”

“Five taka and fifty poysha.”

“So you make fifty poysha profit?”…

Sufiyah Begum earned two cents a day. It was this knowledge that shocked me. In my university courses, I theorized about sums in the millions of dollars, but here before my eyes the problems of life and death were posed in terms of pennies…. I was angry, angry at myself, angry at my economics department and the thousands of intelligent professors who had not tried to address this problem and solve it.31

Sufiyah Begum lived in bondage to the bamboo supplier, who allowed her just enough margin for her family to survive, and well less than she could have made buying bamboo with cash and selling stools at market price. But she had no cash. Buying bamboo on this “supplier credit” left her perpetually subject to monopolistic lending. A cheaper loan from an outsider might free her.

Yunus had a student survey Jobra for others in the same bind. She came back with a list of 42 people who could use a total of $27 in capital. Yunus tells how he took the money out of his pocket, handed it to her on the spot, and told her to lend it without any interest or fixed repayment schedule. Inspired by the experience, he next asked a local bank to lend to the villagers—to which it only agreed after Yunus personally guaranteed all the loans, in effect making him the borrower of record. Next, he persuaded a powerful friend at the state-run Bangladesh Agricultural Bank to let him open his own branch near Jobra, to operate as he saw fit. He called the new project “Grameen,” meaning “of the village” or “rural.” Yunus writes that he never intended to become a banker. Undeterred, he proceeded with vision, flexibility, conviction that the established banking system was wrong-headed, readiness to call on his personal connections in government, and tremendous energy as an advocate and salesman.

With his students, Yunus constructed the Grameen lending model. After much experimentation—including individual loans that were not paid back—they settled on a kind of group lending in which sets of borrowers choose each other, approach the lender together, and take responsibility for each other's debts.³² Though Yunus does not mention it, some of his closest aides in those years make clear that extant credit cooperatives were one source of ideas—as both inspiration and foil. The cooperatives contained the interesting idea of joint liability, but they appeared ungainly at a typical size of twenty-five members and vulnerable to takeover by a village's richest residents. Yunus and his students settled on five as the right size for a Grameen group—the number of fingers on the hand, and the number of times a Muslim should pray each day.³³ Loans were repaid in weekly installments over the course of a year. Within a group, the two neediest members would take loans first; then, while they were repaying, two more would start; then the leader of the five would borrow last.34 After one loan was repaid, a larger one could be taken, in an ascending cycle. Borrowers also were required to make additional payments into a group savings account, which served as a kind of collateral and a buffer fund for times when borrowers could find no other way to meet installments. For efficiency, six or eight groups of five in a village would be clustered into “centers,” which would meet weekly with a Grameen representative to do business. In time the centers became the primary grouping in the system (see chapter 5).

In 1979, having developed the model and demonstrated a high repayment rate, Yunus won the backing of Bangladesh's central bank to test it on a large scale in the Tangail district near the capital city, Dhaka. After learning and adapting during this pilot, Grameen went national and grew rapidly, thanks in part to funding from the Ford Foundation, the U.N. International Fund for Agricultural Development, and the governments of Bangladesh, the Netherlands, Norway, and Sweden.³⁵ In late 1983, Yunus obtained a unique banking charter from the military ruler of Bangladesh, and the Grameen Bank was born. Under Grameen's cooperative structure, each new member bought a share of the bank for 100 taka (a dollar or so). Formally, the borrowers owned most of the bank. In practice, until his politically motivated removal in 2011, Yunus enjoyed great autonomy, and most of the capital came from donors and retained profits. By the end of 2010, the bank reported, 8 million women and 300,000 men had become members.³⁶

Within Bangladesh, Grameen inspired imitation and competition. In the 1980s, the Bangladeshi group BRAC integrated Grameen-style microcredit into its education, health, and grassroots development programs. As mentioned, BRAC had tinkered with credit before Yunus but had never hit on a formula that combined such high repayment rates, manageable costs, and scalability to millions of people.37 Even after BRAC converted to Grameen-style credit, major differences remained. Where Yunus expresses faith in poor people's ability to find their own way once financed, BRAC founder Fazle Abed believes that microcredit helps more when combined with larger programs for economic development. It is often futile, in the BRAC view, to give an illiterate widow with no land and a lifetime of wounds a small loan and expect her to blossom into an entrepreneur. Would-be microentrepreneurs need not just capital but also advice, supplies, and links to markets where they can sell their products.

One long-standing BRAC program integrates women into a vast poultry undertaking. Behind the scenes, BRAC set up at least half a dozen poultry farms nationwide, which produced more than a million chicks a year as of 2004. The women's job is to raise the hens. I met one of these women in the Rangpur district of Bangladesh in 2008. One of her grown sons had severe allergies that make it hard for him to work. She invested large sums in the education of another son who earned a master's degree, but a bus hit and killed him when he was biking. Much of her savings was effectively buried with him. BRAC gave her a series of loans, sold her chicks, feed, and vaccine, and bought the eggs her hens laid.38

In a neighboring village, I watched a monthly meeting of adolescent girls, part of a BRAC program that encourages the young women to borrow on behalf of their parents and even husbands. At meetings, the BRAC representative typically talks about AIDS, violence against women, and vegetable and livestock raising. For BRAC, the credit draws the girls into attendance, teaches thrift, and partly funds the work through interest receipts. Through programs such as these, BRAC's microcredit operations reached 5.5 million borrowers in 2010.³⁹

Filling out the big three of Bangladeshi microfinance is ASA, an organization founded in the 1970s by Shafiqual Haque Choudhury. Choudhury and his associates began ASA to carry out a five-year plan for an armed national uprising against landlords and the government. The plan didn't work out. In 1991, ASA took up microcredit and soon morphed into one of the leanest microcredit operations in the world. Where BRAC bundled, ASA streamlined.⁴⁰ It led the way in dropping joint liability for loans and taking savings deposits, and it limited its offerings to a small set of standard products. Today, ASA offers its 4 million borrowers the purest microfinance.⁴¹ In 2007, this formerly Maoist nonprofit topped the Forbes 50 list of microfinance institutions, thanks to its performance on such criteria as efficiency and profitability.⁴²

The Bangladeshi big three bear strong imprints of their respective founders, who came into their prime as their nation came into existence. Despite the common history, each organization has a distinct character. Only Grameen is legally a bank, meaning that it can take deposits well in excess of its outstanding loans; and these are now its main source of funds for lending. ASA is also autonomous, financing itself by retaining profits from its efficient credit machine.43 BRAC continues to take funding from outside donors to partly finance its non-credit programs.⁴⁴ For all, the system devised by Yunus and his students is still the core of the finance model, though all three have molded the original to suit their own strategies and respond to competitive pressures: as related in chapter 5, taking voluntary savings deposits is now common, and joint liability has been at least formally dropped.⁴⁵

Acción in Central America. Group microcredit was apparently an invention whose time had come in the late 1970s; like cubism and non-Euclidean geometry, it was independently invented or at least brought to prominence more than once within a few years. Two U.S. institutions dating to the Kennedy administration helped to develop it in the Western Hemisphere: Acción International, which began as a sort of private counterpart of the U.S. Peace Corps; and USAID, which President Kennedy forged from disparate government programs.

In the 1960s and 1970s, USAID had tried various combinations of credit, technical advice, and equipment provision to support small businesses in poor countries. Frustrated with the perpetually weak results, it hired Acción in 1979 to scour the globe for methods that worked. Acción in turn tasked the young Jeffrey Ashe, who had worked with credit cooperatives in Ecuador as a Peace Corps volunteer and to this day exudes infectious enthusiasm for financial services that work. Sadly, back then, most examples his team found were emblematic of failed aid: “just awful—ill-conceived, expensive, paternalistic, top down. We'd see sewing machines covered in cobwebs,” Ashe reported. But the team also found a few gems. These tended to focus on doing one thing well: providing finance. In Manila, the Philippines, a bank called the Money Shop made small loans out of stalls set up at the city's markets. In the main market of San Salvador, the capital of El Salvador, a credit cooperative called Fedecrédito lent to grupos solidarios (“solidarity groups”) of jointly liable clients. Just as in the fledgling Grameen Project, which the team also visited, the Fedecrédito groups had five members. To Acción and USAID, Ashe then proposed a lending program synthesized from these examples. Overcoming some institutional reluctance, Acción tried solidarity-group lending in Santo Domingo, capital of the Dominican Republic, among the tricicleros, who were named for the vehicles that they both pedaled and peddled from. It “took off like a shot,” says Ashe. In that moment, Acción found its calling as a midwife for microfinance in the Americas. USAID, too, began a long involvement in the field.46

