Saturday, 18 June 2011

Learning about microfinance

I've spent the past couple of days in Groningen, the Netherlands, attending the Second European Research Conference on Microfinance. My PhD student, Badruddozza Mia, has been studying the use of information systems in microfinance (in Bangladesh) for the past 18 months, and as it wasn't a topic I previously knew about I've been on a steep learning curve about microfinance ever since. I'm at the conference because the Dutch government, like the UK government, has a dreadful attitude to people visiting from certain countries, and so Badruddozza couldn't get a visa in time.

As a newbie to the field, I've found it very interesting to hear some of the debates aired at the conference, and to see the breadth of research in the area. Most of the attendees are economists or finance specialists, with a scattering of development studies types and some practitioners; there are only a few people interested in information systems. I've attended talks on whether microfinance (MF) is dead; the history and impact of MF; the role of group/joint lending; inclusive development; MF and entrepreneurship; corporate shared values; and the importance of savings.

Some of the lessons I've learnt about the controversies from a talk by Milford Bateman, author of a book on why microfinance has lost its way (health warning - quite contentious, and not representative of the wider MF community):

  • MF is not the uncontroversial development programme it's often presented as by well-meaning Western NGOs. While its goals are laudable, evidence is fairly weak that it lifts people from poverty. The famed micro-enterprises, that MF is intended to fund as a route out of poverty, are often only based on providing goods & services to poor local economies, which have limited capacity to absorb them.
  • Moreover, MF has a surprising supporter - the neoliberal 'Washington consensus', where it fits well with their individualism and lack of focus on collective action, although they work hard against the subsidy of MF that is a traditional part of the model. Interestingly, the Obama administration (economically largely neoliberal) is currently funding MF in Egypt, although the goal of the demonstrators in Tahrir Square was often for rather higher-paid traditional jobs (often hard to find under the Mubarak regime).
  • Building a wider system of enterprises  is crucial - in the history of countries like Germany and Italy, micro-enterprises were enabled to grow into larger groupings because of strong local support. This needs much more emphasis by MF institutions and NGOs. There are good models of this in Vietnam (used as key example in Oxfam's new campaign GROW), Japan, South Korea and China.
A more mainstream approach was given by David Roodman, whose own book is due soon. He presented three perspectives of development which underlie different attitudes to microfinance:
  1. Development as an escape from poverty - like Bateman, he acknowledged that evidence that this works is not strong.
  2. Development as freedom (from Amartya Sen, not the libertarian or Isaiah Berlin sense of freedom): access to finance creates a greater sense of economic entitlement. It's important to notice that poverty relates not just to low income but also to volatile income, making access to financial services such as savings and insurance especially important for the poor. Stuart Rutherford's work in Bangladesh fits well here.
  3. Development as industry-building and destruction (cf. Schumpeter's creative destruction). The innovative and experimental nature of MF leads to the creation of many new institutions, often large, but also their churn. As Elizabeth Rhyne observes, building the capacity of financial systems is better than substituting for their inadequacies.
Some other lessons from the conference:
  • The crucial importance of savings. Microfinance is often equated to microcredit, but savings are as important as credit for many people.
  • The important role of group lending (lending to individuals but in a group context) - public repayments can significantly reduce default rates.
  • Again, the important of supporting structures (training, local advisors etc). M.P. Vasimalai from DHAN in India put this very well: "Microfinance alone doesn't do magic - the magic has to be done with the support of structures."
  • Interesting classification of enterprises (from Farban & Lessik) which puts micro-entrepreneurs on the middle of a spectrum from subsistence labour to large enterprises. But does MF really support micro-entrepreneurs, or is its focus actually somewhat lower?
  • The important role of P2P MF institutions like as a way of lower transaction costs (though I heard very little about the P2P lenders).
  • The widespread use of the concept of information asymmetry, which Badruddozza had included in his paper, and which underlies the issues of moral hazard and adverse selection much discussed in the recent banking crisis.
Lots more to absorb, and links to ideas related to our presentation. But it's undoubtedly an interesting area.

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