How much do the world’s poor pay for microfinance?

Excerpt from “The Political Economy of Microfinance: Financializing Poverty”, Chapter 3, The Financialization of Poverty. (see other excerpts here)

Microfinance … performs both financial intermediation and financial innovation … it intermediates across time and space by creating entitlement relationships that reach from now into the future and from capital providers to borrowers. It innovates in generating new financial technologies which bring fresh borrowers into connection with capital-providing actors who can pursue not only financial goals, such as rapid turnover and growth of capital via above-market interest rates, but even quasi-charitable ideals.

The microfinance industry has developed (and continues to develop) technical means for channelling substantial quanta of capital directly to people living without collateral or assets at the bottom of the global income scale, technologies including group lending, social collateral, standardization and computerization, ratings of MFIs, and securitization of loan portfolios. The growth and stability of global microlending, at between 17 and 78 per cent annually during 2002–2009, and 10 per cent on average since then, both demonstrates the resulting system’s efficacy and indicates that capital-owners expect it to be durable.

Surplus extraction through microfinance, 1995–2012

The innovation of microfinance is particularly notable for the fact that the resulting financial relation runs directly from the (very) poor to the (very) wealthy, globally – actors who have been only most tenuously financially connected in the past, with diverse layers of middlemen and organizations separating the owners of substantial capital from the pawnshops, moneylenders and credit associations of the poor. Thanks to microfinance, it is now possible for a Bill Gates to literally strike business deals with some of the poorest people on Earth and become entitled to asset streams generated by them, necessitating only the intermediation of an MFI.[1]

…

This capital is repaid, through the intermediaries, back to the owners, together with surplus payments in the shape of interest or dividends for the capital-providers, and fees, salaries, bonuses and so on for the intermediaries. Sophisticated financial instruments such as collateralized debt obligations (CDOs) are mere variations – steering, manipulating and increasing the scope and trajectories of the financial in- and outflows – on the principle.

What makes microfinance microfinance is not that small sums of money are handled in basic transactions, but that these transactions are part of a system of finance that is recognizable to other systems of finance. Microfinance is not the same as moneylending or pawnbrokering; it is financially more advanced, incorporating the calculatory devices, languages and logics of mainstream finance into the older activity of lending to poor people.

…

Through microfinance, one person’s poverty can become the basis for surplus accumulation by another.[2] That phenomenon is, of course, as old as capitalism itself; but microfinance-built credit relations represent an innovative form which brings even informal and subsistence economic activities, of the kind which many poor people in the global South are currently engaged in to manage their poverty, into the reach of mainstream capital. It expands the frontier of finance to make these activities amenable for capital accumulation.

But is the surplus extraction attained through this considerable, or relevant? Not everything must be quantified, and this research has deliberately chosen a qualitative analysis over a quantitative approach. Yet – having established the principle at work – a brief quantitative assessment will establish the scope of the phenomenon.

As a collector and disseminator of investor-oriented information about microfinance, MIX collates various indicators of MFIs’ financial performance, including their loan balances and returns, and it captures the bulk of global microlending. Despite some qualitative issues, the MIX offers the best publicly available global dataset on the finances of the microfinance industry.

For 2012 (the most recent year with reliable data), 1,257 MFIs reported the size of loans outstanding (total $100.7 billion), out of which 885 also reported their “Yield on Gross Loan Portfolio”.[3] Yield (a percentage figure) is a routinely used proxy for effective interest rates, similar to gross margin: it is the total income earned over a particular period, divided by the average outstanding portfolio over that period.

To determine the amount of surplus value extracted by MFIs in 2012, I calculated the actual loan earnings of each MFI using these data (compare Figure, above). Factoring each MFI’s loans by its yield, a total of $17.319 billion is found to have been extracted. The mean yield of the MFIs which reported their yield, weighted by loan portfolio size, was 21.54 per cent. Assuming the yield of those MFIs which did not report their yield to be the same, we arrive at a global total of $21.696 billion as an estimate of what borrowers actually paid to the microfinance industry in 2012.