Of course, the two versions of solidarity lending on opposite sides of the planet were not identical. Acción's approach was indeed group-based: just as in the German cooperatives from which Fedecrédito descended, joint liability and individual self-interest combined to put members in the service of the lender, filtering unreliable borrowers and marshaling mutual pressure for payment. Acción's groups ranged from three to seven members, sometimes met monthly instead of weekly, and were not federated into centers. Elisabeth Rhyne, who was a senior vice president at Acción for many years, emphasizes that the organization's evolving philosophy was about more than joint liability:

It included the idea of operating close to the ground, using local knowledge to select good clients. The product was a simple loan delivered quickly and easily, appealing broadly to people in the market, free from the weight of training requirements and restrictions on usage. The model also emphasized keeping costs low with a lean staff, plain offices, and efficiency. Finally, it included the idea that staff would have incentives to enforce on-time collections. In short, it was both a loan product and a delivery method.⁴⁷

The first big break for this philosophy came in 1987 in Bolivia, where with funding from USAID and the cooperation of prominent Bolivians, Acción founded Prodem, a nonprofit solidarity lender. Prodem grew steadily; like Grameen, stirred imitation and competition; and eventually converted to a for-profit bank, called BancoSol, so that it could raise capital from investors. Chapter 8 tells more of that story.48

Closest to the Roots: Village Banking and Self-Help Groups

The microcredit movement grew organically in the 1980s out of the early work in Bangladesh and small Latin states. Ideas spread through written reports and word of mouth. Foundations and aid agencies financed replications in Malaysia, India, and dozens of other countries. As more people joined the movement, they invented variations.

Village Banking. Among the most important innovators was John Hatch, an American who like Ashe had spent time in the Peace Corps working with credit cooperatives in Latin America—first as a volunteer in the mid-1960s in Colombia, then as an employee of the Corps in Peru. In the latter, he directed fifty-five volunteers working with farmer credit cooperatives. In 1970 and 1971, Hatch took a Fulbright grant to work as a hired agricultural laborer in Peru. He has written that the experience taught him “deep respect for the subsistence skills of the poor.”49 But he was much less impressed with the foreign aid–financed credit programs he saw up close, which often seemed to hurt more than help.⁵⁰

In 1983, USAID asked Hatch to design a rapid-response program of aid to families in Bolivia beset by drought and hyperinflation. Hatch hit on a different form of microcredit:

On a flight into La Paz, Bolivia—while consuming my second bourbon—God chose to drop into my relaxed mind a new idea for helping subsistence farmers and other severely poor families pull themselves out of poverty. The result of this epiphany was “village banking,” which I instantly knew would become my life's purpose. I was 44 years old, recently divorced, with no savings, living in a tiny New York apartment, working as a semi-employed consultant, and painfully aware that not one of my 55 clients had ever adopted a single recommendation I had made. I was truly facing a dead-end.

Who could have predicted that within 48 hours of my airborne epiphany, the Bolivian mission of [USAID] would award my consulting firm a grant of one million dollars to launch a nationwide test of village banking? Who could have predicted that over the next six months this project would reach 433 villages and benefit 17,000 families—the largest and fastest start-up in the history of microfinance? Who could have predicted that the village banking methodology would eventually be adopted by hundreds of programs worldwide?51

The cooperatives he had worked with two decades before exercised a strong influence upon him; indeed, more than Hatch knew, his idea returned to the roots of credit cooperation. Even the name, “village banking,” unwittingly recycled a nineteenth-century English term for Friedrich Raiffeisen's cooperatives (see chapter 3).⁵²

For Hatch, solidarity groups were too laborious to assemble. In Hatch's plan, as in Raiffeisen's, cooperatives of some fifty villagers, not five or seven, would take block loans from an outsider benefactor, in this case USAID. (The group size would later fall to twenty-five.) The group, not an outside banker, would allocate the credit to members and keep the books. All could borrow immediately. Like the cooperatives of old, the banks would take savings while making loans, working in an informal, tight-knit setting in which members' own eyes, rather than those of a regulator, oversaw the keeper of the funds.⁵³ Hatch's village banking departed from the credit unions he had worked with in going downmarket: his system targeted poorer people and flew below the legal radar.

There followed in Bolivia what Rhyne calls “the closest program on record to the proverbial dropping money from the plane.”54 Shriveling crops and the evaporating value of cash threw aid workers into a manic race against time as they went from village to village starting banks and unloading sacks of pesos. The next year, Hatch started the U.S. nonprofit Foundation for International Community Assistance (now known as FINCA), which has made village banking another common form of microfinance. Through village banking, the Mexican lender Compartamos reached two million customers in 2011.⁵⁵

Self-Help Groups. A cousin of village banking, the self-help group (SHG), has dominated microfinance in India. It, too, arose in the 1980s as a reaction to the way traditional credit cooperatives were operating and represents a partly unwitting return to their original spirit.

In 1959, after a failed Tibetan uprising against Chinese rule, the fourteenth Dalai Lama fled to India. Thousands of refugees followed him across the border into refugee camps where living conditions became deadly because of disease. The Dalai Lama asked Indian Prime Minister Jawaharlal Nehru for land for permanent settlement. The southern state of Mysore (now Karnataka) stepped forward first. Thus many Tibetans ended up some 1,500 miles from their native land. Like Oxfam, CARE, and many other private charities, one nonprofit that was founded to help the Tibetans outlived its baptismal humanitarian crisis, broadening its mission from meeting immediate needs, such as food and shelter, to longer-term goals, such as productive farming. The organization was called the Mysore Resettlement and Development Agency (MYRADA), and by the early 1980s, it was working with Indians as well as Tibetans, often by organizing them into groups in order to deliver training or credit.56

One problem MYRADA faced was that the cooperative societies it had organized, of the type inherited from British rule, were breaking down in just the way Henry Wolff had regretted in 1927, when he wrote about the “dry rot” of corrupt management: more-privileged people took them over and captured most of their benefits.⁵⁷ Aloysius Fernandez, who led MYRADA then and for decades after, picks up the thread:

Between 1983 and 1985 several of the Co-operative Societies started by MYRADA with over 100 members broke up because of lack of confidence in the leadership and poor management systems. Members met MYRADA staff in small groups; they expressed their willingness to repay their loans to MYRADA, but not to the Co-operative Society, which was a large and heterogeneous group and dominated by one individual. We informed them that they had not taken the loans from MYRADA; hence the issue of repayment to MYRADA did not arise. We asked: “Why not repay to the small group of people assembled here?” They agreed. The large Co-operative broke down into several small groups and the group members repaid their loans to whichever group they chose to join.⁵⁸

Feeling its way in the mid-1980s, MYRADA helped form hundreds of what it called self-help groups. For Fernandez, it was essential that the groups be no larger than about twenty members, and that they be homogeneous, arising naturally from the local social fabric. Members might be united by caste, creed, gender, profession, economic status, or kinship. (To emphasize this feature, Fernandez would later call them “self-help affinity groups.”) SHGs could engage in finance and, like BRAC groups, serve as conduits for other services, such as training in efficient irrigation. Where Yunus sought to build a big bank to serve the poor, Fernandez followed the Gandhian ideal of self-reliance. He wanted to help poor people produce their own financial services, informally and on a small scale. SHG rules encouraged all members to save regularly into a group fund, rather than obtain capital from an outside institution. Groups could then decide collectively on any lending to members.

Having grown out of the characteristically Indian philosophy of bottom-up development, it was perhaps inevitable that the successful SHG movement merged with the likewise characteristically Indian philosophy of top-down development. Earlier, I described the Indian government's history of driving banks to poor areas through mandates. This predisposed it to view SHGs as potential appendages to the formal financial system, a new way to channel credit to the poor. As it happened, that perspective was reinforced by advice emanating from Germany. In the early 1980s, thinkers connected to the Gesellschaft für Technische Zusammenarbeit (GTZ), an agency that specialized in technical advice and training, were joining the financial systems revolution started by Dale Adams, searching for alternatives to subsidized credit. Sensitized by their nation's history with cooperatives, they recognized that poor people all over the world operated small, autonomous, informal finance groups. Could GTZ help such groups link to established sources of capital like Raiffeisen's cooperatives had a century before, with a minimum of subsidy?59

In India, GTZ found a partner in the National Bank for Agricultural Development, a state institution whose job, ironically, was disbursing subsidized credit. It made its first grant to MYRADA after hearing the German aid professional Erhard Kropp speak in 1986 at a conference in Nanjing, China, of the Asian and Pacific Regional Agricultural Credit Association. There, he proposed that governments help encourage the creation of informal groups and guarantee them access, as groups, to bank accounts.⁶⁰ The German grant was to go toward organizing SHGs in this way. In 1989, the Indian government began funding other NGOs to do the same. Three years later, it piloted the SHG-Bank Linkage Program, which operates to this day.⁶¹ With government funding, NGOs organize groups and train members in saving, lending, and accounting. The group then opens a savings account at a bank. Once the group has saved enough, the bank gives it a loan, typically four times as large as the savings balance, for which members are jointly liable. As in village banks and Raiffeisen's cooperatives, members apportion the credit among themselves.

