Felix Salmon

When loans beat grants

Felix Salmon
Dec 2, 2013 02:48 UTC

What’s best: giving a man a fish, teaching a man to fish, or lending a man a fish? Nathan Fiala, of the German Institute for Economic Research, went to Uganda to find out, and the results of his study make for fascinating reading.

Fiala’s study is the first to directly pit the newly-trendy area of cash transfers (which come in both conditional and unconditional flavors), against the slightly tarnished area of microfinance. He found a group of small Ugandan businesses, and divided them randomly into five groups. The first received loans; the second loans with business skills training; the third cash grants; the fourth cash grants with business skills training; and finally, there was a fifth control group. The loans and the grants were both around $200; Fiala went back to all of the businesses after six months and nine months to see how the various groups were doing.

The results were not what you might expect. On the simple question of loans versus grants, it stands to reason that you’re going to be better off if you don’t have to repay the money than if you do. Except that’s not what happened:

By the nine-month point in the study, businesses which received grants saw a negligible increase in profits, while businesses which received grants and training actually saw their profits go down, on average. Women-run businesses also saw a decrease in profits after getting loans, whether they were accompanied by training or not. In fact, the only area where the intervention seemed to do any good at all was in male-owned businesses receiving loans: they did well overall, and even better when they got training as well.

Obviously, this is only one study — although Chris Blattman says that it’s a “very important” one. Certainly people should start trying to replicate it. But I suspect that the effects it finds are real. For while the study itself might be new, there are three well-known effects at work here.

The first is that most microlending very rarely makes people richer. That doesn’t mean that it’s a bad thing: access to loans can be very useful in terms of things like consumption smoothing. But if what you’re trying to do is create increased wealth and economic growth, microlending is a very inefficient way of getting there.

The second is the exception to that rule. The one time when microlending does predictably make people richer is when it takes unemployed women and turns them into small businesses. In many parts of the world, women have not historically been given the opportunity to go into money-making work — and in those parts of the world, microlending can make a substantial difference. It increases the number of employed people, and thereby increases both wealth and economic growth.

Finally, as we know from Portfolios of the Poor and from David Roodman’s book, there are many mechanisms, within poor societies, for wealth to get redistributed — and those mechanisms have existed for much longer than microfinance. When one person needs money, they will get it somehow; when another person comes into an unexpected windfall, that money will find its way to people in need.

Put these three things together, and it’s easy to see how Fiala’s study found what it did. As he says, when the small business owners were given cash grants, “the cash does not appear to have been spent into the business, for men or women, but is instead either spent on family obligations or other consumption.” But loans need to be paid back, which makes it more important for the money to be invested into the business: “knowing that the loan had to be repaid appears to have led men to use the money more effectively in their businesses,” he writes.

Because everybody in the study was already running a small business when the interventions began, all of the recipients of funds — men and women both — had jobs all along. There was no opportunity, in this study, for women to use funds to enter the workforce. On the other hand, there was opportunity for men to use loans to start employing their relatives. It’s unclear why men find it easier to hire their relatives than women do — but once again, the only way to increase wealth and growth seems to be to find a way to employ people who would otherwise be unemployed.

It’s worth emphasizing, here, that Fiala isn’t measuring welfare improvements: I’m quite sure that the people who received cash grants, for instance, are noticeably better off for having received them. Instead, he’s just measuring the profitability of small businesses. Using that narrow criterion, it turns out that throwing money at the business doesn’t make it more profitable — which, if you put it that way, is maybe not so surprising. If you want to help small businesses grow, then there is a case to be made for using loans rather than grants. But even then, I suspect, the really valuable resource is underutilized labor, rather than cash.


Thanks for the information. I will definitely look towards and will read out all the terms and conditions of loans while borrowing.

Posted by hermiliesmith | Report as abusive

Muhammad Yunus and Grameen America

Felix Salmon
Jul 26, 2011 23:33 UTC

Muhammad Yunus is in town, plugging the new movie about Grameen America, the US version of his hugely successful Bangladeshi microfinance institution. It’s three years old at this point, and growing fast: it already has four branches, in Queens, Brooklyn, Omaha, and Manhattan, and plans to open another two by year-end. At the moment it has about 6,500 members, growing at a rate of about 5,000 a year.

