microcredit

Applying Counterpressure to the Microfinance Backlash: FP Op-ED

Jamie Zimmerman — Wed, 28 Oct 2009 17:43:00 -0400

I've been arguing for awhile now that microcredit has been overly hyped, even dangerously so (i.e., credit will end poverty). But now media (see The Times, The Boston Globe, Foreign Policy, articles, for examples) are beginning a backlash against microcredit (likely caused in large part by failed expectations caused by said hype) that I nonetheless find equally, if not more, disturbing (i.e., microfinance isn't working). I've never thought of credit as a panacea, but I do believe financial inclusion and access to an array of asset building financial services are essential if the poor are ever to move out of poverty.

So, I'm pleased that my colleague, Shweta Banerjee, just published an piece in Foreign Policy magazine - How Microfinance Can Change the Lives of Millions - that applies some much need counter pressure to the new naysayers of microfinance, by focusing on what is working, what might work, and why we should continue our efforts to innovate before falling back into old (and bad) development policies and practices.

In particular, the piece highlights specific programs and experiments aimed at providing the very poor with effective financial services, including WOCCUs matchsavings.org, Oxfam's Savings for Change and the Center for Social Development's AssetsAfrica pilot study, among others.

I'm interested in hearing others' opinions on which microfinance programs and services are most innovative and also worthy of a spotlight as this debate livens up. Send along your thoughts!

*******PS. I received this note from a colleague at WOCCU, with a slight correction to the description of matchsavings.org in the FP article:

"There isn't actually a physical credit union in these people's villages (a field officer from a nearby branch office travels to outlying communities 1x/month), and the reason they didn't join wasn't so much because of the membership fee. They can actually save over time to achieve full membership, and MatchSavings.org participants become full members after 2 months of saving. Some participants I spoke with didn't join existing credit union groups in their communities because they felt the savings requirement (set by the group itself) was too high for them or they didn't feel ready to join. The MatchSavings.org program, though it required a higher monthly deposit, incentivized people with the 100% match. And when they receive their match after 6 months, the group members then set their own savings goal (the same for all members) and continue on the monthly deposit schedule in their community, with access to the full range of credit union services."

To learn more about WOCCUs matchsavings.org and other matched savings programs in developing countries: http://www.newamerica.net/publications/policy/promoting_savings_tool_international_development

Weighing in on Microfinance and the Financial Crisis

Jamie Zimmerman — Mon, 23 Mar 2009 20:24:00 -0400

Signs point to toughening times for the microfinance industry. A recent article from the Economist has echoed my concerns that selling microcredit (as a concept or a product) will grow increasingly difficult as the global economy stumbles (or crashes and burns) on the heels of a debt-led recession in the United States. Not only in the concept politically less appetizing than it was back when Muhammad Yunus won the Nobel Peace Prize in 2006, the capital fueling the industry is drying up. The similarities and differences between subprime lending that fueled the US recession and the "sub, sub, subprime" lending happening in developing countries through microfinance institutions have been debated and analyzed for over a year now. But only recently has the engine of seemingly-endless capital to MFIs around the world starting slowing, sputtering to slow chug in some instances.

The Economist article argues that the microfinance industry is more insulated from the crisis than many of my colleagues working in the sector would currently state. Just because the Grameen Bank has not faltered in this financial crisis doesn't equate to an entirely healthy sector. Moreover, the decrease in capital, and the resulting liquidity constraints and challenges institutions will face, does not represent the variety of challenges that MFIs, or the microfinance sector, could and will likely face as a result of this crisis. While I commend the Economist for putting on spotlight on this particular problem, the article fails to provide readers with the bigger picture.

Fortunately, CGAP just released last week a more thorough analysis of the potential impacts of the crisis on microfinance. The Focus Note reviews not only the challenges of the institutions, but also those of the clients that frequent these institutions to gain capital for their micro-business or, in many cases, borrow to smooth consumption over time. Essentially, the Note paints a relatively more nuanced picture of the crisis on the microfinance industry and tempers its optimism that the industry is "insulated from the problems of the global economy" (as is speculated in the Economist). On the other hand, CGAP does share my view that this crisis will bring opportunities that could result in a better functioning industry, with potentially better outcomes for the poor.

In my opening remarks at the March 16 USAID panel on Microfinance and the Financial Crisis, I also outlined a number of challenges I either currently see or envision for the industry as the global crisis unfolds, many of which are reflected to some extent in the articles mentioned above, including decreased capital, weakening consumer confidence, increased pressure for tougher regulation, etc.. However, I foresee as serious opportunities for the industry. (Call me hopelessly optimistic, but I prefer to concentrate on opportunities whenever possible, particularly in troubling times.)

