Tuesday, June 30, 2020

Re: [MFP] FaceBook and Microfinance - the parallels

 

Dear Chuck and other current and former colleagues --

this is a healthy and important discussion. Normally I would dive right in, especially since I have been working quite closely with Cambodian MFIs for the past several years. But I also prefer to speak about specifics, referencing real data rather than general observations. I hope that data will come soon.

For now, I would just like to suggest that things are rarely so simple or clear. There are bad apples and good ones and others in between. Some aren't even apples at all, but oranges in disguise. Not all foreign investors act the same, included commercial ones. Some are out for a quick buck, others for a slow one (and hence more keen to look out for long-term sustainability -- which tends to fit well with healthy client relationships). Some take clients relationships and client protection seriously. Others only say they do. Cambodia is full of different actors driven by different goals and doing different things. They influence each other and shape the market in complex ways. The regulator steps in sometimes, but not enough. Self-regulation is a patch, but can bring some useful things - especially if it can foster transparency (as Chuck knows well). Some clients struggle - a lot. Some (too many!) even make unconscionable sacrifices. Still others may do things that seem like dreadful sacrifices from a distance, but aren't all when seen up close.

Cambodia features some of the best client practices anywhere, and also some rather poor ones too. I urge all of you to recognize the complexity and not be led astray by the siren song of simplicity. And if that process of simplification happens to mold especially well onto your favorite philosophical predisposition, I would urge you to question whether your conclusion is guided by the evidence or your evidence by the conclusion... 

Don't take this the wrong way. I love and respect you all. Well, nearly all - you know which list you are on!

Cheers.
Daniel
On Wednesday, July 1, 2020, 12:17:20 AM GMT+2, hugh@vsla.net [MicrofinancePractice] <microfinancepractice@yahoogroups.com> wrote:


 

Thanks Chuck.  No caveats.

 

Hugh

 

From: MicrofinancePractice@yahoogroups.com <MicrofinancePractice@yahoogroups.com>
Sent: 30 June 2020 17:32
To: MFP <microfinancepractice@yahoogroups.com>
Subject: [MFP] FaceBook and Microfinance - the parallels

 

 

I left microfinance 5 years ago, I stopped using Facebook 3 years ago. The parallels between the two led me to the same decision with both.

 

These are the thoughts I had this morning as I was milking my goats, my new occupation, during which I usually enjoy the beautiful morning light and sounds and spend time with my animals. But the discussions of the past few days now force microfinance to percolate in my head even during milking time.

 

Here is my main point: I don't believe microfinance is rotton to the core; I don't believe FaceBook is an entirely evil conspiracy. But business pressures pushed both in the same directions and have created situations in which a large number of people who were formerly enthusiastic supporters have now left and forecast warnings that without external intervention things will do nothing but get worse.

 

The beginnings

At their inception, both were envisioned as innovative ways to reach the masses and provide them with services they would value; both told us that the services were very affordable compared to the alternatives, both told us that their mission was to create a path to viability, but they didn't say anything about plans to get ridiculous rich. The creation of FaceBook may have been motivated primarily by greed, but microfinance was absolutely never envisioned as something that would be lucrative. There was little hope of even covering expenses. We didn't measure ROE, we measured what percentage of our expenses were actually paid by income and were proud when we would be over 50%.

 

In their early days, both attracted smart, dedicated people who were drawn by the exciting idea of helping create something that had never been done and that could "change the world." Most chose to take salaries below what their market potential was, because they considered this a noble pursuit.

 

The transition

Both ended up reaching much higher scale than imagined. They both drew more public attention and they both drew in more professionals. The new wave of people came for a blend of motivations, and the clarity of the original vision began to blur.

 

With growth, management in both had to figure out how to make the numbers work. Scale was increasing, but expenses were increasing faster than income. Both went out in search of MBA-types to bring in and create solutions. Microfinance also invested in developing business skills internally, such as was done with my Microfin software and the 3,200 microfinance professionals that attended my 126 Business Planning courses from 1997 until 2013.

