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I knew I was opening an interesting book when I picked up Lendol Calder’s „Financing the American Dream: A Cultural History of Consumer Credit”. But I had no idea that, in reading the historical chapters, I would stumble onto the microfinance of the early 1900s. Published in 1999, Calder’s book tracks the rise of consumer credit, from Victorian society’s scorn for debt, to credit as a practical life necessity in modern societies. It’s a great read. And against the backdrop of the 2008-2010 credit crisis, this book is as poignant as ever.
However, what astonished me most is that modern microfinance, it turns out, has its almost exact equivalent in North America in the early 20th century. The public of rich countries is currently enthralled by the notion that a supposedly innovative set of morally-driven credit institutions could create a better society, a world without poverty, more empowered individuals… This is so much an instance of history repeating itself, it’s almost creepy. Calder writes how well-meaning people in America tried lending to the poor to help them escape poverty by building up the licensed small-loan industry – before World War I, before the Model T, before Morgan Stanley – and failed. As Calder explains on pp. 111-112, the licensed small-loan industry was created to help the poor take charge of their lives through small enterprise. But credit did not create more entrepreneurial, freer human beings; instead, as an unintended consequence it created the consumer culture of the USA which we know today.
“The lenders and reformers who organized the licensed small-loan industry did not view themselves as advance agents for debt-based mass consumerism. On the contrary, through the mid-1920s small-loan lenders conscientiously resisted modern consumerism, at least what they could see of it. The business of personal finance was perceived as an exercise in philanthropy and social welfare, as a way of liberating workers from the clutches of poverty and the loan shark. In order to combat the odium attached to their business, small-loan lenders characterized themselves as upholders of the American dream. Read the rest of this entry »
Practically everyone has heard the proverbial story of poor a Bangladeshi or Nigerian taking out a microloan to, say, buy a few chickens or start a small business selling mangoes, and becoming a wealthy and successful farm entrepreneur or fruit trade mogul. There is even a picture book for children about that story.
Picture books, however, don’t make the story any more real or representative. This blog has been critical of microfinance success stories in the past, because they mislead people into generalising from a few exceptional success cases (see also Tim Ogden’s smart analysis of the consequences of misleading storytelling). More generally, the blog has been critical of microfinance because not everyone who takes a loan can make a profit on a business venture and use the profit to repay the loan plus interest; very few will benefit spectacularly from this, and their successes do not equal “development”.
But donor bodies increasingly expect microfinance to become the centerpiece of development. Proposals for microfinance to reach beyond small-business-lending and into the traditional remits of the state abound. Microcredit loans are being suggested and applied by various agencies for generating access to a range of goods and services linked to development, from sending kids to school, creating better health, improving water and sanitation, to even helping with peace and reconciliation. Using microfinance for water and sanitation has been an area of particular focus (here is one prominent example, with its own success stories). Read the rest of this entry »
The reactions to Tom Heinemann‘s controversial documentary “The Micro Debt” have mostly been strong. The film sheds light onto a number of questions, first and foremost the risk microcredit borrowers face of becoming trapped in debt. However, public debate has so far focused on two rather marginal parts of the film: a more-or-less resolved dispute over aid money (cf. “GrameenLeaks”), and a dispute about a house supposedly promised in the village of Jobra. It is worth investigating why so much publicity has been given to these two issues, and so little to the film’s main message: that microfinance can cause debt traps.
While the charges of financial malpractice in the Grameen conglomerate have now been largely cleared up, Muhammad Yunus still remains a target of negative attention from the Bangladeshi government. He is now apparently no longer Grameen Bank’s director. But Yunus’ personality and job status should have nothing to do with an impartial assessment of the virtues of microfinance. What becomes clear from the recent debate is how symbols are mobilised (and abused) in legitimising as well as challenging microfinance. However, this distracts from more substantial questions about what microfinance does or doesn’t, can or can’t, achieve.
Let us take a look at “The Micro Debt” and the reactions to it, and also take a look at another, less-known documentary with less impact but perhaps a better focus on substance: “Easy Money”. Both films make the allegation that microfinance can be exploitative and can cause more problems than it solves. But the reason why “The Micro Debt” has been perceived as so inflammatory, while “Easy Money” apparently has hardly been discussed at all, is that “The Micro Debt” attacks microfinance’s symbolic self-representations of success and integrity. Read the rest of this entry »
One of the things that make blogs particularly interesting are series. The “series” series recommends series at related blogs. This time, I introduce the “State of the Sector” series on the blog of the enigmatic Indian rural finance practitioner Ramesh S. Arunachalam.