First, a debt-led global recession is indeed spurring some to cast a critical eye on debt-led poverty reduction like micro-credit. While this may be understandably worrisome for particular institutions, it's a huge opportunity for the microfinance field in general. The backlash against credit and subprime lending could very well lend itself to a microfinance industry whose health is dependent on a more diverse and balanced portfolio, particularly with an emphasis on savings. In fact, deposit-taking MFIs (who are less dependent on capital investments) are indeed the very institutions most insulated from the crisis so far. Next, the spotlight on savings is not limited to acknowledging the need for deposit-taking for an institutions fiscal health. The microfinance field as a whole is now paying long overdue attention to the other critical financial needs of the poor, namely access to effective and safe savings services. Finally, there is a growing recognition that all people, chief among them the poor and the vulnerable, need to save and create a safety net against economic shocks, rather than relying on credit alone. This is a lesson the US learned too late, but for the microfinance field, it's a very real opportunity to look at economic opportunity and resiliency in a whole new way.

(Transcripts and materials from the March 16 event, including perspectives from other panelists on this issue, can be found on the Microlinks site.)

Last Day to Vote: Building Assets into a 21st Century Foreign Assistance Framework

Jamie Zimmerman — Mon, 12 Jan 2009 19:48:00 -0500

Its last day of the Better World Campaign's On Day One project and there is still time to vote for the idea you think President-Elect Barak Obama should prioritize on the first day of the next administration for improving the United State's image in the world. When blogger Mark Goldberg of the UN Foundation came to New America in the spring of 2008 soliciting ideas for policy proposals, I thought it was little more than a fun experiment in the use of new media to express opinions. I had no idea the Campaign would face the ideas off against each other in November, narrowing 81 selected ideas down to 9 for '09 (9 big ideas for the incoming president to consider upon taking office). Or that my idea to reform foreign assistance (to focus the allocation of funds more squarely on the social and economic empowerment of poor people) would win the Global Poverty category. Or that there would be a Round 2 to the contest in which the 9 for '09 would face off yet again.

I don't expect to win the contest -- my idea is up against some even more lofty and innovative competitors. On the other hand, that this idea - that funds should be more smartly allocated to providing opportunities for asset building and wealth creating empowerment for the poor, rather than wasted and corrupted on ineffectual top-down projects - has resonated with voters in this first place (and making a fair showing at that), should be utterly encouraging for those of us working to elevate asset-building microfinance and social policies around the globe.

Even in a world of economic uncertainty, there is a still a belief that given the right tools, the poor and traditionally disenfranchised can stake their own claim it the dream of a better future. The microcredit movement has helped shape this confidence in the power of individuals to lift themselves out of poverty. Yet, the tools people need to take ownership of their lives extend well beyond microcredit, including (but certainly not limited to) an identity that will allow them access to the formal economy; property rights so that they can take ownership in their land, home, or business; access to an array of financial services such as savings accounts allow them to save for future investments in education, a business or old age and insurance to further protect them from the vulnerability of any number of shocks, and; access to policies and programs that facilitate this process, such as child development accounts, conditional cash transfers, or other microfinance-plus initiatives.

Reforming the foreign assistance framework to redirect resources toward bottom-up programs is a fairly specific policy idea, yet it finds itself competing with much grander goals. In this final day of the contest, I thank voters for their encouraging show of interest in telling President Obama to break the wasteful status quo in development assistance spending and, instead, concentrate on something with potentially a much greater return on investment - the empowerment of people.

The Next Big Thing in Microfinance: Savings

Jamie Zimmerman — Wed, 06 Aug 2008 16:18:00 -0400

Last month, I argued that USAID inaptly named a three-day virtual conference on savings as "The Forgotten Half of Microfinance." Instead, I posited:

"As someone working on asset building and financial inclusion for the poor (and/or their cross-fertilization in the development field), I would contend that the hosts got it wrong when chose the title for this event. Indeed, "savings" is not "forgotten" at all. Though perhaps traditionally underemphasized, I would argue that, on the contrary, savings is the in fact the "next big thing" in financial interventions."

Looks like I got this one right.

Probably to the surprise of the organizers, the USAID/Microlinks Speaker's Corner on savings was overwhelmingly active, with 324 participants from 53 countries. For those who didn't attend this virtual, email-based conversation, you missed out on the experience of 72 full hours of non-stop emails (we're talking hundreds) from both the novice and the seasoned, from non-profit, public and private sectors, all eager share their many ideas and experiences and learn from others how to expand opportunities for savings for the poor, marginalized and excluded around the globe. It was an inspiring and educational experience. You can access the entire forum at www.microlinks.org/sc/savings. Or you can download the compilation document, which contains all postings from the forum. Its 200 pages long.