 

Both FaceBook and microfinance decided that increasing income was far easier than controlling expenses. FaceBook went big into advertisements and developed systems to spy on everything we did when inside FaceBook and even when not. And we users were for the most part unaware at the beginning. Microfinance decided hiding the true price was a no-brainer. In most countries, there were no rules against hiding the price, so true prices escalated while not appearing to do so. It got so confusing that even people inside the industry did not know what prices were truly being charged, or which MFIs in a market were less expensive.

 

FaceBook went from a being a financial puzzle - a nice idea with no viable future - to one of the most profitable businesses on the planet.. Microfinance went from being a nice idea with no viable future to a strategy where institutions subsidize the early start-up years with free grant money and then flip from NGO project to a for-profit business cash cow where a handful of insider investors get stunningly rich without having had to take any prior risk.

 

And the problems escalate

FaceBook never anticipated becoming a tool used for manipulation and profiteering by groups of racists, scammers, terrorists, and political idealogues. Microfinance never anticipated becoming a home and a nameplate for the very payday lenders and userers that the industry was created to displace..

 

For example, the 400 payday lending businesses in South Africa, many quite large and quite profitable, create Micro Finance South Africa association (MFSA). Their average price charged is 350%. The dozen very small, struggling "true MFIs" (who charge prices "only" in the low- 100% range, create their own separate associaton.

 

A group of those involved early in creating FaceBook start to make noise about the shifts, the damage already being done, and the potential greater damage that could happen in the future. Those involved early in microfinance do the same. The debates started in the early 2000's with the "poverty lending" group vs the "massification" group. All hell broke lose in April 2007 with the 100% cashout IPO of Compartamos creating a 350-to-1 ROI for the tiny group of insider investors.

 

The search for solutions

In both FaceBook and microfinance, early warning arguments attracted a lot of attention and initiated a small number of initiatives for mid-course adjustments.. But the power of money won hands-down in both cases, at least has won so far. Those making the money argued for "free speech" in the case of FaceBook and for "free markets" in the case of microfinance.

 

You can do an internet search (I refuse to say "google") and find hundreds of articles with proposed solutions for Facebook, ranging from:

               • having FaceBook leadership make internal decisions to create increased societal good with lower short-term profit levels, or

               • creating a social media industry self-regulation group to make rules that limit the damage the members are inflicting, or

               • creating government regulation to define what is allowed and what is prohibited.

 

You can do the same search for solutions for microfinance, and you will find options like:

               • expect leadership of each institution to continue to show self-restraint, even though a few of their friends decided to get rich

               • have the industry collect data and publish it and expect peer pressure to motivate self-restraint

               • have the industry self-regulate and create a boundary between the ethical and the profiteers

               • change our name to financial inclusion so we don't get lumped together with the bad guys the media has labeled microfinance

               • finally start educating the regulators that we have been intentionally keeping in the dark because powerful industry people thought they would just "cause trouble"

 

With prolonged damage that went uncorrected, many professionals who were drawn to work in FaceBook and microfinance for their original visions began to walk away. Others chose to stay because of the portions of FaceBook and microfinance that still had positive impact. In both sectors, the focus on financial returns took priority over dealing with the collateral damage. FaceBook is still more than problematic; microfinance still is a muddle. Both have decisionmaking structures driven heavily by profit targets. Both might consider reducing social damage if it wouldn't reduce their profit-taking quite so much. In "real life," whether you call yourself double, triple, or even quadruple bottom line (e.g., Compartamos), when profit is one of those bottom lines it carries about 90% of the weight in decision making.

 

So lots of talk, lots of hand wringing, lots of clear examples of ugly things happening in some corners of FaceBook and some actors in microfinance. In both, some examples of good progress, like companies this week pulling their ads from FaceBook until FaceBook gets its act together, and like Indian microfinance behaving better because the RBI forces them to behave better. When I think through thepositive changes, I see they are generally imposed by external stakeholders and threaten the profit margin of the business unless the business complies. Again, that is essential a lesson of "real life."