I had a fascinating conversation with Yunus yesterday; he really is a very impressive individual. He’s not letting his setbacks at Grameen slow him down: he’s busy building lots of social businesses like Grameen Danone, where the startup capital is provided in a form where the original investor can never take out more than they initially put in. In short, he’s still working hard at what he’s done for most of his life, and what got him the Nobel Prize: using the power of capitalism to power improvements in developing-country living standards, rather than predatory behavior.

I asked him, then, what he was doing in the US, with a relatively small organization working in the world’s richest country. And he pointed to his left, where Gayle Ferraro, the director of the documentary, was sitting. “We have been doing this for 35 years in Bangladesh, we never got into a movie” he responded. “You do it in the richest country in the world, just a tiny little bit, it becomes a movie.”

Frankly, I’m not a huge fan of Grameen America, which is being parachuted into the media capital of the USA with no real understanding of what has come before it: it looks like a media stunt as much as a real attempt to help the poor. Case in point: if you’re online, it’s much easier to find celebrity endorsements from the likes of Matt Damon and Hugh Jackman than it is to find the addresses of Grameen America’s branches. When I asked about this, Vidar Jorgensen, one of Grameen America’s lead board members, told me blithely that their borrowers weren’t online.

Jorgenson also told me that, essentially, Grameen America had nothing to learn from the credit union movement. He told me that Grameen America was already the second-biggest microfinance institution not only in New York but in the country; that kind of thing only makes sense if you consider member-owned community development credit unions not to be microfinance institutions. He told me that almost no credit unions are profitable. And he was adamant that none of Grameen America’s borrowers could ever get a loan anywhere else. “Credit unions won’t touch these,” he said. “Every time they make a loan, they have to reserve against it 100%. These are people at or below the poverty level. Anybody with enough assets to get a loan would actually be above our standards. We actually go to people’s houses to make sure they’re not too affluent. They have to be down to our standards in terms of income and assets.”

That kind of talk contrasted quite starkly with what I was hearing from Yunus. When the conversation came around to Kiva, for instance, Yunus told me that he found the emphasis on very poor borrowers to be “undignified”.

If you go to the Kiva website, said Yunus, you see an individual whose poverty is being used to gin up donations. Which doesn’t dignify her. “After all, she’s paying interest. Why should you advertise her as someone who’s deserving of donations? It’s an undignified way of doing it. She’s running a business. Respect her as a client. As somebody who’s paying full cost.” Meanwhile, Grameen America, a registered charity, is asking for donations, saying that “your contribution is a tax- deductible way to help families in need”.

As someone who sits on the board of a profitable community development credit union which is significantly larger than Grameen America, I’m aware that Grameen America has spent a good amount of time talking to New York credit unions, and even toyed at one point with the idea of becoming a credit union itself. But it decided to go its own way, and has partnered with banks, not credit unions — Citibank and Capital One are the main ones — to get its members fee-free microsavings accounts.

And here’s the biggest shortcoming of Grameen America, for me. It’s not a depository institution, so it can’t offer savings accounts of its own. And it’s not even much of a lender: for all that its officers love to talk about dreadful payday lenders with their predatory loans, Grameen America only really has one product: the micro-business loan for people to start up small home-based businesses. Making sandwiches for local construction workers, helping people out with hair braiding, baking delicious Dominican pastries — that kind of thing. They take a relatively small initial investment, and yield a relatively small income.

But demand for loans is so much greater than that. Most people, especially if they’re poor, need consumption-smoothing loans. Many just need cash until payday. Others want to be able to buy a television, or a car, or just pay overdue bills. Perhaps they’re in hock to a loan shark, and desperately need money to get out of that particular vicious spiral. For all those people, and many more, Grameen America offers no help at all. (And, of course, men need loans too; so far, all Grameen America’s borrowers have been women.) I specifically asked about people who were looking to get a job, rather than to become self-employed; I was told that Grameen wasn’t for them, either, and that such ambition is probably silly right now, given the unemployment rate.

