How the public sees microfinance

By Felix Salmon
March 24, 2011
demonstrations protesting the ouster of Muhammad Yunus from Grameen Bank, the US publicity machine is gearing up, with a "special theatrical event" (Robert De Niro! Matt Damon! Suze Orman!) scheduled for March 31.

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In the wake of demonstrations protesting the ouster of Muhammad Yunus from Grameen Bank, the US publicity machine is gearing up, with a “special theatrical event” (Robert De Niro! Matt Damon! Suze Orman!) scheduled for March 31. Judging by the trailer, it’s going to be full of fluff, not particularly timely, and will concentrate mainly on the minuscule Grameen America — which has currently raised $275.40 towards building its first branch.

Microfinance is trendy these days, especially with the granola set — the Whole Planet Foundation has raised $3,185,685 to date in its annual microfinance campaign, mostly from shopper donations at Whole Foods checkout counters, as well as employee donations of $1.94 per paycheck. As a frequent Whole Foods shopper myself, I took advantage of my trip to Austin last week to pop in on the foundation, and had an interesting chat with Joy Stoddard, the main microcredit fundraiser there.

In principle, I’m a fan of giving grants to microfinance organizations to help them scale up and become self-sustaining. I think it’s a much better model than investing equity capital and then extracting dividends when the bank becomes profitable. But Whole Foods is conflicted about giving money to microlenders. Technically, that’s what it’s doing. But it goes to great lengths to try to ensure that all of it is used directly for “on-lending”, so that donors can be told that their money was lent out to poor borrower somewhere. (The main criterion for qualifying for one of these loans is that you’re poor, or, better yet, “the poorest of the poor.”)

The result seems to me to be a gratuitous step backwards: rather than leverage the power of fractional-reserve banking, Whole Foods essentially insists that the lenders it backs lend out pure capital. Wouldn’t it make much more sense for the lender to use the Whole Foods money as permanent capital and then fund itself in the domestic wholesale markets? Or, better yet, from local microsavings? Possibly it might. But then it becomes harder for Whole Foods to send out the simple message that your dollar is donated directly to a needy borrower.

Whole Foods, of course, has brought Yunus on as an adviser, which is one reason why some of the money raised — about $150,000 — has gone to Grameen America. Which isn’t nearly as revolutionary as the documentary makes out: community development credit unions have been doing something substantively identical for years. They just don’t tend to have the same star power.

I’m looking forward to talking about all of these issues at my Microfinance USA panel on May 24. US microfinance in particular is going to be a hot topic of discussion: do we need entities like Grameen America to parachute in and try to reinvent the wheel? Or should we be working harder to bolster and grow existing institutions, like my own? For the record, my answers to the posed questions are that borrower-owned institutions are always preferable to lenders owned by rich shareholders, in any country; and that microsavings, small dollar consumer loans, and alternative payday products are all absolutely part of microfinance.

More generally, what I’m looking forward to is a world where microfinance is viewed in a much more sophisticated way. But the world seems to be moving in the opposite direction: initiatives like Grameen’s theatrical event, or the Whole Foods fundraising drive, tend to oversimplify the issues at stake massively — even as the literature remains extremely unclear on the key question of whether microfinance really helps reduce poverty on a macroeconomic level. I’m sure the panel in May is going to be enlightening. But I do wonder whether any of that discussion is going to trickle down to the public-facing front lines.


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I’d kind of expect Yunus to agree with you, at least about the question of bank ownership. A community-based Savings and Loan model (that is, pre ’80s de-reg S&L, when local savers funded loans to local borrowers) is clearly where he was going, with the original Grameen.

Posted by Auros | Report as abusive

Amen Felix!

Rather than lamenting the lack of philanthropic capital the hundreds of millions of poor need from Western investors, here are three steps I suggest those of us in the microfinance field concerned with poverty should consider focusing on instead:

1. Advocate for country legal frameworks around the world that enable institutions to mobilize poor people’s savings. This would: ensure only those institutions that are up to the task of safeguarding poor people’s money can; put poor people’s money in a safer place than under a mattress, as jewelry around a women’s neck, or in the form of cattle or other illiquid assets; put poor people’s money to work for them in ways that we take for granted; and, most importantly to the current debate, mobilize serious local money at lower cost than international borrowing to meet the serious unmet demand among the millions of entrepreneurially-inclined.

2. Support institutional forms like credit unions and cooperatives that make poor people themselves owners; reduce the cost of funds and, hence, the cost to borrow; and yield financial returns to the poor first and foremost rather than wealthy investors in Seattle, San Francisco or New York. An alternative might be to hardwire existing MFIs’ statutes in ways that ensure reduction in interest rates come before dividend payouts to investors when an institution produces a surplus. The weakness in this approach is that trustees/owners find ways to change the rules to meet their needs (I watched this happen first-hand at an MFI I founded, which now manages a $60 million portfolio and aspires to go public like Compartamos. Sigh…).

3. Support low-cost, simple, informal microfinance models that equip the poor to intermediate their money on their terms in places banks and microfinance institutions have proven they cannot and will not go: very rural areas. Here I’m talking about savings groups—also known as village savings and loan groups, self-help groups, etc.—that quietly serve the basic needs of hundreds of millions of very poor people in very rural areas across Asia, Africa and (to a lesser extent) Latin America. This is a powerful “good enough” approach that simply does not get the attention it deserves, most likely because someone on a computer or a high-net worth individual cannot claim a stake in it. What a shame.

Even a cursory look at the evolution of microfinance over the past 35 years points to the inevitable weaknesses of microfinance institutions as tools for anything other than market development. Any serious look at microfinance as a facilitating mechanism for poverty-reduction has to account for the fact that the most visible manifestations of microfinance—non- and for-profit institutions that focus primarily on lending rather than savings for low-income and non-poor clients in peri-urban and urban areas—fail to address the priority needs of very poor people: a safe place to save, health care, clean water, knowledge and skills, etc. Microfinance may not meet all of these needs, but certainly we can aspire to more than money lending with a mission.


Posted by Seankline | Report as abusive