Good afternoon. I'm in the microfinance sector since 1994 and I agree that the hype over microfinance is far above evidence. Agree also that financial inclusion for the sake of financial inclusion is maybe not the first source of happiness at the BoP.
Let's not forget that microfinance "took off" at a moment where there was a lot of despair with traditional development projects fully financed by donor money and with no sustainability strategy in sight. Today, we have sustainable MFIs that manage to reach quite remote places even if rural areas remain underserved. So to remain positive I would consider the following:
First, the cooperative model should be revamped again. It's true that the cooperative model was depreciated during the 70, 80 and 90's mainly due to strong political interference. But a coop is probably the easiest way to take people out of informality. A Coop is a legally recognized body, it has some equity (not much but the purpose of equity is here more to measure the commitment of the members towards the coop) and, because of these 2 elements, you can more easily access a bank loan and finance maybe equipment or machinery. So MFIs should better consider cooperatives as a potential client (some do but most don't).
Second, especially in Africa, you have hardly any SMEs as we find them in Europe. And if we agree that not every body is an entrepreneur than you need SMEs to create jobs for those who are not. And when you have one, it will mostly be either a hotel/restaurant or a construction company. And if this SME is established as Limited Liability Company (SARL in French) you will very rarely find founding shareholders that are not family related because trust is missing. So a MFI taking a (even a minority) stake in a SME could help build this trust between non-kin founding shareholders. Off course it is risky but can be manageable if you keep the size of this SME portfolio below a safe limit.
But to engage in these 2 directions, you need sound governance.
One could say, but this is the market segment for impact finance. Unfortunately, despite the hype :), most of impact financers cannot invest below a USD 500K ticket if they want to be break even. I worked for one and believe me, it's a real issue, mainly because the due diligence is cumbersome.
So there is a missing middle where the social mission of microfinance could drag the industry, at least to some extent.
Sincerely, Francois Rossier
www.senbumo.com | www.socoop.coop
Getaneh
Good post and glad I came across it just now. You were right to point out that there is way too much waffle written about the power of microcredit, and too many attempts to hide the problems of microcredit by attempting to bury the concept within the silly financial inclusion trope.
Microcredit analysts and academics supporters all refuse to confront the issue of the longer run opportunity cost of microcredit because it represents a negative impact, so better not go there if you want to come up with the required positive result. The (in)famous 6 RCTs all did this to varying degrees, of course, as my blog posting you referred to pointed out. Carefully ignoring a whole load of the most important downsides in order to get to the very weakly 'microcredit is sort of a little positive' result they came to, which I guess was a contractual requirement insisted upon by those that funded these RCTs, is what happens a lot these days, unfortunately.
In terms of Odell's work in 2015 (and in 2010) undertaken on behalf of the Grameen Foundation USA it is, sadly, nothing more than a veritable masterpiece in this unethical Soviet-style technique. So she purports to neutrally summarise the research on the impact of microcredit, and centrally claims that there is no evidence of any negative impact arising from microcredit. But by refusing to engage with, or even cite one single article, from the now very extensive literature contending just such an impact, the general reader is left in some ign! orance and confusion, as presumably intended, as to exactly what has been claimed by which critics and on what basis. Phew, we can carry on believin' folks........
Interestingly, this 'looking the other way' approach to the downsides to microcredit continues in spite of much interesting work of late in mainstream neoclassical economics confirming, yet again (see earlier excellent work by people like Ross Levine), that the depth and structure of the financial intermediation system is quite paramount to growth, development and long-term poverty reduction, and that if your chosen financial intermediation structure progressively supports the least productive projects - say, for arguments sake, informal micro enterprises and self-employment ventures - you essentially destroy the foundations required for sustainable and equitable local economic development. I just finished reading some very interesting papers touching on this released by - of all people - the Bank for International Settlements in Basel and they all have profoundly negative implications for the microcredit/financial inclusion project. One by Stephen Cecchetti and Enisse Kharroubi in 2015 is very interesting, arguing that a financial system that allocates scarce capital into unproductive ventures - they talk about construction, but the concept extends further - this will seriously undermine the economy (its here to download)
Another one by a group of authors out in late 2015 argues that the evidence shows that financial crises destroy e! ven more of the economic structure - think microcredit crises here, and you get the picture. This article is here;
These papers, and others by the same team of authors, all highlight how long-term growth and poverty reduction is brought about by consistent patient investment in the most productive enterprises, and NOT by increasingly investing in the least productive enterprises (or, even worse, consumption spending). They use data from the developed economies, sure. But their argument also provides us with an interesting explanatory framework that we can use to begin to understand why we find that when microcredit has reached critical mass - Bangladesh, Bolivia, Bosnia, Cambodia, Peru, South Africa, Nicaragua, Morocco, Andhra Pradesh in India etc - it has actually destroyed the local economic fabric far more than it has improved it, which is why no-one can find any genuine data to confirm microcredit has had an overall positive impact. In spite of some positive impacts, therefore, and as I am hearing a lot in the course of my current assignment on local finance for one of the international development agencies, microcredit can be most accurately summed up as the programmed but unintentional destruction of the local economic and social base.
Milford Bateman
Francois ROSSIER | Director
M: francois.rossier@senbumo.com
T: +41 (0)78 697 44 82
www.senbumo.com
Posted by: SENBUMO <francois.rossier@senbumo.com>
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