Grameen America is even limited on its own terms: while it will help women get from zero to a slow walk, in terms of building a business, it won’t help them much after that. At Lower East Side People’s, we lent one woman money to expand her baking-at-home business, and then, when that was successful, graduated her to a much larger small-business loan so that she could rent her own storefront in the East Village. That kind of thing wouldn’t be possible at Grameen America — they stay small.

Grameen America, then, is quite good at reaching the goals that it sets for itself, not least because its board includes some fabulously wealthy people who are more than capable of throwing millions of dollars at the organization until it does what it’s designed to do. At the end of 2010, Grameen America had $3 million of cash in the bank, another $2 million pledged and on its way, and just $3.3 million in total loans outstanding; it actually had fewer loans than it had equity. (The financial statement is hard to find on the web, so I’ve put it here.)

Meanwhile, Muhammad Yunus is, still, spot-on in his diganosis of the microfinance industry globally. He’s trying to get it more regulated, he’s pushing for national ID numbers so that lenders will know when someone already has too many loans; he thinks there are too many players right now; he wants microfinance institutions to be funded domestically and sustainably, rather than from for-profit or even not-for-profit foreigners bearing cheap dollars. The only thing I worry about with regard to Yunus is that since he got his Nobel Prize, he’s being co-opted as a kind of mascot by do-gooders in the US at places like Grameen America and Whole Foods. The publicity is welcome, I’m sure. But it does have a tendency to perpetuate the idea that the microfinance involves rich people making charitable donations to improve the lives of poor people. Which is not really the story of Grameen at all, even if, for the time being, it is a large part of the story of Grameen America.


Felix, my fantastic mutual community bank runs a lot like your fantastic credit union. I can say with high confidence that neither of our instituions can successfully extend credit to individuals who cannot document income above a poverty line level and who do not have any assets to use as security for a loan.

The lenders at my bank make dozens of business loans each year which are tiny by any industry standard even in my small state. Yet having said that there is no interest at all in doing commercial loans in the sub $25,000 range… even sub $50,000 is a favor. It’s just not enough to cover the cost of servicing and underwriting the loan.

Anyone who can change the status quo for the young working poor is welcome in my book. Right now the status quo is a landscaper who makes $10/hour mowing lawns and works 60 hours a week for 3 years with a 20″ push mower before he can buy a zero turn riding mower and do twice the work in half the time trippling his howerly income.

Anything we can do to improve access to education and access to capital is worth doing!

Posted by y2kurtus | Report as abusive

How the public sees microfinance

Felix Salmon
Mar 24, 2011 16:31 UTC

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.


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

Tail risk in microfinance, Muhammad Yunus edition

Felix Salmon
Mar 2, 2011 16:26 UTC

On Monday, it looked like Muhammad Yunus was going to survive as head of Grameen; today, it looks as though he’s out. As David Roodman explains, it’s all very complicated and murky, but the base-case scenario is that everything will be decided in court, and that the courts will side with the Bangladeshi government.

This is a major diplomatic issue: if Yunus is indeed ousted, the US has promised to end all high-level diplomatic interaction with Bangladesh. Yunus has powerful friends, but that doesn’t seem to have helped him here.

Yunus himself, of course, will be fine whatever happens. The worry is what happens if and when the Bangladeshi government seizes control of Grameen. It seems that the attempt to oust him is a reaction to his anti-corruption campaigns, and the obvious risk here is that Grameen itself will become a vehicle for graft — especially if, as prime minster Sheikh Hasina reportedly wants, the government’s stake in the bank is raised to 60%. (Right now, it seems that the government owns about 3.4% of Grameen, although by law it’s meant to own 25%.)

Nick Kristof is clear about how important this is:

If Grameen is turned into a state bank, that would be a catastrophe — above all for the impoverished people who depend on it. And if a Nobel Peace Prize winner can be shunted aside, then all of civil society is in jeopardy.