Okay, it took me quite some time to appreciate this blog.
First there was the turn-off boring title “Microfinance in India”. And the strange header “Candid Unheard Voice of Indian Microfinance” – think disgruntled ex-microfinance industry dissident, ranting away in Internet obscurity. Also, the site looks like it was designed in the mid-90’s, even though blogs didn’t exist then.
For this reason, the props Ramesh S Arunachalam deserves for having won me over are even bigger. He did so with his high-quality, insightful blogging about – well – microfinance in India. The transnational field of microfinance mostly generates a dull, glossy, PR-esque discourse. Ramesh is one of the bloggers who have proven their mettle not only by being incisive and dealing with messy issues, but also truly familiar with the situation on the ground.
What got me hooked was Ramesh’s exhaustive coverage (an incredible 44 posts since October) of the Andhra crisis, by now a somewhat all-Indian microfinance crisis. The development of the crisis, its causes and consequences, could be followed in a nutshell via Ramesh’s series of posts on the “State of the Sector“, in which he takes a sweeping view of the MFI sector and its environment.
Ramesh publishes with incredible regularity and energy. Each post appears immaculately researched; often he draws on extensive personal experience. In an in Internet full of babbling voices on microfinance – funders, promoters, academics, advertisers … but rarely real practitioners, and of course never clients – Ramesh’s contributions strike me as some of the most insightful analyses of what’s really going on in Indian microfinance.
His most recent original contribution has been to expose the role of unofficial microfinance intermediaries – “ring leaders” or “agents” who create ghost loans and excessive debt at the expense of naive MFI employees and borrowers.
Strangely enough, it is pretty hard to find information on this prolific blogger. He has authored book chapters on microfinance and gender; was recently named a “top pick of the microfinance blogosphere”; and is found throughout the web as a lively commentator. And yet, apart from “rural finance practitioner” with “over two decades of experience”, the all-seeing Google turns up little info on this enigma. His personal website is undergoing maintenance.
So, without knowing much about the subject of my praise, I must highly recommend listening to this “Candid Unheard Voice of Microfinance” … If, last but not least, just for the delightful way most posts end, no matter how serious the subject, with a cheerful message like
“Have a great day!”
(phil)
In this interview, Professor Malcolm Harper analyses some of the underlying causes and consequences of the microfinance crisis in Andhra Pradesh. Professor Harper is chairman of the microfinance rating agency M-CRIL and editor of the volume “What’s wrong with Microfinance?”. He has been Professor of Business Development at Cranfield Business School, and as the former chairman of BASIX, significantly pioneered microfinance in India.
Professor Harper, you recently returned from India. How bad is the situation for the microfinance sector there?
I was in Delhi at a very large meeting of microfinance people, where of course Andhra Pradesh was being talked about a lot. I then spent some time in Orissa, in a village three kilometres from the Andhra Pradesh border. I called in on the local office – which previously I didn’t even know existed – of BASIX. And the local staff said there had been no trace of any repayment difficulties, even though the Andhra Pradesh border was so close by. This surprised me, and even they were rather surprised. Repayments were at the normal high level.
But I was running a course nearby and my students were interviewing various traders in the local market, and a few of them mentioned that one or two of the microfinance institutions, from which they had taken loans, had stopped making disbursements. And that of course has the seeds of trouble, because one reason why people repay is because they’re going to get another loan.
So it seems that the MFIs are having trouble refinancing themselves now, raising capital for their lending activities.
That’s inevitable, I think, because when the banks are beginning to wonder about the quality of their loans to the MFIs, they’re not about to release further loans. And that, of course, contributes to the problem, because – as I said – people repay mainly because they’re going to get another loan. Read the rest of this entry »
In the past few weeks, I’ve been silent here about the microfinance crisis events in India. But why not let others do the talking? This blog published (what I think was) the first analysis of the A.P. events right after the crackdown ordinance; following up with a two-piece search for the underlying causes (1, 2). Most of the causes I speculated about at the time are pretty much turning out to be true:
- interest rates were far too high and have been rushed down
- the sector was under-, or practically un-, regulated (especially, if Kaushik Basu says so)
- the borrowers were/are overindebted (far more than the MFIs were aware of, I assume)
- and the profit motive created perverse incentives for MFIs.
