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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 »
Joseph Hanlon, Armando Barrientos, David Hulme, 2010: Just Give Money to the Poor: The Development Revolution from the Global South. Sterling: Kumarian Press.
If it sounds novel to suggest that if you want the poor to have more money, you could just give them money, these are strange times. What could be more straightforward than giving money to people in need? But cost recovery, self-help, and “financial deepening” are essential tenets of the current development ethos, so someone must go out and make the argument – as Joseph Hanlon, Armando Barrientos and David Hulme do in Just Give Money to the Poor – that simply handing out cash may be easier, and better, than anything else.
Cash transfers are a rising idea in development policy. Even The Economist likes them. Still, they are far from a hype, and little is known to most people about the successful programmes implemented by Brazil, Mexico or Indonesia, for example. This book aims to change that. Perhaps its greatest strength and weakness is its simplicity. But hard science can be discussed elsewhere. Just Give Money to the Poor introduces a broader audience, and gives impetus, to the simple but still-controversial idea: that redistribution works.
The authors recap evidence from two decades of experimental and pragmatic progress on social transfer programmes in the developing world. They argue that no-strings-attached, widespread systems of cash distribution are far more effective and cheaper than other models, such as vouchers, food subsidies (where monitoring creates costs) or microcredit. The key is that the money must be a dependable, substantial and easy source of income for the poor. Assured regular cash transfers – not charity or philanthropy – are the key, even at a relatively small scale, for achieving impressive outcomes:
“In the short term they reduce poverty levels and ameliorate suffering. In the medium term, they enable many poor people to exercise their agency and pursue micro-level plans to increase their productivity and incomes. In the longer term, they create a generation of healthier and better educated people who can seize economic opportunities and contribute to broad-based economic growth.”
The target groups could be particularly vulnerable demographics – children, the elderly – or simply everyone. Programmes can be gradually expanded as experience grows, since garnering political support by demonstrating impact, fairness and adequacy, is key. Read the rest of this entry »
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.
… that lower interest rates were possible all along!
India’s embattled microfinance industry has agreed to cap interest rates on its loans in southern Andhra Pradesh state at 24 per cent, as it seeks to counter an intense political backlash against the sector. …
Previously, the industry insisted its high interest rates were needed to cover the cost of outreach to so many small borrowers. However, it has decided to cap the rates in a bid to reduce antagonism from Indian policymakers, who are increasingly uncomfortable with the large profits and personal fortunes being amassed in an industry ostensibly dedicated to alleviating poverty. (ft.com)
And in The Hindu:
“We’ve made several concessions because we’re under duress and not because we want to. It is against our model, but we want the sector to survive. Mr Gopalan completely understands our situation, but he has not let us off the hook,” said Mr Vijay Mahajan, President, MFIN.
As India celebrates Diwali this week, the debate about how to deal with microfinance has calmed a bit. But since I wrote up my analysis of the root causes Andhra Pradesh showdown (part 1, part 2), the news has taken few further twists. Here’s an update:
- Vijay Mahajan, Chairman of BASIX and speaker for the MFIN industry organisation, stated on TV: “Alot of the reasons for invoking the ordinance were the creation of the microfinance sector itself. There has been a certain degree of wrongdoing by our sector. And as the president [of MFIN] I am the first one to accept it, I want to do it on record.”
- The interest rate disclosure requirement under the new microfinance ordinance in AP has uncovered interest rates far higher than previously reported – up to 60.5 percent. I wish I was surprised; but MFIs usually neglect to factor compulsory savings, fees, etc., into their publicly quoted rates.
- The AP government has published the complete list of complaints of malpractice and suicide launched against the MFIs – see it here.
- A massive borrower database in AP will go on-line in January, in an effort to clear up the mess.
Meanwhile, India’s vibrant media and civil society have been grappling with the issue, as are some American media. The rest of this post is a digest of the most provocative, insightful and intelligent commentary I’ve seen on the subject.
This is the second half of my search for the causes of the microfinance crisis and suicide tragedy in Andhra Pradesh. In my last posting, I outlined the macro causes as I saw them. I found evidence that MFIs were charging borrowers interest rates over and above what they actually could have charged them. I also found that the government failed to regulate despite an evident lack of self-regulation; that is, until Andhra Pradesh clamped down two weeks ago. In this posting I search for micro-level causes.
Since my last post, SKS on Saturday posted profits up by 116 percent y-o-y (read: more than doubled), and also apparently held a secret board meeting over the weekend. You don’t need to be a Marxist to find a steep rise in profits disturbing for a bank which lost at least 17 of its clients to debt-driven suicide in the same quarter. Yet the crisis in AP is far bigger than SKS, and the five biggest MFIs’ have realised this and collectively announced last Friday to restructure distressed loans. Finally. It took nearly two months of suicides, a heavy-handed regulatory clampdown and a media backlash to drive enough sense into the MFIs. The women’s Self-Help-Group movement is also pushing for better regulation. How did we get here in the first place?
The poor are prone to debt traps
The media have caught onto some of the macro issues, but here I will identifiy drivers for the heavy debt burdens and suicides which operate at the micro level. We must be aware that suicide in India is already shockingly common among farmers. But many, if not most victims in AP were small traders, not subsistence farmers, so we’re dealing with a new phenomenon here.
It is no surprise that highly-indebted microfinance borrowers can be driven into debt spirals towards MFIs under conditions of heavy marketing, misinformation, social pressure to join self-help groups, and the vagaries of economic life at the bottom of the social order. If one thing goes wrong (an illness, a crop loss), an apparently sensibly invested loan suddenly turns into an insurmountable debt burden (see these media reports for illustrations of microfinance-funded debt traps). In reality, “India Shining” is home to some of the poorest people in the world. As we saw last week, some microfinanciers are apparently out of touch with this reality. Atul Takle of SKS went on the record telling the Associated Press, “I personally don’t think a person would take her life for 225 rupees ($5.08) a week.” But four out of five people in India live on less than 20 Rupees a day (2007; latest figure I could find).
This (self-drafted, non-exhaustive) list outlines individual causes for the poor taking on unsustainable debt. It shows that there are mulitple reasons for the poor falling into microfinance debt traps, and that most are outside of their control. Read the rest of this entry »
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 »
governancexborders.com 