This would be dreadful, too, for the broader cause of microfinance. Grameen is the shining example of how microlenders can avoid disastrous implosions by dint of being owned by their borrowers. If that changes and it becomes the shining example of how governments can swoop in and seize ownership and control for their own ulterior motives, then it becomes very hard to envisage any ownership model which looks strong and sustainable over the long term.

Today’s news, then, is a stark reminder of the huge amount of tail risk in microlending. The weakness of the model isn’t in high default rates, it’s in the way that extreme events, often orchestrated by politicians, can strike even the biggest and most successful lenders. If Grameen and Muhammad Yunus aren’t safe, then no one is.


@christofurio: Actually it seems very likely that microfinance has played a small role in poverty reduction whereever it has been used. That doesn’t mean no role, but a small role. All of the high quality evidence on the impact of microfinance basically tells the same story: small but important benefits of the poor; no large scale impact on poverty.

Compare Bangladesh to Pakistan for instance. Penetration of microfinance in Bangledesh is far higher than Pakistan; neither country has what could be called effective government or policy. When you compare HDI scores for the two countries over the last 30 years, Pakistan does better.

Back to Felix’s point: Yunus and Grameen should be defended from all attacks from the Bangladeshi government using whatever reasonable means are to hand.

But, and this is a big but, I really hope that all of those defending Yunus from Hasina will take the next step of defending Grameen from Yunus. A big factor in the tenuous situation that Grameen is in now is Yunus’s failure to create an institution independent of himself. He has routinely pushed out anyone within the organization that appears to challenge his authority and power. Grameen can’t afford to lose Yunus right now because it doesn’t have a good succession plan and doesn’t have the leadership talent to easily replace him.

No one is at fault for that other than Yunus and the “Friends of Grameen” that have abetted his reluctance to separate Grameen from himself for the good of the people that it serves.

Posted by timothyogden | Report as abusive

Why Yunus is right about for-profit microfinance

Felix Salmon
Jan 16, 2011 20:12 UTC

Muhammad Yunus has a heartfelt NYT op-ed railing against for-profit financiers. When he founded Grameen Bank in Bangladesh, he writes, “I never imagined that one day microcredit would give rise to its own breed of loan sharks. But it has.”

Yunus names the obvious names, such as Compartamos in Mexico and SKS in India, which have gone public, providing windfall profits for their founders with little if any benefit for their borrowers.

Yunus calls for stricter government regulation of microfinance entities, saying that their interest rate should be capped at 15 percentage points over their cost of funds. (Grameen manages on a spread of 10 percentage points.)

But Matthew Bishop, on his Philanthrocapitalism blog, pushes back hard against Yunus’s essay, with some rather peculiar arguments. (I’m assuming this is Bishop writing, and not his co-author Michael Green; the posts on the Philanthrocapitalism blog annoyingly don’t have bylines.)

It’s worth taking Bishop’s arguments in order:

For some microfinance providers, like Grameen, the way to keep down the interest rate is to take deposits from clients to fund loans. That is all well and good for Grameen but financial regulations in many countries stop microfinance providers taking deposits and the capital has to come from somewhere else. And, given the limited supply of the sort of philanthropic donations that helped Grameen get started, the only plentiful supply of capital is for-profit investors.

It’s true that it’s much easier to become a lender than to become a fully-fledged deposit-taking bank. If a lender goes bust, only its owners are hurt; if a bank goes bust, either its depositors stand to lose all their money, or else some kind of government insurance scheme takes the hit.

But that’s kinda Yunus’s point: microlenders should be more regulated, and the world of microcredit should not be open to any old loan shark wanting to hide behind a flimsy veil of ostensible social responsibility.

As for those for-profit investors, they come in many forms, and there’s no reason why they need to invest equity. There are lots of people out there willing and able to make relatively low-interest loans to microfinance institutions; those people don’t require an ownership stake or the chance to make millions of dollars when the bank goes public. Microfinance institutions should be owned and run for the benefit of their borrowers and depositors, not by foreign (or even domestic) millionaires.

Banks do need capital as well as loans, but equity isn’t the only form of capital, and philanthrocapitalists looking to support microfinance institutions should be perfectly happy to provide a combination of grants and subordinated debt.