One prediction I won’t make, though, is whether microfinance in India will pull through. That depends on politics in Delhi (bailout or not?) as much as it does on the adaptiveness (not the resilience, which means “no change”) of the sector. But I wouldn’t bet my money on an MFI in India at the moment, given the pessimism of Vijay Mahajan (“If this situation continues, there will be no microfinance sector in 2011.”) or the SKS’ shareholders (shares down by 52 percent).
The real surprise story of the week, however, were WikiLeaks’ diplo-inslults.
Or really, were they? Only the Americans are really making a big deal out of the leaked diplomatic cables. If anything, the now-public secret assesments of sundry politicians should provide a few good-natured jokes at upcoming international summits. Would-be Israel-nukester Ahmadinejad will hardly be insulted by being compared with “Hitler”, and German Chancellor Angela Merkel and Foreign Minister Guido Westerwelle already had their share of laughs about “their” leaks.
Maybe it’s too early to seek real explanations for the microfinance tragedy in AP. The dust hasn’t settled yet, but I’m struggling to come to grips with the big “why?”. (For a summary of events until Tuesday, see here.) My usual blog sources of all colours for all things development are silent, so far. But the Indian media are buzzing with coverage and an occasional piece of analysis. From what I can tell from these reports, the crisis was caused by a failure to regulate and a set of ultra-perverse incentives for microfinanciers and their employees.
What happened? In the past 6 weeks or so, some 30 to 60 microcredit borrowers in Andhra Pradesh (according to different sources) committed suicide over their loans. Individual stories had surfaced increasingly throughout early and mid-October about borrowers suffering under heavy debt burdens and massive pressure from agents; with measures apparently even including child abduction as punishment for loan default and agents urging borrowers to take their lives to reap credit life insurance. Protests ensued, and last week, the AP government issued an ordinance imposing rules of conduct and compulsory registration on MFIs (microfinance institutions). A consortium of MFIs (MFIN) claimed this had halted their business completely, and this week the MFIs submitted a petition at the AP High Court asking to quash the government’s ordinance.
This Indian news video concisely tells the horrific story.
The High Court today officially permitted MFIs to continue their business activities, while upholding the terms of the ordinance that MFIs may not engage in coercive practices and must proceed with registration. Meanwhile, employees of SKS Microfinance and Spandana have been arrested for harassing borrowers. SKS shares have dropped by over one fifth, indicating that investors are worried about profitability (rightly so). An Indian apex organisation has proposed for all its members to cut interest rates – more about that below. Read the rest of this entry »
Capitalism as a system transcends borders, and so does the latest capitalist crisis. Sometimes pictures tell a story better than words. A brilliant animated cartoon appeared this summer on youtube, illustrating a lecture by CUNY-based British social theorist David Harvey in which he outlines his explanation of the 2008-20xx economic crisis.
Harvey’s analysis of the structural politico-economic origins and mechanisms of the crisis is poignant. The witty animation brought to life by the RSA is a true delight, regardless of what one may think of his arguments. A certain part of Harvey’s narrative caught my eye in relation to microfinance (more below). But first, let me briefly recap his story (in an unduly simplified manner). Harvey says:
There are five common explanations of the crisis, all of which are somewhat true:
[1] It stems from human nature – predatory instincts, greed, etc.
[2] The regulators failed, therefore institutions need to be reconfigured.
[3] Everyone believed in a false theory – forget Hayek, return to Keynes!
[4] It has cultural origins – homeowning-obsessed Americans and lazy Greeks, your fault!
[5] It’s a failure of policy – too much regulation of the wrong sort.
Milford Bateman’s book Why Doesn’t Microfinance Work? has generated heated discussion, with blows not always struck very far above the belt. Recently, I got involved by recapping and analysing several book reviews published on the web. I was critical of the tone and substance of David Roodman’s review (published on his blog, of which I remain a fan, notwithstanding), because I felt it attacked the person more than the argument, and it didn’t engage with Bateman’s overall point that microfinance is politically useful while economically questionnable.
David Roodman has responded to this challenge in a more elegant and eloquent piece than his original review. Some allegations against Bateman’s writing have been clarified, new ones have appeared. I think Roodman is still off with his accusations of “sloppy thinking” and “extremism”. I would still like to see Roodman engage with Bateman’s overall argument.
Most of the criticisms launched against the book (by diverse authors) have validity; however, I would urge those who dislike the work to beware the trap of accusing Bateman of what they see him as accusing others of, namely malignance. In plainer English: try to measure the book and your reaction by the same standard.
Here are my (less brief than intended) responses to what I see as David Roodman’s main points:
governancexborders.com 