Bank-linked SHGs proliferated beginning in the late 1990s, thanks in part to “priority-sector lending rules” that prodded commercial banks in India to devote 40 percent of their credit to deserving people and activities. By 2010, a cumulative 4.6 million SHGs had received bank loans. At a typical size of thirteen women per group, that suggests an astonishing 60 million women have access to loans through their SHGs.62 However, many of the SHGs in the statistics may have gone defunct, and their members joined new groups, so this figure is probably high. Still, the Indian SHG–bank linkage system can be considered the largest microfinance program in the world, albeit with a degree of subsidy beyond that of other large microfinance programs.

Village Savings and Loan Associations. At the boundary between informal finance and “microfinance” are village savings and loan associations (VSLAs). These, too, are cooperative. Unlike most village banks and bank-linked SHGs, they generally eschew outside finance. At their best, they are self-sufficient, member-run, and therefore appropriate for the poorest of the poor.

In 1991, the U.S. charity CARE ran a small project in Niger to help women making and selling handicrafts. A Norwegian named Moira Eknes was put in charge. In time, Eknes discovered that the women knew more about handicrafts than she did, so she had nothing to teach them in that respect. What they lacked was capital. So Eknes studied the forms of community finance indigenous to the region and arrived at the idea of a group that would accumulate savings in a box with three locks, the keys held by three different people to prevent theft. The group could then lend money to its members or non-members. On the presumption of illiteracy, record-keeping would be oral. The biggest departure of the VSLA system from conventional microfinance in this example is that the supporting organization has no permanent local presence. It is there to train people to organize groups and provide some guidance to new groups.⁶³

Many big international charities now organize VSLAs. They include CARE, Oxfam, Pact, Plan International, Catholic Relief Services, and World Vision. According to Hugh Allen, a leading VSLA proponent, the groups are multiplying fast. At least 4.5 million people in fifty-two countries have joined them, including 4 million in Africa. Most VSLAs are in the countryside, where the majority of the world's poorest live. They also operate in urban areas, such as the Kibera slum in Nairobi, Kenya, one of the largest in the world. The groups, Allen says, do not work well with more than about thirty people. Beyond that, the meetings become too long and the transactions become too numerous to remember, so they become opaque. With opacity come distrust, error, and theft.64 Interestingly, when lending, VSLAs charge interest rates that in other contexts are decried as usurious: 2 percent per month is low and 10 percent is common.⁶⁵

Like the differences between finches, the differences between VSLAs and better-known microfinance forms reflect adaptations for survival in different niches. The poorest cannot afford to pay, through interest, for the wages, computers, and buildings of microcreditors. And if people are poor enough, they will accept walking a mile and sitting under a tree for an hour in order to save $1.⁶⁶ From the microcreditors' point of view, a large stratum of people are so poor and their loans and savings needs are so small that they can only be served at great relative cost. Ashe—the man who helped launch solidarity-group lending in Latin America and who today leads Oxfam America's VSLA work—once described conventional microcredit to me from the point of view of a poor woman in rural Niger: “That is for rich people.”67

Individual Microcredit and Microsavings

Microfinance is often equated in the public imagination with groups and loans. But there is more to it than that. The word “microfinance” was coined around 1990 precisely because the movement had expanded beyond group microcredit to include services other than loans. While group savings programs like VSLAs do exist, the main rationale for working in groups—joint liability—falls away in the switch from giving loans to taking deposits. Because most microsavings has been individual, savings and individual service appear together in this survey.

Indonesia. Like the Brits in India, the Dutch in Indonesia introduced German-style credit cooperation around the turn of the twentieth century. For reasons that are unclear, the similarities ended there. Where the Indian credit cooperative system apparently remained static and stagnant, the Indonesian one evolved and diversified into an array of “rural banks,” “village banks,” “market banks,” and “people's banks.” In general, these banks did savings as well as credit and could be owned by members and/or local and regional governments. They received government funding yet were left to die if they failed miserably on the market test. They generally did not use groups.68 From this financial firmament sprang two particularly significant institutions in the 1970s, one private, Bank Dagang Bali (BDB), and one public, the Badan Kredit Kecamatan (BKK) program. Both would influence the development of an absolute giant of microfinance in the 1980s.

It appears that the private institution in this pair was the first large-scale, commercial microfinance institution in the current era—in the world. It was founded by a Balinese couple, Ms. Sri Adnyani Oka and Mr. I Gusti Made Oka. Around 1955, not long after they married, they took their small savings out of a bank account and began moneylending. Ms. Oka made and collected the loans, accepting gold as collateral, and her husband kept the books. To increase their capital, Mr. Oka borrowed $222 in 1956 from one of those cooperative banks descended from the colonial era. In order to borrow, Mr. Oka became a shareholder. His first shareholders' meeting changed his life.

My wife and I already knew that when a person we trusted needed to borrow money, we could go to someone who had money and arrange the transaction. At the bank shareholders' meeting, I was surprised to learn that is exactly what banks do. I knew then that we could run a bank, that it could be profitable, and that it would help many people who were afraid of banks. From that time on, I was determined to obtain a bank license.69

The Okas realized their dream of graduating to formal banking a dozen years later. They opened a small “secondary market bank” in 1968, then the full-status Bank Dagang Bali in 1970, making it Bali's second private bank.⁷⁰

BDB succeeded by knowing and going to its customers. Employees made regular rounds to clients' homes and market stalls by foot, bicycle, and motorcycle to collect savings and loan payments. These visits also helped BDB staff judge creditworthiness and build long-term relationships with clients—relationships that implicitly promised access to new loans if clients stayed current on old ones. As a licensed bank, BDB also took savings. By 1996, it grew to 15,645 loan and 363,859 savings accounts. While 92 percent of the loan balances that year exceeded $420, indicating a well-off clientele by the Indonesian standard, 94 percent of the passbook savings accounts were smaller, pointing to a poorer clientele for this service (though one perhaps a step above Grameen's target demographic). According to American anthropologist Marguerite Robinson, many of the savers were entrepreneurs who made or sold food, clothes, and other goods; they earned $2–6 a day, of which they might save $1–2 on good days.71

In a shocking move, the Indonesian government closed BDB in 2004. The Okas' daughter had married the son of another bank owner, and through that relationship had flowed inappropriate loans.⁷² Yet in Robinson's view, BDB left a permanent legacy. Writing before the BDB's downfall, she explained that the bank

was not the first financial institution to provide microcredit profitably, nor was it the first institution to collect savings from the poor. In an important sense, however, BDB was where the microfinance revolution began. Today it is the longest-serving formal sector financial institution providing commercial microfinance (both savings services and loans) on a substantial scale in a developing country, having done so continuously and profitably since 1970—and without ever having received a subsidy.⁷³

In 1970, the same year the Bank Dagang Bali opened, a public program called Badan Kredit Kecamatan was launched in the province of Central Java. Not unlike the Dutch long before, the provincial governor created these village banks to improve the lot of the poor and reduce unrest—only five years earlier, communists had attempted a coup in Jakarta, Suharto had come to power, and a million people had been massacred. True to its name, which means “subdistrict credit organization,” the BKK program set up 500 banking branches in subdistricts, local administrative units, throughout the province. To give the network finer articulation, each branch in turn dispatched staff to rotate day by day among a dozen or so pos desas (village posts) within its subdistrict. In a 1991 book, Richard Patten and Jay Rosengard, American advisers to the program, described one pos desa at a busy market:

In the middle of this cacophony of Javanese capitalism is a small wooden shack that looks like it won't withstand the next strong wind or major rainstorm. The floor is bare earth, the roof a zinc sheet. Air conditioning is a cross-breeze. On closer inspection, this appears to be a makeshift office: three young men in starched white shirts and dark blue trousers sit behind wooden tables, busily filling out forms, making bookkeeping entries, and handling cash transactions. Local vendors are seated on a few benches around the walls of this shack or are huddled at the front table. These petty traders, dressed in a mixture of traditional village garb and simple Western-style city clothes, carry on animated conversations in Javanese…while awaiting their turn….

This is Pos Pasar Boja (Boja Market Post), one of sixteen pos desas…of the [Boja subdistrict]. Every Thursday, two or three employees from the BKK head office come to the market to conduct all normal BKK credit and savings operations: extend loans, accept loan payments, disburse savings, and receive savings deposits.74

The public BKK system differed from the private BDB in important respects. Its capital for lending came right from the public fisc, not the deposits of customers or the equity of investors. In fact, other than the “forced savings” (deposits required as partial collateral for loans), the BKKs could not take deposits until 1987. Individual BKKs functioned autonomously but according to common rules. This made the BKK program a laboratory for testing ways to blend public-sector support and mission with private-sector principles and discipline.

