Senior Associate Dean Bhaskar Chakravorti interviews Kim Wilson, Lecturer in International Business and Senior Fellow for the Center for Emerging Market Enterprises
Bhaskar Chakravorti: We are having this conversation while the so-called Arab Spring is turning to an Arab Fall. So much of the impetus behind the upheaval in North Africa came from large portions of the population feeling politically and financially excluded. This is not unusual in a developing economy – however, there are innovations that are helping promote inclusion and contributing to a fundamental transformation in income and power distribution and, thereby, preventing an explosive revolution. Microfinance is one such innovation that has taken root in many parts of the developing world. But then, its success in some parts of the world, most memorably in Andhra Pradesh in India, may also have become one of its principal weaknesses leading to unexpected consequences and a new source of tension. This begs the question: Does microfinance forestall political upheavals, or does it cause them? What do you think?
Kim Wilson: I think a little bit of both, and it can correlate to both. Let me give you a few examples.
In Nicaragua a couple of years ago, there was a movement afoot called “No Pago,” which means I Don’t Pay. This was started by a group of low-income ranchers and farmers in the north of the country who were dissatisfied with the very structured loan repayments, the debt harassment policies, and the interest rates that some well-meaning microfinance institutions were requiring as part of their loan packages. In some cases, they were actually fire-hosing some of this debt on these people.
Having been to that area, I could see and understand what that felt like, because some people are located far out in the countryside. To have somebody come on a bicycle or a motorcycle to visit you is a big deal, and you treat them with hospitality and respect, and you invite them into your home, even if you just have beans and rice to feed them. And then they offer you money, and you take it.
This same person is somewhat stunned a few months later, when another person comes to visit you and says, “Where’s the money that I gave you?” And you’re a bit confused. Was that a gift? Is that a loan? And the second and third time it happens, you start to become wary, and your neighbors start to become wary, and you get a little angry, and a movement begins to grow.
And so this No Pago movement blossomed. The head of state, Daniel Ortega, jumped on board, and said, “This is absolutely right. You shouldn’t pay your loans back. They’re usurious, and we have to teach these microfinance institutions (MFIs) and these banks a lesson.” It became a political statement. He was rallying behind the people. The people didn’t want to pay, and he told them that they shouldn’t pay.
Well, you can imagine what happened. There was a closure of one bank that really had been a very solid bank up until that time. It had a negative ripple throughout that financial system, so that banks that could stop lending to that market segment did because they were terrified of nonpayment. The more stable banks already had a very diversified portfolio, with better-off borrowers, and higher-level savers. It sent a ringing message throughout the countryside: “MFIs, you have to get your act together. You have been over-stepping your bounds.” On the other hand, a solid financial system was fractured and weakened out of political interest.
So did microfinance forestall this? Certainly not. Did it cause this political problem? Well, it exacerbated an aggressive platform that that political party already had. So I’d say that’s the first example.
BC: And the second example?
KW: The second example is a famous one now. It’s the story of Andhra Pradesh, and it’s very complicated. The background story is that there were self-help groups promoted by the government in this particular state in India. These are groups of 20 to 30 women, and they get together, they save, and they can borrow from the government, or the local banks.
They also get benefits from the government through these groups. The benefits could be food, or 100 days of work, or other benefits that come from that government. They’re channeled through this particular system. And, as you can imagine, it gets political, by virtue of how the different channels are structured.
So along comes a group of financial institutions. Again, I believe well-meaning; they were very well known and respected. They included Spandana, SHARE, and SKS. And they’re lending to the same group of people that the government is lending to. It looks like there’s saturation in that market, perhaps too much credit. Every single day of the week a villager could borrow from a new source. Over-indebtedness ensued.
The credit bureau’s method of reviewing individual clients wasn’t that strong. There was a big incentive to push credit on these entrepreneurs, and that area simply could not absorb all that debt.
Simultaneously, and one really can’t prove if it’s a cause, there was a spate of suicides in the same area. To give a bit of background on that: suicide among Indian farmers does happen. It happens when the cotton crops fail. It happens because of a variety of kinds of debt accumulate, and not necessarily this kind of debt. So it’s not the first time there have been suicides in India among farming women and men. In this particular case, the press tied it to the repayment of these loans, and it could tragically be true. It’s hard to know.
So what happened is the federal and state governments stepped in and created a body of rules that really shackled these microfinance institutions. Unfortunately, even these heavy-handed government policies – which capped margins, as well as interest rates – it was a bit too late, because there was a no payment movement underfoot by the people.
SKS, the microfinance institution that had a very high profile and highly controversial IPO, in particular, had problems. It ran a huge reputational risk, meaning that word of mouth traveled very, very quickly in the area: “Don’t pay back. They’re the bad guys.” And that happened in Andhra Pradesh, parts of Karnataka, and even in Tamil Nadu.