More generally, I’m not at all convinced that for-profit microfinance shops are a consequence of a lack of philanthropic donations: in fact I suspect that it might be the other way around. Given the millions to be made in the microfinance space, entrepreneurs wanting to lend money to the poor are more likely to want investments from the for-profit sector than they are to want grants from philanthropists who will insist that the bank be owned not by its founders but rather by its borrowers. If the world of for-profit microfinance institutions dried up, then maybe all those philanthrocapitalists might be more inclined to simply donate startup capital to non-profit institutions instead.

Bishop continues:

Of the billion people living in poverty about 150 million currently have access to microfinance, so there is still plenty of unmet pent-up demand. Providers like Compartamos and SKS have grown quickly and therefore helped more people because they have engaged the for-profit capital markets (and as they have grown, they have passed some of the savings from scale efficiencies back to borrowers in lower interest rates). If Mr Yunus has his way, this supply of growth capital will be choked off and hundreds of millions of people will be left waiting for financial inclusion.

This is highly disingenuous, partly for the reasons explained above: we simply don’t know how many people would have access to microfinance in an alternative world where non-profit organizations were the norm.

On top of that, for-profit lenders tend to congregate in dense cities where most of the population already has access to some kind of microfinance institution. In order to provide small loans to the billion people living in poverty, new lenders are going to have to venture out into much more rural areas, where banks can’t easily scale and where the limiting factor is finding qualified loan officers rather than finding sufficient capital. Yes, there’s pent-up demand for small loans. But most of that pent-up demand will not be met by for-profit lenders who can grow much more quickly in banked urban areas.

I’d also like to see some evidence that Compartamos and SKS “have passed some of the savings from scale efficiencies back to borrowers in lower interest rates”. Indeed, according to the CGAP report on Compartamos, the bank grew to its present size partly because of a deliberate decision not to lower interest rates:

When Mexico was hit by heavy devaluation and inflation in 1995, Compartamos, still in a pilot phase of operations, responded by raising its effective annual interest rate above 100 percent, in order to provide real (inflation-adjusted) yields that were sufficient to cover its lending costs. When inflation dropped back to normal levels, the founders and managers deliberated about whether to lower the rates. They had a choice about the matter because they faced little direct competition and were in a near-monopoly position with respect to their clients.

They decided to leave the high charges in place…

Looking at the facts available to us, it is hard to avoid serious questions about whether Compartamos’ interest rate policy and funding decisions gave appropriate weight to its clients’ interests when they conflicted with the financial and other interests of the shareholders.

CGAP’s report makes it clear that Compartamos never reduced its interest rates as a result of scale efficiencies; the only thing which would ever prompt it to lower its rates seems to be competition. Similarly, when SKS reduced its interest rates in October, it was clearly in response to political pressures, rather than a result of any scale efficiencies.

And this, from Bishop’s post, is just plain weird:

Mr Yunus supports the idea that governments should impose caps on the interest rate charged by microlenders. He says this should be no more than 15 percentage points above the cost of raising the funds to lend. In the case of Grameen, he says, that would be an interest rate of 25% – a number that, it would be easy to conclude, is not far off what he thinks would be the right cap on interest rates elsewhere. Yet in countries such as India and Mexico, where interest rates are significantly higher, the consequence of a rate cap of anything close to 25% would be a dramatic decline in the number of poor people able to get access to credit.

The proposal that banks’ lending rate be limited to 15 percentage points over their cost of funds is surely simple enough for the US business editor of the Economist to understand. At no point does Yunus ever say or imply that the lending rate be limited to 15 percentage points over Grameen’s cost of funds. Yet somehow that’s what Bishop contrives to understand him to mean.

And in what bizarro world are interest rates in India and Mexico “significantly higher” than they are in Bangladesh? The benchmark central bank interest rate in India is 6.25%; in Mexico it’s 4.5%. In Bangladesh, by contrast, the interbank rate is 15%. Poor borrowers in India and Mexico pay much more in interest than their counterparts in Bangladesh not because interest rates are higher in those countries, but because microlenders in those countries charge much higher spreads over their cost of funds.