 

Until there is far more external pressue on both that resolves the large (and growing) pockets of bad consequences, I will continue my abstinence of both FaceBook and microfinance. And with the inevitable takeover by digital finance, I'm not holding out any hope for the microfinance side.

 

Chuck Waterfield

Active 30 years in Microfinance from 1985 until 2015

__._,_.___
Posted by: Daniel Rozas <danrozas@yahoo.com>
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Re: [MFP] FaceBook and Microfinance - the parallels

 

Chuck, 

I agree with Paul. Your statement could hardly be clearer, Thanks, too, for the parallel with Facebook. Sean and Paul, thanks too for your comments. I think that one road not taken is to build on the ROSCAS and ASCAS already in place and listen to and facilitate their building on what they are already doing. I chose my words carefully. I did not say that we should take what they are doing and create our programs around their ideas. The only thing that makes sense if facilitating the exchange of good ways to do provide a better way to save and borrow that benefits the saver and the borrower by those actually doing the work. Thes best of these, those we are calling the "community geniuses" (much better than positive deviants) could receive a small stipend for their work to pay for them getting together and to pay for their travel as they go to more distant villages. Our role would be to listen in and ask questions. Our role would to have the privilege of listening in and helping to guide the discussion with the full awareness that weather or not we are there are not the process of learning and sharing will continue without us.

At least this is what I have come up with in my thinking. Better to attend to your goats and enjoy the clear light of dawn.(or play your guitar or bike and bake bread.)

This is what we learned about immigrant ROSCAS 

Jeff



-----Original Message-----
From: Sean Kline seankline@alumni.lse.ac.uk [MicrofinancePractice] <MicrofinancePractice@yahoogroups.com>
To: MicrofinancePractice@yahoogroups.com
Sent: Tue, Jun 30, 2020 3:13 pm
Subject: Re: [MFP] FaceBook and Microfinance - the parallels

 
Yes, thanks Chuck. Agree..
 
I moved away from microfinance for similar reasons (though my version of your story replaces 'goats' with 'biking, bread and policy advocacy to address market failure in North America.)
 
Back in the 2000s I began to feel there had to be shifts to safeguard microfinance's promise for low-income communities:
(a) increased transparency of MFIs and their investors — thanks for your work!
(b) external government regulation — the real kind, not industry self-regulation compromised by conflicts of interest
(c) greater 'industry' emphasis on member-governed institutions (coops, ASCAs, ROSCAs, etc.) and, regardless of legal form, governance models that keep institutions (more than less) accountable to those they serve
 
In the end, given relatively weak government supervision, North American and European investors looking for aggressive returns, and a new era of practitioners conflating inclusion with positive impact, maybe the direction of microfinance was inevitable :  (
 
Sean
 
P.S. it's good to see Omidyar Network (+ this), Facebook co-founder Chris Hughes, and others fighting Facebook, Google, Amazon, Apple and other giants whose colossal size and power now undermines the interests of workers, environment, consumers and the integrity of American (and arguably others') democracy. Where did anti-trust go in the early 80s?!
 
P.P.S. Tim Ogden's relatively recent piece comparing the economic security challenges to those in the global south with those in North America is compelling.
 
From: <MicrofinancePractice@yahoogroups.com> on behalf of "Paul Rippey paulrippeypdx@gmail.com [MicrofinancePractice]" <MicrofinancePractice@yahoogroups.com>
Reply-To: <MicrofinancePractice@yahoogroups.com>
Date: Tuesday, June 30, 2020 at 9:56 AM
To: MicrofinancePractice <MicrofinancePractice@yahoogroups.com>
Subject: Re: [MFP] FaceBook and Microfinance - the parallels
 
 
Bravo Chuck for that essay. I have tried to say similar things but never got them on paper so well. 
 
A couple of tweaks I would make to personalize it so it would describe my own thoughts and experience:
 
Delete "goats". Insert "folk music".
Rant about advertising-driven toxic consumerism being the deadliest byproduct of capitalism.
 