And so, again, you see a situation where the government has interests in the outcome that are more than simply a regulatory interest. Did they want these credit institutions simply to go away so their self-help program would be the program of choice for the people? They instituted a variety of other measures. For example, transactions happen through the local Gram Panchayat, or local self-government. They’re not really set up for loan payment or loan disbursal. They’re set up for a whole different kind of functionality.
So in this particular case, again I would say microfinance certainly did not forestall the upheavals. It might have aggravated political action of sorts, but it was very much involved.
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- Is there such a thing as too much microfinance?
BC: So if I understand you right, at least one major problem is the government, and the government actually having a competing service. But then looking at it at the other end of the spectrum, could one of the problems be the proliferation of too many private enterprises?
Going back to Andhra Pradesh, every day there would be a new microfinance institution knocking on a typical farmer’s door. And the farmer says, “Hey, why not? This guy’s offering me a loan. I’ll take this one.” And maybe they’re taking a loan to pay back the previous MFI.
KW: True. And that’s also true in Nicaragua, very similar. You had a lot of different suppliers, not just the government. You had private suppliers -- NGOs and banks – all competing for the same customer. And, as you know, there’s only so much debt that one could be asked to be repaid.
BC: Maybe it’s a problem of there being too much competition in this market.
KW: Yes. Because, interestingly, we’re not seeing competition in microfinance create innovation or drive prices down. There tends to be collusion, from what I’ve seen. I’m not saying it’s active, but unwitting collusion about the price of money that they’re offering people. It doesn’t seem like people are undercutting at all.
And even in the case of Bolivia, where supposedly the interest rates dropped because there was competition, it was not driven by competition. The government actually had to step in. So it looks like a nice, pretty case on the outside.
And the other problem is it that competition doesn’t seem to drive innovation in this area. If you look at the loans in Andhra Pradesh, they were really similar. Regular repayments, a certain monthly term, no variations on the theme. There were no interesting savings products that were offered alongside the basics.
BC: Think about the underlying game theory of this. This is a classic problem of incentives and moral hazard. If you think about it from the farmer’s perspective, and every day there’s a new MFI knocking on my door and offering me a loan, what incentive do I have to be responsible? If I don’t pay back this loan, will this MFI come back and take away my house? If no one is paying back, then this whole notion of mutual policing goes away. So I have a moral hazard problem.
On the side of the MFI, they have these agents, who are just motivated to lend money. The number of clients you rack up is your definition of victory. As opposed to your repayment rate.
KW: And the incentive plans reflect exactly that. They reflect new loans issued, portfolio under management. And only sometimes do they reflect on the quality of the portfolio. If you follow loan officers around, which I have, you see that it’s a thankless, tough job. It’s not this wonderful world of microfinance where you’re helping the poor bootstrap themselves out of poverty. You’re staying in the country, far from your family. You’re living in a group in little huts just to sleep. And then you go out the next day on your bicycle, and you’ve got X number of groups you have to convince to borrow from you. It’s a very, very difficult job. It’s not that high-paying at all.
And there’s another element to being a loan officer, which is a dignity aspect. People want to work for a “real bank,” not necessarily an MFI. So you’re not necessarily attracting college graduates into these kinds of jobs. You’re attracting people who really need a job. In order to do their job well, they’re going to look exactly at their financial incentives, and not necessarily get socially creative about it. So I think a lot of these factors contribute.
I tend to agree with you that competition hasn’t necessarily proven to be a great thing. Then what is the role of government? I don’t know. We’re facing that right here in the United States. What’s the responsible role of government?
Have you ever seen a situation where microfinance has forestalled political upheaval?
BC: Yeah. Let’s take the example of Bangladesh. If you take the example of a derivative of microfinance, which is Grameenphone.
KW: Great example.
BC: When Grameenphone started, there was one phone for every 500 Bangladeshis, and now there’s one phone for every three Bangladeshis. And at least in the early stages, this transformation has largely been conducted on the infrastructure created by the microfinance networks. Instead of taking a loan to invest in a cow, or chickens, the asset was the phone. So to the extent that better communications forestalls political upheaval, this potentially leads to more productive political dialogue and political systems.
KW: So much of the Arab Spring was reinforced by better communications. So, the financing of Grameenphone – which happened through Grameen loan – can be seen as stabilizing political upheaval in Bangladesh. But also exacerbating political upheaval, if you look at what’s happening in Tunisia, Egypt, Libya … Now in the Arab Spring, I can’t quite tie together the social networking media and microfinance.
