Whatever happened to microfinance?
David Boyle, nef
Once hailed as a paragon of new economic thinking, the microfinance sector has become embroiled in allegations about its practices.
It is nearly twenty years now since the former nef director Ed Mayo sat me down and asked me to write a short pamphlet called What is New Economics? It sold out in a week or so (it only cost £1.50). But what I remember most from it was the list of new economics heroes, ideas in practice, at the end of each section.
They defined the new economics in more ways than one. Seikatsu Club of Tokyo, the Green Belt in Kenya, Mondragon in Spain, they provided a frame by which we understood the new economics in those days.
But the practical projects were also what distinguished us from so much of what had gone before. The Distributists in the 1920s had tended towards melancholia; it wasn’t clear that any other way was possible, however they might yearn for one. Even Small is Beautiful was a bit sparse when it came to practical examples.
But of all the practical examples, micro-credit – and the extraordinary story of the Grameen Bank – were the strongest and most inspiring. “Your bank just roared past in a cloud of dust,” said the original article in Christian Science Monitor. We read it with huge enthusiasm.
But two decades later, we have reached something of a watershed. Grameen inventor Muhammad Yunus in under huge personal pressure, and the micro-credit schemes of India – the creation of Hilary Clinton and George Soros and their championing of micro-credit in the 1990s – are now in crisis.
The Indian micro-credit industry is now worth about $4 billion, ploughed into it by the Indian banks. But these are now in doubt.
In Andhra Pradesh, politicians have regulated how companies can lend and collect money and are encouraging people not to pay back their loans.
This matters because a third of India’s microfinance customers live in that state, only ten per cent of borrowers are continuing with their payments, and there are fears for some of the banks involved.
Yunus himself is in the middle of allegations from the Norwegian government that grants they made in 1996 were used by the wrong part of the Grameen operation, and for aid not loans (shock, horror).
It is far from clear what is really going on, except that one of the foremost practical new economics ideas in the world is facing the inevitable test of going mainstream. David Roodman from the US Centre for Global Development’s said: “As an outsider, I only half-understand the extraordinarily complex situation.” So don’t let’s assume that we yet have the full truth.
Part of the problem is when major profit-making institutions try to coerce micro-finance, rather as they did subprime loans in the USA. SKS Microfinance, the biggest for-profit micro-lender in the India has just reduced its interest rate to a whopping 24 percent. There are also fearsome tales of the methods used for collection and of suicides for those hideously in debt.
On the other hand, the government of Andrha Pradesh has its own micro rival micro-finance schemes known as Self-Help Groups, so they may not be unbiased.
Politicians in Nicaragua also persuaded people to stop paying back loans, leading to the collapse of the local bankers and the return of the money-lenders. Similarly in Latin America, Pakistan and North Africa. After all, some politicians are not that keen to have ‘their’ poor made more independent.
It may be that the main lesson here is that new economics solutions, however imaginative, are never foolproof. Once that crucial embedding in the local population, which is what Yunus did with Grameen, gets abandoned, then there are bound to be abuses and destructive politics.
A critical, but unremarked, aspect of the new economics is that creative and imaginative solutions can’t usually be delivered in the old industrial way. Perhaps that is the most important message of all.
As Felix Salmon puts it in the Columbia Journalism Review:
Much better that full-service banks grow organically out of local communities than monoline micro-lenders parachute in, flush with venture-capital funds, make a huge splash, and then implode.