There are good reasons to believe that Yunus’s 15% rule of thumb is overly simplistic: Richard Rosenberg points out that many of Grameen’s own favored microfinance institutions lend at much higher spreads than that. But once an institution becomes huge, like Compartamos or SKS, it’s pretty hard to make a case that it needs to charge vastly higher spreads than Grameen.

Grameen bank showed that the poor could be very good credits, and would repay loans even when they carried an enormous interest rate. Bishop himself concedes that Compartamos has a non-performing loan rate below 2%, which means that it clearly doesn’t need to charge enormous interest rates to cover the credit risk on its loans. And there’s no reason to believe that Grameen is vastly more efficient than Compartamos in the way that it does business, or that its all-in cost of funds is significantly lower. Which means that the excess lending rates charged by Compartamos over Grameen are entirely a function of profiteering, and that Yunus is right to criticize them.

Going forwards, I’m hopeful that a lot of the unbanked in poor countries will be reached by m-banking using mobile phones rather than through traditional microfinance institutions. Which is all the more reason to try to ensure that people lending to the poor do so at reasonable interest rates, rather than dividending monster profits back to international financiers who don’t need the money. I’m definitely on Yunus’s side of this debate: it’s pretty hard to be an apologist for millionaires and billionaires seeking to delude themselves that the best way to help the poor is to extract lots of money from them.

Update: David Roodman has a sophisticated, nuanced, and highly-informed view, which — like all his stuff — is well worth reading.


The huge profits made by MFI institutes in India and lead to crisis in India. And further has broken credit discipline.

http://devinder-sharma.blogspot.com/2010  /11/mfis-profiteering-from-poverty.html

Posted by yayaver | Report as abusive

from Barbara Kiviat:

The real revolution in microfinance

Oct 22, 2010 13:48 UTC

People often talk (and write) about how commercialization is changing the nature of microfinance. Yet increasingly it looks like an even more fundamental shift is afoot. Microfinanciers are finally figuring out what their customers want.

The well-worn story of microfinance goes something like this. Lend a poor person in a poor country a little bit of money, and that person can invest in a business—by buying a sewing machine, say, or another cow. Over the long run, that person pulls himself out of poverty with the income generated by his endeavor.

One reason this story involves a loan is because in most countries it's a whole lot easier to lend money than it is to take deposits. (The latter requires a banking license, which the former doesn't.) But there's another reason loan-making is at the center of traditional microfinance: the people who started this work more than 30 years ago assumed that since mainstream banks didn't lend to poor people, there was a massive, untapped demand for borrowing.

The thing is, no one ever really asked poor people if business loans were the most important financial product they were missing. That's now starting to change, thanks in part to a recent wave of academic research. As it turns out, poor people lead complicated financial lives and they need money for all sorts of things.

Thursday I was at this conference, where Dean Karlan of Yale talked about research he's been doing with Jonathan Zinman of Dartmouth. In interviews with microfinance recipients in the Philippines, the pair discovered that some 46% of borrowers used a decent chunk of their business loan to pay down other debt and about 28% spent part of the money on a big household purchase—even though fewer than 4% of people in either category ever admitted this to their bank. (Disclosure: I was at this conference because I am now doing work for the Financial Access Initiative, which co-sponsored the event.)

This sort of finding—which quantifies what many practitioners have long suspected was the case—is having an impact on how microfinanciers go about their business. "We're an industry built on assumptions, and we've gotten to a point where we have to test those," said Carlos Danel, a co-founder of the Mexican microfinance behemoth Banco Compartamos. "Research is showing us that we actually don't know a lot about the customers we serve." That's why Compartamos is conducting a 4-year study with Karlan and other researchers to find out how customers use microfinance products, and how those products do—or don't—change their lives.

As Danel put it, microfinance is an industry that was born out of supply—one that came from people thinking about what organizations were capable of doing. Now, he said, the challenge is to figure out what poor people around the world actually need.


@inboulder: The story is that practitioners (not just researchers) are increasingly interested in being able to more deeply understand what services and features clients need– and then doing something about it.

Posted by BarbaraKiviat | Report as abusive