What does this figure mean?

• It is not the profit earned by MFIs, or their investors; MFIs face high costs, including personnel, infrastructure, loan loss provisions and the cost of capital, which might ultimately make the returns for many negative; although we know from well-publicized cases around the globe that microfinance can be very gainful for owners and managers. We know that the bulk of microfinance, even the formally “non-profit”, has been profitable for years (Rosenberg 2008).
• This figure also does not automatically represent a loss for the poor, since the best net estimate of the effect of microloans, after deducting all costs, is currently zero.

The figure simply tells us how much surplus was extracted by the microfinance industry from its borrowers in 2012 – surplus which, we know, must be produced through some form of labour. It details the price which borrowers paid for their “financial inclusion” via microcredit in 2012 in terms of the market value of the labour expended.

Roughly $21.7 billion then was the value of the labour performed by microfinance borrowers for the microfinance industry and its principals in 2012. What could one compare this to? For scale, the government of Greece paid €13.017 billion ($16.582 billion) in debt service in 2010 for a total debt of €329.3 billion ($419.5 billion) at the time.[5] As a sovereign, despite with hindsight being the less reliable debtor, Greece paid a lower interest rate than microborrowers, whose total microfinance debt in 2012 was “only” $100.7 billion. This comparison illustrates how lucrative microfinance lending can be, compared with some other options that capitalists have. We may also compare microfinance surplus extraction with the debt relief granted in 2005, the year of the G8 Summit at Gleneagles, which was $24.357 billion.[6] Microfinance recoups almost this sum every year.

The rise in microdebt, in parallel with public austerity, may be seen as a reflection in the political economy of development of how public debt is supplanted by private debt (cf. Streeck 2011). Evidently, microborrowers’ aggregate debt service is today at least as “systemically relevant” as Greece’s, and threatens to (privately) undo much of the (public) debt relief that was obtained by developing countries a few years ago.

However, $21.7 billion was only for 2012. MIX data for MFIs’ gross loan portfolios reach back to 1995 and yield data to 2003 (see Figure above). Calculating only the surpluses that are known to have been extracted from 2003 to 2012 gives a total of $88.792 billion. Extrapolating for those MFIs which did not report yield (as done above) and backwards for all until 1995, the figure rises to $124.579 billion, as the estimated total value extracted so far via microfinance.

For a number of reasons, including portfolio growth, under-reporting, conservative assumptions and data delays, these figures are likely to very grossly underestimate the actual surplus that was extracted. But $125 billion at least offers a minimum estimate of how much has already gone into the financial system from microfinance borrowers, as a quantitative indication of the sheer scope of accumulation through finance thanks to this financialization of poverty.

[The book comes with an appendix detailing the calculation method and explaining the sources of downward bias inherent in these estimates.]

Footnotes:

1. Not to suggest this is a motive behind Gates’ noted support for microfinance, though materially the relationship takes this form.

2. The creation of surplus value, following Marx (1976) being a “quantitative aspect” of the production process, where value is produced beyond the amount that is necessary to sustain the labourer and the labour process itself.

3. These 885 accounted for 79.8 per cent of the global loan portfolio. Of the $20.3 billion reported without yield, $10.9 billion were with Bank Rakyat Indonesia (BRI).

4. The figure is in the same ballpark as Rosenberg, Gonzalez and Narain’s (2009) estimate of interest rates of 175 “sustainable” MFIs: 28.2 per cent.

5. The 2010 figures are important, because this was the last year when Greek government bonds were not wholly “junk” (which raised its interest rates massively), and before “haircuts” affected its debt load.

6. This debt relief was a one-off; in 2012 only $3.01 billion were forgiven.

.

Mader, Philip: The Political Economy of Microfinance: Financializing Poverty. London: Palgrave-Macmillan, June 2015.

(phil)