Otherwise I wouldn't change a word. Thanks.
 
Paul
 
  



----------
On Tue, Jun 30, 2020 at 8:32 AM, "Chuck Waterfield chuck.waterfield@gmail.com [MicrofinancePractice]" <MicrofinancePractice@yahoogroups.com> wrote:
 
I left microfinance 5 years ago, I stopped using Facebook 3 years ago. The parallels between the two led me to the same decision with both.
 
These are the thoughts I had this morning as I was milking my goats, my new occupation, during which I usually enjoy the beautiful morning light and sounds and spend time with my animals. But the discussions of the past few days now force microfinance to percolate in my head even during milking time.
 
Here is my main point: I don't believe microfinance is rotton to the core; I don't believe FaceBook is an entirely evil conspiracy. But business pressures pushed both in the same directions and have created situations in which a large number of people who were formerly enthusiastic supporters have now left and forecast warnings that without external intervention things will do nothing but get worse.
 
The beginnings
At their inception, both were envisioned as innovative ways to reach the masses and provide them with services they would value; both told us that the services were very affordable compared to the alternatives, both told us that their mission was to create a path to viability, but they didn't say anything about plans to get ridiculous rich. The creation of FaceBook may have been motivated primarily by greed, but microfinance was absolutely never envisioned as something that would be lucrative. There was little hope of even covering expenses. We didn't measure ROE, we measured what percentage of our expenses were actually paid by income and were proud when we would be over 50%.
 
In their early days, both attracted smart, dedicated people who were drawn by the exciting idea of helping create something that had never been done and that could "change the world." Most chose to take salaries below what their market potential was, because they considered this a noble pursuit.
 
The transition
Both ended up reaching much higher scale than imagined. They both drew more public attention and they both drew in more professionals. The new wave of people came for a blend of motivations, and the clarity of the original vision began to blur.
 
With growth, management in both had to figure out how to make the numbers work.. Scale was increasing, but expenses were increasing faster than income. Both went out in search of MBA-types to bring in and create solutions. Microfinance also invested in developing business skills internally, such as was done with my Microfin software and the 3,200 microfinance professionals that attended my 126 Business Planning courses from 1997 until 2013.
 
Both FaceBook and microfinance decided that increasing income was far easier than controlling expenses. FaceBook went big into advertisements and developed systems to spy on everything we did when inside FaceBook and even when not. And we users were for the most part unaware at the beginning. Microfinance decided hiding the true price was a no-brainer. In most countries, there were no rules against hiding the price, so true prices escalated while not appearing to do so. It got so confusing that even people inside the industry did not know what prices were truly being charged, or which MFIs in a market were less expensive.
 
FaceBook went from a being a financial puzzle - a nice idea with no viable future - to one of the most profitable businesses on the planet. Microfinance went from being a nice idea with no viable future to a strategy where institutions subsidize the early start-up years with free grant money and then flip from NGO project to a for-profit business cash cow where a handful of insider investors get stunningly rich without having had to take any prior risk.
 
And the problems escalate
FaceBook never anticipated becoming a tool used for manipulation and profiteering by groups of racists, scammers, terrorists, and political idealogues. Microfinance never anticipated becoming a home and a nameplate for the very payday lenders and userers that the industry was created to displace..
 
For example, the 400 payday lending businesses in South Africa, many quite large and quite profitable, create Micro Finance South Africa association (MFSA). Their average price charged is 350%. The dozen very small, struggling "true MFIs" (who charge prices "only" in the low- 100% range, create their own separate associaton..
 
A group of those involved early in creating FaceBook start to make noise about the shifts, the damage already being done, and the potential greater damage that could happen in the future. Those involved early in microfinance do the same. The debates started in the early 2000's with the "poverty lending" group vs the "massification" group. All hell broke lose in April 2007 with the 100% cashout IPO of Compartamos creating a 350-to-1 ROI for the tiny group of insider investors.
 