Yet another legacy of Dutch projects in credit cooperation is a national institution called the Bank Rakyat Indonesia (BRI). As BDB got its banking license and the governor of Central Java launched his BKKs, BRI began a massive credit program on quite opposite principles. It was classic subsidized credit, part of a larger effort to make Indonesia self-sufficient in rice. BRI set up 3,600 branches throughout the country, called unit desas, to dispense cheap credit for farmers for buying chemical fertilizer, pesticides, and seeds for high-yield rice varieties. The program developed typical ills: the richest farmers captured the credit, paying rates that were often negative after inflation, and hardly bothered to pay back. A military-style campaign to force repayment succeeded mainly in discouraging farmers from borrowing. By 1983, the loan portfolio was shrinking as defaults drained the government treasury.⁷⁵

Hoping to break the downward spiral, the government sought advice from a Harvard-based team partly funded by the World Bank and USAID. The team studied Indonesia's experience with cooperatives and “people's banks,” as well as the recent successes of BDB and the BKKs. It recommended that BRI borrow heavily from these examples. The government took the advice and with remarkable speed created a Goliath of microfinance.76 To imbue BRI with a business culture, each of those thousands of unit desas was required to generate a balance sheet as well as a profit and loss statement each month. To cut losses, many units were downsized or relocated to busy markets.⁷⁷ Today BRI services roughly 4.5 million loan accounts, none through groups, and an extraordinary 21 million savings accounts—about as many small accounts as in all of Bangladeshi microfinance.⁷⁸ The clientele is probably more affluent than is true for most group microcredit: about 21 percent of BRI's savings-only customers live below the poverty line, and just 9 percent of its borrowers do.⁷⁹ Still, by global standards, BRI's customers are poor and service to them worthy of the label “microfinance.”

ProCredit in Bolivia and Beyond. If the Indonesian institutions demonstrated the potential of individual savings and lending for poor people, much credit for spreading individual services globally goes to a German company led by Claus-Peter Zeitinger. A hard-charging, chain-smoking bear of a man, Zeitinger is not a polished ambassador like Yunus, but he, too, knew how to influence the rich and powerful to get what he wanted. His commitment to good works—and some key working friendships—were forged when he was a young man, in the quasi-revolutionary year of 1968. After working for GTZ and other organizations in the 1970s, Zeitinger cofounded a consulting firm called Interdizciplinare Projekt Consult (IPC) in 1981. Two years later, GTZ got IPC into financial services by hiring it to apply the German sparkassen model (see chapter 3) in Peru.

IPC's job was to help establish what were known locally as cajas municipales de ahorro y crédito (CMACs), which like sparkassen, took guarantees from local governments to reassure depositors about the safety of their savings. In exchange for the guarantees, government representatives held positions on CMAC governing boards. In IPC's experience, CMACs worked when they were small and relatively self-sufficient. But when they received too much outside funding and grew too large, the temptation for collusion and corruption among local players grew strong while the ability of innocent members to detect it grew weak. Such failures forged a philosophy at IPC that a financial institution had to create the right incentives for all involved to be effective. According to their thinking, an outsider setting up the institution should hold shares in it to give the outsider a serious stake in the institution's success. Subsidies should be minimized to expose shareholders to the consequences of poor performance. Borrowers should be held individually accountable for their debts. And loan officers should be paid in part based on the performance of the loan portfolios they built and managed.80

Zeitinger and IPC colleagues set up a separate entity called ProCredit Holding to deliver microfinance according to IPC's philosophy. In 1992, it entered Bolivia, already Latin America's microfinance hotbed because of Prodem, the nonprofit lender mentioned earlier in this chapter. ProCredit's Bolivian affiliate, ProCrédito, rebelled against local convention by lending to the poor individually rather than through groups. Zeitinger had argued that people don't like being on the hook for others' debts and would rather borrow amounts tailored to their needs than be shackled to the rigid cycle of a group loan schedule. But ProCrédito had to compensate for the loss of the two services the group guarantee provided: filtering and enforcement. To filter out the uncreditworthy, ProCrédito loan officers, like their counterparts in Indonesia, had to understand their clients' businesses and cash flows and be wise to their local reputations. To enforce repayment, ProCrédito took collateral—but not the government-registered property that conventional banks demanded. ProCrédito accepted looms, washing machines—things that were a hassle to collect and sell but meant a great deal to the borrower.⁸¹

ProCrédito succeeded in Bolivia and in 1995 followed Prodem in transforming into a for-profit company (see chapter 8). Today, ProCredit Holding owns banks in twenty-one countries including Colombia, Bosnia, and the Democratic Republic of Congo. It ended 2010 with €3.6 billion in outstanding loans and €3.2 billion in savings deposits.⁸² The group's motto, “Banks for ‘Ordinary People,’” embodies Zeitinger's doubts about the value and practicality of credit for the poorest.

Placed next to group lending, individual lending looks conventional. Indeed, no line sharply divides individual microlending from mainstream small-business lending. As in conventional lending, loan officers assess clients' current and potential earnings rather than leaving such judgments to the borrower's peers. Still, individual microfinance differs in spirit from its upscale sibling. Where mainstream lenders rely heavily on collateral, individual microcreditors lean more on assessments of character and business operations. Gabriel Solórzano, president of the recently dissolved Nicaraguan microfinance group BANEX, which also took collateral on the ProCredit model, once told me that his company didn't “want a used, rusty refrigerator. We lose two-thirds of the value when we seize collateral.” BANEX took such collateral chiefly to threaten borrowers with the distress and embarrassment of having a truck arrive at their domicile to remove the item. He once said that BANEX extended not “asset-based credit” but “integrity-based credit.”83 Zeitinger echoes him, calling ProCredit's loans “information-based credit.”84

Microinsurance

This survey of microfinance, like the movement itself, focuses on credit first, savings second—and insurance only third. Yet chapter 2 argued for the paramount importance of risk management in households rich and poor. As I wrote, health and life insurance are the financial services I am most loath to lose. The need to manage risk is even greater for the poor. Their earnings are unpredictable and volatile. And for them, an illness in the family can cause expenses to spike and income to plunge; the only way out of the pincers may be to sell the assets on which livelihoods depend—tools, land, even children. While loans and savings accounts can help people navigate these waters, insurance would seemingly serve best. So why doesn't microinsurance get more ink?

It turns out that it is tough to sell appropriate, adequate insurance to poor people without losing a lot of money. The next chapter details the reasons. For now, suffice it to say that the economics of selling tiny insurance policies calls for low administrative costs and high sales volumes; yet insurance is generally more complex than credit and savings, making it harder for sellers to administer and buyers to understand. For instance, many people are dubious at the prospect of paying insurance premiums month after month and getting nothing in return.

Of course, there are many kinds of insurance, and some are more workable at micro scale than others. Easiest and most common is credit life insurance, which covers the outstanding balance on a loan if the borrower dies.⁸⁵ Tacking this on to a loan is cheap and lets borrowers sleep easier at night, knowing that if they die, they will not burden their families with debt.

Many microcreditors offer their borrowers additional life insurance, which promises to go beyond cancelling debts to covering funeral expenses or making payouts to survivors. Mexico's leading microcreditor, Compartamos, is also one of its largest life insurers, measured in lives covered. Its standard microcredit product includes free insurance for the outstanding loan balance and a $1,250 death benefit. All 2 million current borrowers have that policy. They can buy additional policies covering $1,250 each for $13 per year, and another 800,000 such policies are currently active.86 In an interesting twist on the typical credit life insurance, Bolivia's BancoSol offers what might be called savings life insurance: sold to depositors, its payouts are based on the average savings balance over the last three or six months. This nicely combines the virtues of insurance with an incentive to save.⁸⁷

More complex are health and crop insurance. The latter especially has been tried for decades. Brazil, India, Mexico, and other governments have sold farmers multiple-risk crop insurance, which indemnifies them against damage from pests, drought, floods, and other threats that together make poor farmers the most risk-prone people on earth. But this subsidized crop insurance has succeeded little better than subsidized credit, with which it went hand in hand in the 1960s and 1970s. In an authoritative and diplomatic review, agricultural economists Peter Hazell, Carlos Pomareda, and Alberto Valdés conclude that “multiple-risk crop insurance has proved disappointing, and it has fulfilled few of its supposed objectives.”⁸⁸ New York University economist Jonathan Morduch is blunter: “Experts that I have canvassed have difficulty naming even one truly successful small-scale crop insurance program anywhere (i.e., one that serves the poor, makes profits, and meaningfully reduces the largest risks).”⁸⁹ Thus the big challenge in microinsurance has been going beyond credit life insurance.

Several initiatives have grown large enough to make this imaginable, but on inspection most prove ambiguous. One is the Self-Employed Women's Association (SEWA), which also appears in the history of women's banking later in this chapter.

