Microfinance's Sub-prime Moment

The debate over whether microfinance does more harm than good has been raging long before Muhammad Yunus and Grameen Bank were awarded the Nobel Peace Prize in 2006 for their work extending micro-loans to the poor of Bangladesh. However, rather than settling the question, the award seems only to have increased skepticism in some that, given the opportunity, the poor are capable of managing their own financial affairs, while others scream more vehemently that microfinance institutions (MFIs) are nothing more than “blood sucking leaches” burdening the poor with inappropriate amounts of debt.

Then came the IPO for SKS Microfinance Ltd., India’s largest micro-lender by assets, that reaped millions for the company’s founder and early stage institutional investors. Some heralded the event as “an important step towards fully engaging mainstream capital markets in the fight against poverty,” while others, including Professor Yunus, decried it as profiting off the poor. Now there is a financial crisis in Andhra Pradesh, one of the largest micro-lending markets in the world which is being compared to the sub-prime crisis in the U.S. and is raising concerns for the survival of microfinance as a tool for alleviating poverty.

Last week the Center for Global Development hosted a timely panel discussion addressing the crisis and its implications for the global microfinance community. (You can view this discussion by clicking on the link.) Swaminathan Aiyar, a prominent Indian journalist and research fellow at the Cato Institute, made a compelling case for the underlying local political issues at the root of the crisis. He explained that in lending to the poor in India, “default is built into the system.” It is essentially a part of the political system politician use to get elected. He was not at all surprised by the crisis. “When you lend to people who are insolvent,” he claimed, “they will default no matter what interest rate they are charged.”

With the government of Andhra Pradesh giving the poor permission not to repay their loans to private sector MFIs, large scale defaults are almost certain. This will have a devastating effect on micro-lenders, many of which are likely to go under and default on their loans from Indian commercial banks. This has led a former governor of the Reserve Bank of India to call for a study of commercial bank lending to MFIs that are “profit seeking.”

In my opinion the “profit seeking” MFIs are at the heart of the problem in Andhra Pradesh and microfinance in general. As one particularly vehement, anti-microfinance blogger has pointed out “SKS Micro-Finance has become a proxy, hammer it, hammer the whole industry.” While it may be unfair to single out SKS in this way, its early success prompted a rush of for-profit micro-lenders into Andhra Pradesh leading to poor lending practices and inevitable abuses similar to what was seen in the sub-prime mortgage lending in the U.S.

As I argued in an earlier post, greed is not good for microfinance. When MFIs are under pressure to provide market rates of return to investors, loan volume and debt collection will trump collaborative efforts to assist the poor out of poverty. The participants in the Center for Global Development discussion had many good recommendations for improving the way microfinance works to help the poor including: greater consumer protection, better corporate governance, encouraging savings, establishing credit bureaus and avoiding over lending. All good suggestions but difficult to implement the face of profit maximization. Microfinance belongs in the realm of sustainable social enterprise where issues like consumer protection, savings, appropriate lending policies and transparency do not conflict with shareholder needs.

Community Development Banker Corps

It’s been quite a while since my last post. After a good run I have taken some time out to think about why I write this blog and where I want to go with it. This is partly the result of attending two excellent conferences in October and becoming somewhat overwhelmed with meeting so many fantastic people and learning so much of what is going on in the poverty alleviation field.

As readers of this blog will remember, I attended the SOCAP10 conference in early October and submitted an entry to the SOCAP Challenge which, thanks to the votes of many readers, was selected as one of the winning entries and posted on Triple Pundit. My idea for starting a social business focused on training young graduates to work in low income communities as Community Development Bankers has generated a great deal of interest and now I am working on moving the concept forward.

In mid-October I attended another conference, the Opportunity Collaboration, held in Ixtapa, Mexico. About 300 social entrepreneurs, funders and non-profit executives gathered to share ideas, learn from one another and create alliances and synergies in their efforts to alleviate global poverty. For one so new to the cause it was an exciting and humbling learning experience. Again, lots of positive feedback on what I am now calling the Community Development Banker Corps (CDBC).

So, how to move the CDBC from concept to reality and what of “Banking on the Poor?” Clearly, a business plan is needed for the CDBC and I have begun working on that. I am also looking for collaborators and fellowship and social business plan contest opportunities. I first articulated the idea for the CDBC in my post below "$120 Billion Opportunity for the Poor." Essentially the idea is to create a social business, modeled on Teach for America, to train college graduates to work as Community Development Bankers in low-income communities. I believe the biggest constrain facing anti-poverty efforts is not a lack of money but a lack of well trained, motivated people working with the poor to help them raise themselves out of poverty.

“Banking on the Poor” has morphed over the past year (almost) that I have been writing it from an account of my experience in Indonesia working with Grameen Foundation’s “Bankers without Borders” (see a YouTube clip here which features the work done by this organization including my work with PT Ruma), to a forum discussing issues affecting the poor. While I will continue to use the blog to speak out on poverty related issues in general and articulate ideas around financial access for the poor, I will also use it to promote the development of the Community Development Banker Corps.