Not only is savings indeed not forgotten, but a recent article in the Wall Street Journal confirms my contention this is in fact "the next big thing." On July 31, the WSJ published Robert A Guth's piece, "Giving a lot for savings a little," which announced the Bill and Melinda Gates Foundation intention to "donate hundreds of millions over the next few years to programs to spur savings in poor countries." In the article, Bob Christen, Director of the Financial Services for the Poor division of the Foundation, says the foundation intends to invest heavily to get savings back on the world agenda. So, if it's not already there (as I claimed it to be), then it will be soon-and in a big way.

The Global Assets Project is working inform this new movement towards savings and financial inclusion by promoting savings products, policies and programs that facilitate asset building and wealth creation for these populations. Indeed, the WSJ article was printed one day after the Global Asset Project's launch of its newest report: Global Savings, Assets and Financial Inclusion: Lessons, Challenges and Directions. The report addresses emerging global trends, opportunities and collaborations across the fields of asset building, microfinance, policy and financial education. It describes lessons, challenges and opportunities for thinking about how the poor, in developed and developing countries, can build their assets and wealth. Finally, it includes possible next steps that the diverse range of actors working within these fields should take to move this emerging body of work forward.

As this next big thing grows ever bigger, my hope is that the insights, challenges and recommendations in this report can help inform those policymakers, funders and practitioners in the drivers seat.

The Debate over Negative Returns on Savings

Jamie Zimmerman — Mon, 23 Jun 2008 19:36:00 -0400

Our newly released report on thrift in the United States has gotten some good play in the media but has also sparked internal and external debate, domestically and internationally, on the importance of savings and thrift relative to credit and consumption. The report advocates a culture of thrift and a renewed focus on savings (as opposed to our current focus on credit and culture of indebtedness). As a team, the Asset Building program promotes these goals and others heavily in our domestic work as well as internationally through the Global Assets Project.

In recent weeks we've received a lot of feedback (from within our organization and among practitioners and policymakers in microfinance and related fields) wondering if, in a time of higher inflation, we're advocating irrational behavior among our target populations. For instance, Sherle Schwenninger, the director of the Global Economic Growth program here at New America, challenged the asset building team's focus on pushing people to save when typical interest rates on savings accounts are lower than the rate of inflation. That basically means that people are losing money on their savings, instead of gaining interest over the long run on their deferred consumption. On popular microfinance listservs like MicroFinancePractice and DevFinance, the report sparked similar debates over encouraging thrift in developing or emerging economies, which are typically less stable than advanced economies. In India, many savers are earning 1% interest or less on their savings in an 8% inflation climate. In Zimbabwe's hyper-inflation, money not used today is tomorrow's fire kindling. But that is an extreme example. Essentially, the argument is that, in the absence of better products, we are irrationally encouraging people to save up, but to nothing.

Or so it seems, if you don't look at the bigger picture:

Yes, the poor, low and moderate income populations, particularly those traditionally excluded from low-cost, appropriate and mainstream financial services do indeed need and deserve access to more attractive savings and investment options, one's that do not deteriorate their financial assets, but protect and build them.
However, in the U.S. but most especially in many parts of the developing world, the poor lack access to a safe place to put away their savings in the first place. Experience in the micro-savings field has shown that the poor are quite often willing to pay a fee to have someone or some institution safely hold their savings, as it's a much safer prospect than stashing the money under the mattress. They are much less concerned with making a return on their savings than the prospect of loss or mismanagement that comes with not having it safely locked away until needed. Where these options don't exist, you face a potentially tumultuous and threatening environment where even small lump sums are not safe. This isn't just a problem in the developing world. Here in the United States, unbanked Latino immigrants are increasingly targeted for robbery, as because of their undocumented status, they are often paid in cash and lack access to a bank account to store their money.
And for those among this population who do have access to basic savings products, the fact of the matter is that the vast majority are not saving with the intent to make a return on those savings. They need lump sums to pay for certain expenditures like marriage, education, property and even funerals; they need a nest egg to protect them against economic and environmental shocks to which they are disproportionately more vulnerable.

Losing money on savings is very much a bad thing and seems an irrational choice. But then again we must consider all the options from which certain populations get to choose. I mentioned negative return on savings in India, a sad case that turns ever sadder when considering that over 50% of India's population has absolutely no access to formal savings products in the first place, something the government in India is aggressively trying to change.

While designing and offering short and medium-term higher-yield savings products for the poor and underserved around the world is important work and an ultimate goal, it will be of little value until we 1) can provide effective access to banking services and 2) increase understanding of the value of savings and thrift for long-term financial growth and asset building for those populations who have for too-long gone underserved and excluded.

I'm glad that this new report on thrift is forcing us to acknowledge these realities and to think more deeply on how to get people not only into, but benefiting from, formal financial systems.