In 1992 SEWA started an insurance arm, Vimo SEWA. Like SEWA Bank, Vimo SEWA strives to deliver services similar to what the middle class enjoys rather than the rigid, stripped-down insurance analog of solidarity-group lending. The firm offers life, accident, health, and property insurance to poor women in India, and it counted 119,477 policyholders in 2010—substantial, but down from 214,181 three years earlier.90 Vimo SEWA's history is one of trial and error without clear-cut success or failure. In the property insurance line, it first retailed another company's insurance, then switched to selling its own, absorbing risks and processing claims itself to improve service. But the Gujarat earthquake of 2001 loosed an avalanche of claims that showed the danger for a small insurer of going it alone. Vimo SEWA resumed partnering with large insurers. Meanwhile, the dramatic payouts to insured earthquake victims led to a quick tripling of membership—which then partly reversed in the earthquake-free years that followed as new customers grew disappointed over receiving no payouts themselves. In 2001, Vimo SEWA planned to reach financial self-sufficiency within seven years. Four years later, a case study concluded that financial independence still lay seven years off. Funding from the German aid agency GTZ and SEWA proper has kept Vimo SEWA afloat.⁹¹

Such difficulties suggest that microinsurance does need to be streamlined in a way roughly analogous to group credit in order to cut costs, if at the expense of quality. One simplified approach that has generated much excitement is that of “index insurance” for farmers. As with so much in microfinance, the idea goes back farther than most realize, to an Indian scholar named J. S. Chakravarti during World War I.⁹² The idea then arose independently in the West. In 1947, a young man named Harold Halcrow who had grown up farming in North Dakota was studying for a Ph.D. in economics at the University of Chicago. He was concerned that crop insurance programs like those Franklin Roosevelt had introduced fifteen years before were fraught with “adverse selection” and “moral hazard”—that is, farmers who were most likely to suffer losses took the insurance most, running up costs; and by covering losses, insurance actually offered a disincentive for prudent husbandry. Halcrow hit upon an alternative. Instead of insuring all wheat farmers for all losses, the government should base payouts on an area index, such as a county's average wheat production or rainfall per acre. If the county's wheat production or rainfall was below preset thresholds in a given year, all farmers who bought the insurance in that county would get payouts at the same rate per acre, regardless of actual losses.93

Index-based insurance is subpar in the sense that variations in climate and growing conditions within a county would cause more damage to some farmers than would be covered, while others would escape harm and still get payouts. Insurers call this mismatch “basis risk.” But if local microclimates are not too variable (as they tend to be in mountainous areas), index-based payouts might correspond reasonably with actual losses.⁹⁴ And collecting the necessary data would be cheap and nearly fraud-proof. The system would also vitiate the bugaboos of adverse selection and moral hazard. Since every farmer in a country would represent the same bet to the insurer—all would be paid or not according to the same formula—the insurer would not find itself insuring only the farmers liable to make the biggest claims. And since the insurance would not automatically compensate for individual farmers' carelessness, it would not, in Shakespeare's words, “dull the edge of husbandry.”⁹⁵ Halcrow's dissertation committee members, including future Nobel Laureates Theodore Schultz and Milton Friedman, saw much to like and persuaded him to publish and pursue his proposal. But it went nowhere for forty years.⁹⁶

Then in 1989, an agricultural economist of a younger generation came to Washington, D.C., to direct research for the congressionally mandated Commission for the Improvement of the Federal Crop Insurance Program. Pondering how to revamp the now-venerable and perpetually loss-making program, Jerry Skees became the third person in history to invent index-based crop insurance. He then discovered Halcrow's work (and later, Chakravarti's). This time around, the idea was tested. Acting on the commission's recommendation, Congress created the Group Risk Plan in 1992, which insured against county-level crop yield drops. At Skees's invitation, the 81-year-old Halcrow attended the program's official launch.

In 1998 Skees consulted for the World Bank, collaborating on a proposal for index-based rainfall cover for farmers in northwest Nicaragua. Rainfall measuring stations would be spaced across the region; if precipitation at a station failed to attain a set minimum, nearby policyholders would receive payments whether or not their crops had dried out. Calibrating to rainfall seemed practical since historical data essential for the insurer in computing odds were available. Focusing on rain also would make a single policy useful to growers of many crops, as well as to shopkeepers and other non-farmers whose fortunes depended on the local agricultural economy. Unfortunately, the Nicaraguan government paid the proposal little attention. Perhaps insuring against low rainfall seemed ludicrous after Hurricane Mitch, which had smashed through the country the previous fall, dropping a meter of rain in places and killing thousands.97

Still, Skees and his collaborators had sowed the seeds of an idea. One would sprout back in India. There, the World Bank partnered in 2003 with ICICI Lombard and BASIX, an Indian company that provides financial and technical services to farmers, to pilot rainfall insurance. ICICI Lombard underwrote the insurance, while BASIX retailed it to growers of peanuts and castor beans in the state of Andhra Pradesh, leveraging its credibility in villages where it already worked.⁹⁸ By 2005, the program reached 6,700 farmers in six states, and other programs brought the national index insurance total to 100,000 policies.⁹⁹ The biggest disappointment has been low uptake. One study of the pilot found that only 5–10 percent of households that could buy the insurance did, and many bought far less than needed to fully cover their crops.¹⁰⁰ Apparently, as Vimo SEWA found, people with tight cash flows are skeptical of buying a product that might pay them nothing in return. At least with a savings account, you get your money back.

Progress in insuring the people and their crops should be fervently supported, wished for, and welcomed. Yet if history and the success of microcredit are any guide, it is the simplest forms of microinsurance, notably life insurance, that will reach the most poor people. Since credit and savings are likely to dominate the financial service portfolios of the poor, this book is mostly about those simpler services.

Crosscurrents

We have traveled along four branches of microfinance—solidarity lending, village banking, individual microbanking, and microinsurance—in each branch following the flow of time. For a fuller understanding of the contemporary landscape, I now take leave of time's arrow to explore some crosscutting themes in thought and practice. Associated with each is a longstanding, passionate debate about how best to do microfinance. My purpose here is less to analyze the arguments than to document the diversity.

Gender

Modern microfinance stands out against the historical record in its emphasis on serving women. But it did not start out that way. John Hatch targeted his first village banks primarily at male household heads.101 Barely 20 percent of Grameen borrowers in the experimental first three years were female.¹⁰² Every triciclero in Acción's solidarity group pilot was a man.103

Yet microfinance was a creature of its time, and in its time came a global wave of feminism. By the late 1970s, practitioners of economic development were primed by the tide of ideas to view poor women as disadvantaged by their gender as well as their economic status, therefore doubly deserving of aid. Indeed, even before the delivery methods that led to the microfinance takeoff were perfected, some groups were working to bank poor women. One early leader was Ela Bhatt, who founded SEWA in the city of Ahmedabad, in India's Gujarat state. Here is what happened, as told by journalist Elisabeth Bumiller:

[Mohandas] Gandhi's first fast…was in Ahmedabad in 1918, on behalf of the striking workers who labored in the city's textile mills. Out of that fast grew the Textile Labor Association, or TLA, the oldest and largest trade union of textile workers in India. A generation later, a young Brahmin woman from a well-to-do Gujarati family could find no better place to nurture her Gandhian ideals than in a job with the TLA, which did extensive welfare work among its membership. By 1968, Ela had taken over the women's division of the union, a job that historically entailed social work among the members' wives.

Ela would soon demolish the assumption that what these women needed was charity from well-meaning people like herself. In 1971, she met with a group of “head loaders”—women who carry cloth on their heads between Ahmedabad's wholesale and retail markets—who complained that the cloth merchants routinely cheated them. Ela helped them form a group to collectively demand better pay, then wrote an article about their plight for one of the local newspapers. When the merchants countered with an article of their own, insisting they were paying the women fairly, Ela printed the merchants' claims on cards and distributed them to the women.

Out of that effort grew the SEWA, which today has organized women into 70 different trade cooperatives, from fish vending to cattle raising to weaving to hand-rolling the small Indian cigarettes called bidis.104

From the start, Bhatt saw financial services as central to economic emancipation: in 1974, SEWA started a bank for self-employed women. As a bank it could take savings as well as lend. Because SEWA Bank won the ideological fight it picked—proving that poor women were bankable—it is hard for us today to appreciate just how radical the bank was in its early days. The bank continues to this day, with 26,000 loan accounts (none through groups) and 348,000 savings accounts.¹⁰⁵

In 1974, when BRAC was two years old, it, too, began searching for ways to reach women. An English journalist reported:

It was in northeastern Sylhet, where the Bangladesh Rural Advancement Committee works, that I saw the seed of the quiet revolution starting in village women's lives. At the meeting houses BRAC has built, the wives, young and old, are learning to read and write. Forbidden from doing marketing, they now at least can keep the accounts.