BC: Yeah, it’s hard to tie it together, partly because it’s an apples and oranges comparison. And also if you just think about the demographics, microfinance serves almost 95 percent rural women, right? That’s the classic model. And Arab Spring is urban men. So that’s about as far on the demographic spectrum as you could imagine. The only common theme may be that they all own cell phones.
KW: Right. So maybe women is one of these political stabilizing factors. And the Grameenphone was largely in the hands of women. Although men were using the service, it was mainly the Grameen ladies.
- Microfinance at Fletcher
BC: Let me ask a couple of final questions. One final question is: how does education at Fletcher help you get a better perspective on these issues? Because clearly there’s no clear answer to a question like this, right? All we can hope for is having a way to frame the issues with some thoughtful, perhaps systematic, conceptual approaches to identifying which institutions are more likely to succeed than not. So talk about Fletcher.
KW: I think there’s nothing I’d rather talk about, because this is a subject near and dear to my heart. But I’d like to give another example to bring it home. I was in Brazil recently with a Fletcher alum, and we were working with a bank.
She works at CGAP at the World Bank. We’re working with some of the bankers there, and most all of them had MBAs. It’s a very nice group of people. But they were in shock about the information we were able to get from our interviews with community members, versus what the market research firm was able to get. Part of it was that we opened our eyes, and we immediately saw links. Let me give you the example.
In one of the neighborhoods where we were working, pacification had occurred. This is when the military comes in, says to the drug lords, “You have one week to get out, or we bring in our artillery.” Some of the drug lords leave. Some don’t, and then there’s fighting in the streets until the military wins. Then, very precisely timed, a new cadre of police comes in called the “peace police.” They are not part of the regular police force. They’re young, they’re idealistic, and they’ve been trained by an entity that isn’t the police department. No corruption. It’s people that really want to help. So first there’s the warning, then military intervention, then bring in the peace police to stabilize the community. We were in some of these pacified communities, and my former student was saying that just two years ago, she could only spend two hours a day there because the gunfire was so bad. Now we were walking around in this favela up until 11:30 at night.
What we saw was that everyone we talked to wanted to invest in their home, because now there was stability in the neighborhood. People were squirreling money away. Some were still afraid to use banks, because the banks there are intimidating. Some of them were just hiding it as best they could. Some people were saving or borrowing for home improvement.
But in the space of one day, we were able to make all these tie-ups very, very quickly, and say to the bankers, “Well, follow where pacification is happening, because then you might be able to do regular savings, but also micro-mortgages, and you have a very committed population.”
This was not coming up in any of the market research. And I’m convinced it’s because the broad Fletcher perspective, which looks at peace-building and social issues, and then filters those to be able to say, “What are the business implications of that, and what are people really doing?”
And so that’s why I think it’s a great place to have a business-focused program, surrounded by the issues that can drive business that I think typical business students wouldn’t necessarily have. In fact, I know they don’t have.
- The father of microfinance is...Jonathan Swift?
BC: I do have one final question. In a talk you gave recently at Fletcher, you made the, shall we say, provocative point that it isn’t Muhammad Yunus who’s the father of microfinance, it’s actually Jonathan Swift.
If Jonathan Swift were the father of microfinance, it clearly didn’t take off. Maybe it did, and then it sputtered, and went sideways, and then eventually disappeared. So now you have, a new father of microfinance. Given what we’ve just been talking about, that microfinance could go either way, it could actually cause political upheaval, it could forestall it. It can alleviate poverty, or not. Who knows? There are many different elements that need to come together for good outcomes to happen, but they don’t always. So is it possible that this whole thing eventually sputters, and we go through a downward phase, and we have to wait a hundred years for the next Jonathan Swift or Muhammad Yunus?
KW: That’s a good question. I think the way it will continue is one of two obvious ways. One, it will continue to be propped up, much the way the Grameen Bank has been propped up, or the self-help groups in India have been continued to be propped up. Meaning subsidies. Not subsidies in the hands of the users, necessarily, but subsidy for the infrastructure.
If governments and society feel that it’s important for people to have financial resources that are better than underneath the mattress, we’ll continue to see it subsidized. Though it’s getting a bit of a bad rap now, so some of it may well go away.
The second option is that commercial institutions will continue to see this as a viable market, and that it’s good business to pay attention to this group of people. And this is happening bit by bit. Will commercial banks be the ones to do that? They’re somewhat slow to move. I think after all of these years they would have jumped on the bandwagon more vigorously than they have. There are some exceptions to that, and we study them in class. But I must say that I’m pulling out the exceptions rather than the rule.
I don’t know if it’s going to be such a clear sector, or if it’s going to have to be revived again in 200 years by, you know, the next poet. I don’t really know. But certainly pieces of it will be mainstreamed. But there are so many people who are “financially excluded,” so it’s hard to say that we’ve really made a big dent in the population.