The search for solutions
In both FaceBook and microfinance, early warning arguments attracted a lot of attention and initiated a small number of initiatives for mid-course adjustments.. But the power of money won hands-down in both cases, at least has won so far. Those making the money argued for "free speech" in the case of FaceBook and for "free markets" in the case of microfinance.
 
You can do an internet search (I refuse to say "google") and find hundreds of articles with proposed solutions for Facebook, ranging from:
                • having FaceBook leadership make internal decisions to create increased societal good with lower short-term profit levels, or
                • creating a social media industry self-regulation group to make rules that limit the damage the members are inflicting, or
                • creating government regulation to define what is allowed and what is prohibited.
 
You can do the same search for solutions for microfinance, and you will find options like:
                • expect leadership of each institution to continue to show self-restraint, even though a few of their friends decided to get rich
                • have the industry collect data and publish it and expect peer pressure to motivate self-restraint
                • have the industry self-regulate and create a boundary between the ethical and the profiteers
                • change our name to financial inclusion so we don't get lumped together with the bad guys the media has labeled microfinance
                • finally start educating the regulators that we have been intentionally keeping in the dark because powerful industry people thought they would just "cause trouble"
 
With prolonged damage that went uncorrected, many professionals who were drawn to work in FaceBook and microfinance for their original visions began to walk away. Others chose to stay because of the portions of FaceBook and microfinance that still had positive impact. In both sectors, the focus on financial returns took priority over dealing with the collateral damage. FaceBook is still more than problematic; microfinance still is a muddle. Both have decisionmaking structures driven heavily by profit targets. Both might consider reducing social damage if it wouldn't reduce their profit-taking quite so much. In "real life," whether you call yourself double, triple, or even quadruple bottom line (e.g., Compartamos), when profit is one of those bottom lines it carries about 90% of the weight in decision making.
 
So lots of talk, lots of hand wringing, lots of clear examples of ugly things happening in some corners of FaceBook and some actors in microfinance. In both, some examples of good progress, like companies this week pulling their ads from FaceBook until FaceBook gets its act together, and like Indian microfinance behaving better because the RBI forces them to behave better. When I think through thepositive changes, I see they are generally imposed by external stakeholders and threaten the profit margin of the business unless the business complies. Again, that is essential a lesson of "real life."
 
Until there is far more external pressue on both that resolves the large (and growing) pockets of bad consequences, I will continue my abstinence of both FaceBook and microfinance. And with the inevitable takeover by digital finance, I'm not holding out any hope for the microfinance side.
 
Chuck Waterfield
Active 30 years in Microfinance from 1985 until 2015

__._,_.___
Posted by: jaashe@aol.com
Reply via web post • Reply to sender • Reply to group • Start a New Topic • Messages in this topic (5)
WARNING! If you hit REPLY, your message will go to the entire listserve, not just the original author!

.

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No comments:

Re: [MFP] FaceBook and Microfinance - the parallels

 

Dear ex-colleagues, I should not intervene really, I have also moved away from the 'field' of MF except for my continuing role with M-Cril (and I've stopped many other things too) but not for the logical and deliberate reasons you all mention. It's more because I got involved in other things, such as 'our' 400 or so children in Odisha in India (ww.orissa.org.uk) and I thought there was not much I could add to MF. 

The 'baby' with which I had had some slight involvement since Kenya in the early 1970s (under other names) and Senegal and India in the 1990s and early 2000s has grown up in all manner of ways, as children (and grandchildren) do, some of which I admire, some of which bothered me, but it has gone far beyond my own 'poor power to add or detract' (if Lincoln will forgive me).  

But pioneers in any field (and I do not claim to be one), sometimes do have a tendency to deplore the way their babies have evolved, rather than to take proper and well deserved pride in the the independent routes they have taken. There are bad eggs (excuse the mixed metaphors) in what is now an enormous global activity, but on balance there is surely far more good than bad, and if MF had never become a profitable business it could surely never have grown as it has. 