At community centres, I saw destitute widows, war victims, and wives of the landless, the poorest farmers and fishermen, learning skills like sewing, mat-making, and vegetable growing that will give them some security. “Most of the men were very surprised at the idea at the beginning, but few object now,” said a young BRAC field worker.

In one fishing village, the women have even become the bankers, saving over $2,000 and lending it to their men to buy better equipment. It started in the simplest way—they collected a handful of rice a week from each family, stored it, and sold it in the market. About 50 villages in the area have thriving women's cooperatives, investing in new power-pumps or seed, and winning respect for their members.¹⁰⁶

In August 1975, an American named Martha Chen began working for BRAC to improve and expand its programs for women, helping them find new economic activities to engage in individually or collectively. A daughter of missionaries, Chen had grown up in India. Later, with her husband, she had worked with Fazle Abed to found the predecessor to BRAC.107 As with other early BRAC programs, one model for this project was the credit cooperative, which showed the value of forming groups, taking savings, and making loans. Over the course of a year, her team organized 6,000 women into 250 cooperatives to perform activities from silk spinning to fish farming. For her team, financial services were never ends in themselves, merely means to supporting such livelihoods. So in BRAC's early work with women, credit played only an incidental role.¹⁰⁸

But after Yunus demonstrated the power of mass-producing credit, it was only a matter of time before Grameen's ideas about making loans and BRAC's ideas about reaching women blended in Bangladesh and beyond. BRAC began mass-producing credit on the Grameen model. At Grameen, lending to women went unmentioned in the 1983 Ordinance that created the bank but became an official priority in 1985.¹⁰⁹ Today, about 97 percent of Grameen borrowers are female (see figure 4-1) and 92 percent of BRAC borrowers are female.¹¹⁰ Worldwide, the figure for the typical lender that works exclusively through groups is 99.6 percent; that for village banks is 86.6 percent. The share for individual microlenders is a comparatively low 46 percent; but even gender parity goes against history.¹¹¹

The full reasons for microfinance's shift to women are difficult to sort out. Without doubt, the rise of feminism helps explain why modern microfinance favors women more than its forebears. So does a body of scholarly evidence roughly confirming the stereotype that women invest extra resources in their children while men spend them on beer.¹¹² But pragmatism was at work, too: women turned out to pay back more reliably than men in group-based microcredit. For example, after several repayment crises among its predominantly male clientele, during 1981–83 Grameen doubled its female fraction to 40 percent.¹¹³ Evidently peer pressure worked better on women than men in Bangladeshi villages. That women are more susceptible to this pressure may be a sign that credit disempowers them. Or it may merely corroborate the view that women use finance more responsibly. At the heart of this ambiguity is the paradox that women like Jyothi's savings clients (in chapter 2) may gain financial autonomy in the home precisely by binding themselves financially in public. Chapters 5 and 7 return to these themes.

Figure 4-1. Grameen Bank Members by Gender, 1976–2010

Source: Grameen Bank.

Savings versus Credit

Chapter 2 showed how people can view borrowing and saving as more similar than different. Although the two services allocate risk and obligation oppositely, whatever credit can do, savings can, too. Both can finance investment, pay for consumption, and help a family through health crises. This is why all but the poorest households can and want to save. Indeed, “most people, including the poor, want to have savings nearly all the time and to be in debt less frequently,” says Malcolm Harper, former chairman of BASIX.114 The most common informal saving methods—cash under the mattress, jewelry, livestock, Rotating Savings and Credit Associations (ROSCAs, defined in chapter 3)—carry considerable risks. Jewelry can be stolen. Cash can be lost through inflation or fire. When disasters such as floods and earthquakes strike, livestock can lose their value if everyone tries to sell them at the same time.

Despite the need for better ways to save, credit has dominated in microfinance. In the classic Grameen groups, members saved even as they borrowed, but in an involuntary way. They were required to put part of a new loan's proceeds into an emergency fund to guard against defaults and contribute regularly to a group fund, which members could only access when they departed. And though Hatch foresaw that members' own savings would eventually supplant that of sponsors, FINCA continues to pump millions into village banks, tilting them toward credit.¹¹⁵

The dominance of credit has been neither complete nor uncontested. Recall BRI's 4.5 million loan accounts and 21 million savings accounts, the latter generally held by poorer people. Stuart Rutherford, the British microfinance expert, worked hard to prove the practicality of microsavings in the emblematic nation of microcredit. In the mid-1990s, he became convinced that microcredit in Bangladesh was stuck in a rut. In addition to being inflexible, opaque, and authoritarian (with male loan officers running weekly meetings of groups of female borrowers), it did not offer individualized blends of credit and savings. So Rutherford started SafeSave, which caters to dwellers in Dhaka's slums, dense warrens of one-room houses of bamboo, tin, and thatch. SafeSave holds no group meetings. Rather, as with some nineteenth-century British “collecting societies” (see chapter 3), a bank officer visits clients at home daily, allowing them to save a penny at a time if they want, and collecting loan payments on a flexible basis. Program officers use handhelds to record transactions into a computer system designed to prevent fraud.¹¹⁶

With just 14,550 clients and an average savings balance of $40, SafeSave is not a Bangladeshi finance giant, but it may have influenced one of them.¹¹⁷ A major plank of the “Grameen II” package of reforms adopted around 2001 was to make the Grameen Bank into an institution worthy of that name: a good place to put money. Grameen introduced new kinds of individual savings accounts and raised interest rates on existing ones. In a startling development, the bank saw its savings “portfolio” surpass its loan portfolio at the end of 2004. The icon of microcredit was doing more savings than credit.118 Established microbanks in Latin America, including BancoSol in Bolivia and MiBanco in Peru, have also moved strongly into savings. BancoSol now holds 130,000 loan accounts and 323,000 savings accounts.¹¹⁹

It seems that there are two good ways to provide savings services. One is intimate and informal, such as in small, functioning cooperatives, village banks, and ROSCAs. The other is large-scale and formal, through government-run public banks or government-regulated private ones. There is little middle ground—SafeSave squeezes through a loophole in Bangladeshi law—because legally chartered entities such as nonprofit groups must almost always meet high regulatory standards before they can be entrusted with other people's money. A small NGO, on the other hand, can go about lending money rather easily. And for the provider, lending earns income more reliably than taking deposits. As a result, most self-identified microfinance institutions do more credit than savings.¹²⁰

Pure Finance versus Bundling Services

Few would deny that poor people need more than financial services to better their lot. Health, education, infrastructure, physical security, political freedom, and other things matter, too. In the convening power of group microfinance, many organizations have spied an opportunity to provide non-financial services as part of the package at little extra cost, to do “credit plus.” One example is Pro Mujer, a microfinance institution that delivers a package of microfinance and basic health services to women in five Latin nations. Pro Mujer's Carmen Velasco and Saiko Chiba explain the company's philosophy: “We conceive that Human Development is given not only through access to financial resources but also [through] an integrated group of basic services that will allow poor people and poor social groups to improve their quality of life and insert themselves in the economic cycle of their country.”¹²¹ California-based Freedom from Hunger supports affiliates on three continents administering the Credit with Education program: at weekly village bank meetings, officers teach clients “basics of health, nutrition, birth timing and spacing, and small business skills.”122 Vijay Mahajan, the director of India's BASIX, has remarked that “if you look at [our] income statements, 80 percent of it is still financial services because that's the fuel which makes it all go. But unless you add on these other things, you're just burning the fuel without really getting much result.”¹²³ A decade ago, BASIX commissioned research that concluded that about as many of its microcredit clients were slipping behind as getting ahead. In reaction, Mahajan overhauled BASIX to more fully address the needs of its clients—not the generic challenges of health, education, sanitation, and so on, but the concrete obstacles to, say, raising a water buffalo for milk. If you want to invest in a buffalo, BASIX will lend you the money, and it will vaccinate and deworm the animal and check its health every two weeks for another $10 a year.¹²⁴

Some argue that microfinance institutions do best when they stick to their knitting. Rich people don't want their bankers telling them what to feed their kids. And even if poor women value such education—and they well may, for lack of alternative sources—the benefits of weekly training on a limited set of topics may decline after a year or so. The question also arises of whether one organization can do two different things well. Acción affiliates, including BancoSol in Bolivia and Compartamos in Mexico, have succeeded by delivering financial services only, striving for constant gains in efficiency and quality and, ultimately, permanent extension of the financial system to poor people. As Elisabeth Rhyne wrote in reference to the “credit plus” partners of Pro Mujer and Freedom from Hunger in Bolivia, “The tool of microfinance…sits somewhat uncomfortably atop the objectives and motivations of these institutions, creating ongoing tension within them. It fits most solidly with institutions whose objective was always fundamentally financial.”¹²⁵ A virtue of providing one service is that it is subject to a clear market test: people can take it or leave it. Once a well-intentioned donor begins bundling, the risk rises that the added services are so many unneeded sewing machines, doomed to gather cobwebs. Or worse, if the lender uses profits from credit to subsidize the added services, as BRAC does, both lender and borrower may find themselves propelled into inappropriate loans.

