Courtney
A friend recently sent me interesting article by Jeffrey Tucker: Will Microcredit Save the World posted on the The Free Market. The article basically says that microcredit won't work and that the Grameen Bank is doomed to fail.
Why is Grameen and the rest of the microcredit industry doomed to fail? in Tucker's article, Vijay Mahajan -head of an India-based microfinance institution BASIX - highlights five fatal assumptions of the Grameen Bank:
- The idea the poor should be self-employed over working for someone else, contrary to the whole history of successful economic development
- The idea that loans are the main financial services needed by the poor, not savings and insurance
- The idea that credit builds business, not entrepreneurship and management
- The idea that the non-poor don't need credit, where market-based banking has shown higher incomes can handle higher debt
- The idea that MFIs can become self-sustaining, where history has shown that the majority cannot
With a 6,000+ credit card bill vested in a microfinance start-up, Tucker's article definitely threw me for a loop. The poor not entrepreneurial? Credit only for the rich? Is he serious? Or is he right?
Some thoughts:
- True: Capitalism has been fueled by large corporations (like Ford, McDonalds, Coca-Cola, and GM) and small businesses where people work for "the man". Not True: That that is the way of the future. I think the question that Mahajan is not asking is "why". Why is it that in the past we all work for someone else as opposed to starting our own ventures? I think the answer to that question is a lack of access to capital, which is exactly what microfinance provides. In addition, we need to think about the people we are dealing with in microfinance. Microfinance clients are typically located in rural areas. Rural China is a different ball of wax than Corporate America. Most individuals do start their own business - they farm their rice and raise their pigs. Therefore, in agrarian societies, I would argue that it IS the norm to work for one's self (or one's family), quite the opposite from Mahajan's point of view.
- How can you save if you don't have any income? More importantly, how can you insure yourself if you don't have money to make insurance payments? You can't. Grameen and the rest of the microfinance industry unfortunately cannot alter capitalism. As we say in banking, "it is what it is." But, what they can do is work within the confines of the system. Grameen requires its borrowers to create a savings account. For every x amount of dollars repaid, borrowers are supposed to save x amount of dollars. Grameen has also developed an insurance system based on this same model.
- Mahajan had me on this one for a while. I agree. It is not credit that builds businesses; it is entrepreneurialism. But what Mahajan is forgetting is context. Microfinance provides loans to the poor. The poor may not be entrepreneurial by nature, but I do believe they become entrepreneurial by nurture. If your child was unable to eat, would you think of a way to provide food? If your mother was ill, would you think of a way to make money to get her the medicines she needs? Probably. Human nature reverts back to survival of the fittest mentality in tough times. Remember the phrase: desperate times call for desperate measures? And as for management, while a microfinance institution may not be able to provide the training for the next Microsoft, they have been proven capable of providing business training for a small hand-good shop or a business in animal husbandry.
- Hogwash. The poor are just as capable of paying off a $300 loan as the rich. They just have not been able to do so historically due to risk. The poor do not have collateral - car, house, steady job, etc. Therefore it is much harder for banks to determine their creditworthiness. Harder means higher costs. Banks shy away from high costs unless there is high reward. Until recently, it was not known that loaning to the poor could be profitable. Microfinance has only recently established that the poor are reliable, with 95% and up repayment rates.
- Sustainability is not easy in microfinance, but it is possible. Remember Compartamos - the Mexican MFI that has made 70% up and above returns? They clearly have moved way past sustainability into heavy profiteering. But Mahajan does have a point: most MFIs have not been able to achieve sustainability. But that does not mean they won't in the future. Microfinance is not one stop shopping. It takes time to perfect a microfinance institution. There are many factors to take into account: cultural norms, demographics, weather, ecology, etc. And so far, they have only been at it for about 30-40 years, so with the added complexity and the dire circumstances, I think the industry has fared pretty well. Besides, how long did it take the formal financial sector in America to develop anyways?
You know I'm 100% with you in wanting to beat back the naysayers and hail microlending as an essential aspect of most economic development packages, but I think you need to be careful with your response to Vijay's first point.
I couldn't link to his article, so I'm doing a lot of assuming here, but I think the point he's trying to make is that economic prosperity and percentage employment in the SME segment are most often very well correlated.
Again, I'm pulling statistics from admittedly fallible memory, but I think G8 economies average between 60% and 70% employment in SMEs, while the developing world sees 90% of its population either self/family-employed or working for huge (often state owned) companies. SMEs only employ 10%.
A lot of people see the development of the SME job market segment as THE magic beans, and it looks to me like they have the historical data to make a solid argument.
As for how to counter Vijay's claim that microlending is by nature out of step with growing an SME-heavy economy, I think all you have to say is that the best MFIs (the kinds of MFIs with which Wokai is actively pursuing partnership in China) focus not only on rural income smoothing but also on business activity diversification, micro mergers and acquisitions, and graduating clients to the formal financial sector.
Microlending, if carried out according to real, long term vision, can be a hugely helpful tool in the creation and support of a growing SME segment (and healthily developing economy).
It's important to remember that not all MFIs are able to look very far or very clearly into the future, and thus some MFIs are, in fact, hindrances to development. By no means, however, does that HAVE TO be the case.
Posted by: Jake de Grazia | July 10, 2008 at 06:44 PM
You'd be interested in the following article. The authors basically argue that while the "entrepreneurial" aspect of microfinance might be over-emphasized, microfinance (not just loan) brings a range of other benefits, centered around providing some stability to people's life:
http://www.wilsoncenter.org/index.cfm?essay_id=361250&fuseaction=wq.essay
Posted by: Sam Lee | August 05, 2008 at 11:16 PM