Malcolm
On Tuesday, 30 June 2020, 20:17:32 BST, Sean Kline seankline@alumni.lse.ac.uk [MicrofinancePractice] <microfinancepractice@yahoogroups.com> wrote:


 

Yes, thanks Chuck. Agree..

 

I moved away from microfinance for similar reasons (though my version of your story replaces 'goats' with 'biking, bread and policy advocacy to address market failure in North America.)

 

Back in the 2000s I began to feel there had to be shifts to safeguard microfinance's promise for low-income communities:

(a) increased transparency of MFIs and their investors — thanks for your work!

(b) external government regulation — the real kind, not industry self-regulation compromised by conflicts of interest

(c) greater 'industry' emphasis on member-governed institutions (coops, ASCAs, ROSCAs, etc.) and, regardless of legal form, governance models that keep institutions (more than less) accountable to those they serve

 

In the end, given relatively weak government supervision, North American and European investors looking for aggressive returns, and a new era of practitioners conflating inclusion with positive impact, maybe the direction of microfinance was inevitable :  (

 

Sean

 

P.S. it's good to see Omidyar Network (+ this), Facebook co-founder Chris Hughes, and others fighting Facebook, Google, Amazon, Apple and other giants whose colossal size and power now undermines the interests of workers, environment, consumers and the integrity of American (and arguably others') democracy. Where did anti-trust go in the early 80s?!

 

P.P.S. Tim Ogden's relatively recent piece comparing the economic security challenges to those in the global south with those in North America is compelling.

 

From: <MicrofinancePractice@yahoogroups.com> on behalf of "Paul Rippey paulrippeypdx@gmail.com [MicrofinancePractice]" <MicrofinancePractice@yahoogroups.com>
Reply-To: <MicrofinancePractice@yahoogroups.com>
Date: Tuesday, June 30, 2020 at 9:56 AM
To: MicrofinancePractice <MicrofinancePractice@yahoogroups.com>
Subject: Re: [MFP] FaceBook and Microfinance - the parallels

 

 

Bravo Chuck for that essay. I have tried to say similar things but never got them on paper so well. 

 

A couple of tweaks I would make to personalize it so it would describe my own thoughts and experience:

 

Delete "goats". Insert "folk music".

Rant about advertising-driven toxic consumerism being the deadliest byproduct of capitalism.

 

Otherwise I wouldn't change a word. Thanks.

 

Paul

 

  




----------
On Tue, Jun 30, 2020 at 8:32 AM, "Chuck Waterfield chuck.waterfield@gmail.com [MicrofinancePractice]" <MicrofinancePractice@yahoogroups.com> wrote:

 

I left microfinance 5 years ago, I stopped using Facebook 3 years ago. The parallels between the two led me to the same decision with both.

 

These are the thoughts I had this morning as I was milking my goats, my new occupation, during which I usually enjoy the beautiful morning light and sounds and spend time with my animals. But the discussions of the past few days now force microfinance to percolate in my head even during milking time.

 

Here is my main point: I don't believe microfinance is rotton to the core; I don't believe FaceBook is an entirely evil conspiracy. But business pressures pushed both in the same directions and have created situations in which a large number of people who were formerly enthusiastic supporters have now left and forecast warnings that without external intervention things will do nothing but get worse.

 

The beginnings

At their inception, both were envisioned as innovative ways to reach the masses and provide them with services they would value; both told us that the services were very affordable compared to the alternatives, both told us that their mission was to create a path to viability, but they didn't say anything about plans to get ridiculous rich. The creation of FaceBook may have been motivated primarily by greed, but microfinance was absolutely never envisioned as something that would be lucrative. There was little hope of even covering expenses. We didn't measure ROE, we measured what percentage of our expenses were actually paid by income and were proud when we would be over 50%.

 

In their early days, both attracted smart, dedicated people who were drawn by the exciting idea of helping create something that had never been done and that could "change the world." Most chose to take salaries below what their market potential was, because they considered this a noble pursuit.

 

The transition

Both ended up reaching much higher scale than imagined. They both drew more public attention and they both drew in more professionals. The new wave of people came for a blend of motivations, and the clarity of the original vision began to blur.

