microfinance

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.

What goes up, as the saying goes, must come down, and for all the splash that the microcredit movement has made in the past decade, it seems that the belief that small loans will provide a pathway out of poverty is revealing some fissures.

A recent Times of London article (World poverty guru "fails" to spread wealth) brought attention to the questions surrounding the movement to which Muhammad Yunus helped to bring awareness.  The article cited a recent study conducted by Dean Karlan and Jonathan Zinman in the Philippines, where they discovered that microcredit recipients did not fare better than those not receiving loans.

That's not to say that the advent of microlending has not been a vital and necessary innovation.  But it isn't a panacea, and more voices have arisen to ask: what about providing the poor the financial services to which they so often lack access; most notably, a safe place to deposit and save their money?

A quick note on an interesting article in this week's Time: Barbara Kiviat writes about the emergence in the field of microfinance for the need for a safe place to save and deposit money, which is something that we at the Global Assets Project have been talking about for a while.

While microcredit was at the root of the microfinance movement's beginnings, what's becoming clear is that those who take out small loans also desire a place to deposit and save their money.  Indonesia's Bank Rakyat, she notes, has ten savers for every one borrower, and their borrowers use the loans for household needs about 30% of the time.  And they save in the form of assets (such as livestock and jewelry), requiring them to pay a fee to pawn those assets in times of need.

The recipients for this year Medal of Freedom have been announced and include Nobel prize winner, Muhammed Yunus. When Yunus (then the chair of the rural economics program at the University of Chittagong) launched the Grameen Bank as a pilot research project in 1976 in a post-war Bangladesh, his motive was to extend credit and foster micro-entrepreneurship amongst the poorest that were largely ignored by the formal Banking sector. Since then, Grameen has become synonymous with micro-credit and has inspired, along with other pioneers such as SEWA and ACCION, many other lenders to mushroom across the world. However, its own evolution as an organization reflects advancements in the microfinance field as a whole, which is increasingly shifting its focus from credit to savings.

On April 29^th, the Global Assets Project hosted an event to launch its newest policy brief, "Savings-Linked Conditional Cash Transfers: A New Policy Approach to Global Poverty Reduction," at the New America Foundation. By request, we have created a 10 minute Podcast summarizing the paper and key points from the event, for those unable to attend the two-hour event or watch or listen to it in its entirety on our website or YouTube. 

Just days before the New America Foundation released its Global Assets Project policy brief, "Savings-Linked Conditional Cash Transfers: A New Approach to Global Poverty Reduction," the Colombian announces a major effort to do just that - link the beneficiaries of its nationwide CCT program with savings accounts.  This major policy development in Colombia has emerged in part as a result of the efforts of the policy brief's co-author Yves Moury (Executive Director of Fundación Capital), and his project, Proyecto Capital. Our brief, released today, advocates using the (typically) massive CCT infrastructure to formally bank the largely unbanked poor populations in developing countries. But we also advocate going one step further: use the power of CCTs to encourage saving and asset accumulation of the poor.

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.

Dubbed "the Anti-Bono" by the New York Times, Zambian-born Dambisa Moyo is generating buzz.  In her recently published book Dead Aid, she maintains that foreign aid is largely holding Africa back.  And despite the fact that billions of dollars of aid have been poured into the continent, poverty rates continue to escalate.  In an interview with the New York Times Magazine:

"You get the corruption - historically, leaders have stolen the money without penalty - and you get the dependency, which kills entrepreneurship. You also disenfranchise African citizens, because the government is beholden to foreign donors and not accountable to its people."

While it doesn't take a rocket scientist to figure out that foreign assistance has been problematic in reducing poverty rates, Moyo's alternatives caught my eye, among which are: bonds, dealing more with China, and cutting all aid in the next five years (arguably her most controversial proposal), more microfinance, and remittances.

E-mail, the internet, mobile phones, and microfinance.  At first glance, you might think I'm playing Sesame Street's "Three of these things belong together" game.  But I assure you that, despite my love for the Cookie Monster, I'm not.  It turns out that these four innovations, along with 26 others, have been named the Top 30 Innovations of the Last 30 Years by PBS's Nightly Business Report.

To some, lumping microfinance-- a relatively new concept to much of the world's inhabitants, especially after Muhammed Yunus and his Grameen Bank won the Nobel Peace Prize in 2006-- with such staples of our modern life might seem puzzling.