The success of purists like BancoSol and credit plus providers like Pro Mujer lends credence to both sides of the debate. Given that fixed packages of services designed by outsiders to help poor people so often fail, much can be said for financial purism. But if specific, bundled interventions can be shown to work, they deserve support. A study done through Freedom from Hunger's Peru affiliate, for instance, found that borrowers assigned to receive business training along with their credit earned higher and more stable incomes. They also repaid their loans more reliably, perhaps because the training attracted them into attending more of the weekly meetings.126

From Charity to Profit

As a project meant to help poor people, microcredit is unusual in asking the beneficiaries to cover most or all of the costs. Hence its capacity for explosive growth. Because of repeated success on a market test, what began as a nonprofit movement has trended toward commercialization and profit—not en masse but on average. As a result, microfinance institutions today exhibit a variety of institutional forms and levels of profitability. Among institutions providing data to the Microfinance Information eXchange (MIX), 407 were nonprofits with a combined 27.9 million loans outstanding in 2009; 384, with 34.9 million loans, were “non-bank financial institutions,” which are generally for-profit companies limited to lending; and 81, with 24.4 million loans, were full banks.¹²⁷ Among all the institutions reporting to the MIX, the majority stated that they had a profit between 0 and 30 percent during 2007–09 (see figure 4-2). Subsidized finance, such as grants and low-interest loans, improves the income statements of many of these institutions; were these removed, apparent profitability would fall to the extent costs were not passed on to clients. Still, the point stands that microfinance institutions are as diverse in profitability as in legal orientation toward profit-making.

Beneath these dry statistical differences lie a pair of passionate disagreements about how best to serve the poor with microfinance. The first, which Jonathan Morduch once called the microfinance schism, is whether subsidizing microfinance is appropriate, especially to reach the poorest with the smallest loans.¹²⁸ If microcredit is a powerful weapon against poverty, then even the poorest deserve it. If reaching the poorest costs more than they should be asked to pay in interest, then donors should pay the difference. On the other hand, if microfinance is “merely” a useful service, which leavens but does not end poverty, as I argue, then the case for subsidization loses its punch. Rather, it makes more sense to help microfinance play to its strengths as a businesslike way to serve millions of people who are poor by global standards, if not the poorest. In fact, as told in chapter 8, many in the microfinance world would go farther than breaking even. Microfinance institutions ought not to be merely businesslike nonprofits, they argue, but real businesses, with profits, capital, and investors. Michael Chu, who once ran Acción, has written that “humanity has found only one way to deliver consistently and simultaneously the four attributes of scale, permanence, efficacy and efficiency, and it is through private enterprise. This is the result not of any single firm—individual enterprises are born, prosper and die—but of the emergence of an entire industry. And industries are born out of the union of two factors: an economic activity and above-average returns.”¹²⁹

Figure 4-2. Microfinance Institutions, by Average Profit or Loss Rate during 2007–09

Source: Author's calculations, based on the Microfinance Information eXchange.

Note: For clarity, the figure excludes ninety-nine microfinance institutions with profit rates less than 100 percent or greater than 100 percent.

Today, the microfinance schism is mostly forgotten. Exemplars such as Pro Mujer and Grameen seem to reach quite poor people by the standards of their countries—as indicated by average loans of $400 and $250, respectively—with little or no subsidy.130 While the trade-off at the margin between self-sufficiency and service to the poorest has not been banished, the consensus appears to be that the trade-off is not so binding as to be an existential threat. Self-sufficient institutions can reach impressively poor people, and that is to be celebrated.

In the place of that schism, though, a new one has emerged over the justice of channeling profits from poor to rich. If the old schism was rooted in the caricature of credit as salvation, the new one is rooted in that of credit as exploitation. Some argue that in going fully commercial, leaders of for-profit microfinance institutions are selling more than parts of their companies to investors; they are also selling their souls. The charge is that to hit quarterly earnings targets, these institutions will profit at the expense of their customers rather than in service to them. They will slip into “mission drift,” avoiding the poorest, least profitable people. And they will commit usury, overcharging the customers they keep. Muhammad Yunus leads this camp. In early 2011, he wrote,

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.¹³¹

Yunus's barb was clearly aimed at for-profit companies doing Grameen-style microcredit in India, above all SKS Microfinance, founded by Indian-American Vikram Akula. In 2010, Yunus clarified in a debate with Akula that he does not oppose profit. He draws the line at sending the profits to outside owners. The Grameen Bank, he pointed out, was 96 percent owned by its members, making it a giant, for-profit cooperative. In recent years, the bank has paid out dividends of 30 taka per annum on the shares each member bought for 100 taka.¹³²

But Grameen was never a storybook credit cooperative: members contributed little to the working capital and the management.133 Foreign donors gave much more than members; and while members filled the majority of the board seats, they demonstrated little independence from the founder. Yunus was right that Grameen was not beholden to outside investors, and that this may well have made it a more trustworthy, mission-driven institution. But the singularity of the Grameen Bank, particularly its ability to attract substantial donations in its early years, makes it a hard act to follow. Most microfinance institutions have needed investment from outsiders if they want to grow large. As a result, the number of for-profit, investor-owned microfinance institutions will probably keep rising.

Conclusion

Clearly the microfinance phenomenon is a movement. It is a historical development united by the shared ideal of bringing financial services to the world's poor. Yet, it is divided—or at least diversified—by differences of opinion about how best to do so in various contexts. The unifying ideal predates the microfinance movement, which is why the methods dubbed “microfinance” are merely a subset of the strategies deployed today to bring financial services to poor people, along with savings banks and credit cooperatives. Because microfinance is the approach most apt to seek the aid of outsiders, it is worth assessing with particular care, which is what the rest of this book does.

I opened this book by pointing out the powers and limits of storytelling. This chapter exploited that power in order to breathe life into a survey of contemporary microfinance. After all, understanding where things come from helps us understand where they are headed. The common thread in this history is the potential for microfinance to catch on in a big way when practical formulas are found for delivering on a cost-covering basis. Superficially, the fact that microfinance can operate in a businesslike fashion and reach many people tells us nothing about how it affects those people. But I would argue that the propensity for businesslike operation and growth is a core strength of microfinance.

Having spread the map of the microfinance world before us, it is time to scrutinize it, to ask the impertinent (and vague) question, “Does microfinance work?” Here, we hit the limits of narrative. So now we will mostly leave storytelling behind and shift into analytical mode. In chapters 6–8 we will review what is known about how microfinance contributes to economic and social development. But first, in chapter 5, we will approach that question through a back door, by exploiting one of the most powerful scientific paradigms ever: natural selection.

 

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1. Conger, Inga, and Webb (2009), 5.

2. Sheridan (1787), 234.

3. Hollis (2002).

4. Moody and Fite (1971), 333.

5. Moody and Fite (1971), 317–21, 332–36.

6. WOCCU (2010).

7. Jennifer Isern and Li Zou, “Highlight on China, Part 1: A View of the Landscape,” Microfinance Gateway, October 7, 2007 (j.mp/k25JJU).

8. CGAP (2004).

9. Peachey and Roe (2005).

10. World Bank and ING Bank (2006), 21.

11. Maddison (2003), 262.

12. World Bank and ING Bank (2006), 7.

13. WOCCU (2010).

14. For example, see Harry Truman's 1949 inaugural address.

15. On the interwar roots of British aid, see Barder (2005), 3–4.

16. Caufield (1996), 70–87.

17. Kapur, Lewis, and Webb (1997), 154–60.

18. Burgess and Pande (2005).

19. OED (1994). Figures are cumulative to 1994.

20. Kapur, Lewis, and Webb (1997), 436.

21. Adams (1971).

22. For example, Adams, Graham, and Von Pischke (1984).

23. Braverman and Guasch (1986), cited in Armendáriz and Morduch (2010), 11.

24. Dunham (2009 [1992]), 236.

25. Tendler (1983).

26. Smillie (2009), 69.

27. Unusually, Yunus defines “microfinance” to exclude for-profit institutions owned by outside investors.

28. CGAP (2004), 1.

29. Zahid Hussain, senior economist, World Bank, Dhaka, Bangladesh, interview with author, March 2, 2008.

30. Asif Dowla, professor, Department of Economics, St. Mary's College of Maryland, St. Mary's City, Md., interview with author, September 23, 2008. Dowla worked for the Ford Foundation–funded Rural Economics Program, which provided financial and administrative support to the Grameen Project.

31. Yunus (2004), 46–48.

32. Hulme (2008), 4.

33. Asif Dowla, professor, Department of Economics, St. Mary's College of Maryland, St. Mary's City, Md., interview with author, September 23, 2008.

34. Dowla and Barua (2006), 17–19.

35. Armendáriz and Morduch (2010), 12.

36. Grameen Bank, “Grameen Bank Monthly Update in Taka: December, 2010” (j.mp/n59fAe [January 9, 2011]); MIX (Microfinance Information eXchange) Market, “Grameen Bank Profile” (mixmarket.org/mfi/grameen-bank [January 4, 2011]).

37. Smillie (2009), 69.

38. Matin and Yasmin (2004), 90; see also Smillie (2009), 91–101.

39. MIX Market, “BRAC Profile” (mixmarket.org/mfi/brac [August 24, 2011]).

40. Rutherford (2009b), 97.

41. ASA (2010), 38.

42. Matthew Swibel, “The 50 Top Microfinance Institutions,” Forbes, December 20, 2007.

43. Stuart Rutherford, founder, SafeSave, Dhaka, Bangladesh, interview with author, March 2, 2008.

44. A separate legal entity, BRAC Bank, lends to small- and medium-sized enterprises.

45. Rutherford (2009b).

46. This account is based on Jeffrey Ashe, director of community finance, Oxfam America, Boston, Mass., interview with author, November 26, 2008; Rhyne (2001), 60–62.

47. Rhyne (2001), 62.

48. Rhyne (2001), 62.

49. Biography posted at Marriott School, Brigham Young University, Provo, Ut. (j.mp/dIJBJU [January 5, 2011]).

50. John Hatch, founder, FINCA, Santa Fe, N.M., interview with author, October 6, 2008.

51. Hatch (2010).

52. Wolff (1898).

53. Wolff (1898).

54. Rhyne (2001), 58–60.

55. Compartamos, “Banco Compartamos, S.A., Institución de Banca Múltiple, Surpasses 2 Million Client Milestone,” press release, April 4, 2011 (j.mp/lhTLdH).

56. Fernandez (1985), 1–2.

57. Wolff (1927), 83.

58. Fernandez (2005), 4.

59. Seibel (2005), 6–7.

60. Seibel (2005), 9–10.

61. Fernandez (2005), 9–11.

62. Srinivasan (2010a), 2, 13.

63. Wilson (2010).

64. Hugh Allen, CEO, VSL Associates, Solingen, Germany, e-mail to author, April 16, 2011.

65. Wilson, Harper, and Griffith (2010), 5.

66. Hugh Allen, CEO, VSL Associates, Solingen, Germany, conversation with author, September 9, 2009.

67. Jeffrey Ashe, director of community finance, Oxfam America, Boston, Mass., interview with author, November 25, 2008.

68. Robinson (2002), 94–99; Steinwand (2001).

69. Robinson (2002), 149.

70. Robinson (2002), 148–49.

71. Robinson (2002), 150–61.

72. Bill Guerin, “New Worries for Indonesian Bank Sector,” Asia Times, April 17, 2004.

73. Robinson (2002), 144.

74. Patten and Rosengard (1991), 17–24.

75. Patten and Rosengard (1991), 166–94.

76. Patten and Rosengard (1991), 163, 364–409.

77. Maurer (2004), 96.

78. MIX Market, “BRI Data” (mixmarket.org/mfi/bri/data [January 16, 2011]).

79. Johnston and Morduch (2007), 29.

80. J. D. von Pischke, chairman, Frontier Finance International, Washington, D.C., interview with author, October 15, 2008.

81. Rhyne (2001), 91–94.

82. ProCredit Holding (2011), 4.

83. Gabriel Solórzano, president, FINDESA (later BANEX), Nicaragua, interview with author and Uzma Qureshi, April 27, 2006.

84. Claus-Peter Zeitinger, chairman, ProCredit Holding, presentation at Pangea Artisan Market & Café, International Finance Corporation, Washington, D.C., June 19, 2006.

85. Roth, McCord, and Liber (2007), 29.

86. Banco Compartamos, “Seguro de Vida (Life Insurance)” (j.mp/hYRhq8 [March 2, 2011]); Carlos Danel Cendoya, executive vice president, Banco Compartamos, e-mail to author, March 1, 2011.

87. BancoSol, “Micro Insurance: Sol Seguro” (j.mp/hP2XmD [February 22, 2011]).

88. Hazell, Pomareda, and Valdés (1986), 294.

89. Morduch (2006), 339. See also Hazell (1992).

90. Vimo SEWA, “Background” (j.mp/i7bZvW [January 23, 2011]). Figures include spouses and children covered by life insurance policies.

91. Garand (2005), 5–10.

92. Chakravarti (1920), cited in Mishra (1997), 307.

93. Skees (2007), 1–2; Jerry Skees, professor, Department of Agricultural Economics, University of Kentucky, Lexington, Ky., interview with author, May 4, 2009.

94. On microclimates and basis risk in Nicaragua, see Morduch (2001), 3.

95. Hamlet, in G. Blakemore, ed., The Riverside Shakespeare (Boston: Houghton Mifflin, 1974), 1.3.77.

96. Halcrow (1949); Jerry Skees, professor, Department of Agricultural Economics, University of Kentucky, Lexington, Ky., interview with author, May 4, 2009.

97 . Jerry Skees, professor, Department of Agricultural Economics, University of Kentucky, Lexington, Ky., interview with author, May 4, 2009; Skees, Hazell, and Miranda (1999).

98 . Manuamorn (2007).

99 . World Bank (2005), 99.

100. Cole and others (2009).

101. John Hatch, founder, FINCA, Santa Fe, N.M., interview with author, October 6, 2008.

102. Grameen Bank, “Historical Data Series in USD” (j.mp/e6wwqS [November 28, 2008]).

103. Jeffrey Ashe, director of community finance, Oxfam America, Boston, Mass., interview with author, November 25, 2008. Acción's first credit program, in Recife, Brazil, was 85 percent male (Tendler [1983], 105).

104. Elisabeth Bumiller, “The Jewel in the Town,” Washington Post, March 26, 1995.

105. MIX Market, “SEWA Bank Data” (mixmarket.org/mfi/sewa-bank/data [January 24, 2011]).

106. Quoted in Chen (1983), 4–5. The journalist and source are not identified. The $2,000 sum seems implausibly large given how much the dollar was worth in 1973 and how poor most Bangladeshis were then.

107. Smillie (2009), 19–20. The Chens' son Greg, of CGAP, peer-reviewed a draft of this book.

108. Chen (1983), 6.

109. Grameen Bank Ordinance No. XLVI of 1983 (j.mp/nNoO2A).

110. Grameen Bank, “Historical Data Series in USD” (j.mp/e6wwqS [November 28, 2008]); MIX Market, “BRAC Data” (mixmarket.org/mfi/brac/data [February 25, 2011]).

111. MIX (2010). Figures are end-2009 medians among institutions reporting to the MicroBanking Bulletin.

112. Armendáriz and Morduch (2010), 224.

113. Todd (1996), 20; Grameen Bank, “Historical Data Series in USD” (j.mp/e6wwqS [November 28, 2008]).

114. Harper and Vogel (2005), 5.

115. John Hatch, founder, FINCA, Santa Fe, N.M., interview with author, October 6, 2008.

116. Stuart Rutherford, founder, SafeSave, Dhaka, Bangladesh, interview with author, March 2, 2008.

117. SafeSave (safesave.org/performance.html [January 28, 2011]).

118. Grameen Bank, “Historical Data Series in BDT” (j.mp/pVks8w [January 4, 2011]).

119. MIX Market, “BancoSol Profile” (mixmarket.org/mfi/bancosol [May 11, 2011]).

120. MIX Market, “Microfinance at a Glance” (mixmarket.org [November 27, 2008]).

121. Velasco and Chiba (2006), 4.

122. MkNelly and Dunford (1998), 6.

123. CGAP, “Microfinance Now: Vijay Mahajan,” October 2009 (j.mp/e2uhgS).

124. Naren Karunakaran, “How to Fix Flaws in the Present Microfinance Model,” Economic Times, November 12, 2010.

125. Rhyne (2001), 101.

126. Karlan and Valdivia (2007).

127. Author's calculations based on the MIX (mixmarket.org).

128. Morduch (2000).

129. Michael Chu, “Profit and Poverty: Why It Matters,” Forbes, December 20, 2007.

130. MIX Market, “Pro Mujer Data” (j.mp/gUzcV5 [February 23, 2011]); MIX Market, “Grameen Bank” (j.mp/h4wzbB [February 23, 2011]).

131. Muhammad Yunus, “Sacrificing Microcredit for Megaprofits,” New York Times, January 14.

132. Grameen Bank (2010), 25.

133. At this writing, the member-majority's loyalty to Yunus has made it suddenly powerful, the main obstacle to government control of the bank.