 

With growth, management in both had to figure out how to make the numbers work. Scale was increasing, but expenses were increasing faster than income. Both went out in search of MBA-types to bring in and create solutions. Microfinance also invested in developing business skills internally, such as was done with my Microfin software and the 3,200 microfinance professionals that attended my 126 Business Planning courses from 1997 until 2013.

 

Both FaceBook and microfinance decided that increasing income was far easier than controlling expenses. FaceBook went big into advertisements and developed systems to spy on everything we did when inside FaceBook and even when not. And we users were for the most part unaware at the beginning. Microfinance decided hiding the true price was a no-brainer. In most countries, there were no rules against hiding the price, so true prices escalated while not appearing to do so. It got so confusing that even people inside the industry did not know what prices were truly being charged, or which MFIs in a market were less expensive.

 

FaceBook went from a being a financial puzzle - a nice idea with no viable future - to one of the most profitable businesses on the planet. Microfinance went from being a nice idea with no viable future to a strategy where institutions subsidize the early start-up years with free grant money and then flip from NGO project to a for-profit business cash cow where a handful of insider investors get stunningly rich without having had to take any prior risk.

 

And the problems escalate

FaceBook never anticipated becoming a tool used for manipulation and profiteering by groups of racists, scammers, terrorists, and political idealogues. Microfinance never anticipated becoming a home and a nameplate for the very payday lenders and userers that the industry was created to displace..

 

For example, the 400 payday lending businesses in South Africa, many quite large and quite profitable, create Micro Finance South Africa association (MFSA). Their average price charged is 350%. The dozen very small, struggling "true MFIs" (who charge prices "only" in the low- 100% range, create their own separate associaton..

 

A group of those involved early in creating FaceBook start to make noise about the shifts, the damage already being done, and the potential greater damage that could happen in the future. Those involved early in microfinance do the same. The debates started in the early 2000's with the "poverty lending" group vs the "massification" group. All hell broke lose in April 2007 with the 100% cashout IPO of Compartamos creating a 350-to-1 ROI for the tiny group of insider investors.

 

The search for solutions

In both FaceBook and microfinance, early warning arguments attracted a lot of attention and initiated a small number of initiatives for mid-course adjustments.. But the power of money won hands-down in both cases, at least has won so far. Those making the money argued for "free speech" in the case of FaceBook and for "free markets" in the case of microfinance.

 

You can do an internet search (I refuse to say "google") and find hundreds of articles with proposed solutions for Facebook, ranging from:

                • having FaceBook leadership make internal decisions to create increased societal good with lower short-term profit levels, or

                • creating a social media industry self-regulation group to make rules that limit the damage the members are inflicting, or

                • creating government regulation to define what is allowed and what is prohibited.

 

You can do the same search for solutions for microfinance, and you will find options like:

                • expect leadership of each institution to continue to show self-restraint, even though a few of their friends decided to get rich

                • have the industry collect data and publish it and expect peer pressure to motivate self-restraint

                • have the industry self-regulate and create a boundary between the ethical and the profiteers

                • change our name to financial inclusion so we don't get lumped together with the bad guys the media has labeled microfinance

                • finally start educating the regulators that we have been intentionally keeping in the dark because powerful industry people thought they would just "cause trouble"

 

With prolonged damage that went uncorrected, many professionals who were drawn to work in FaceBook and microfinance for their original visions began to walk away. Others chose to stay because of the portions of FaceBook and microfinance that still had positive impact. In both sectors, the focus on financial returns took priority over dealing with the collateral damage. FaceBook is still more than problematic; microfinance still is a muddle. Both have decisionmaking structures driven heavily by profit targets. Both might consider reducing social damage if it wouldn't reduce their profit-taking quite so much. In "real life," whether you call yourself double, triple, or even quadruple bottom line (e.g., Compartamos), when profit is one of those bottom lines it carries about 90% of the weight in decision making.

 

So lots of talk, lots of hand wringing, lots of clear examples of ugly things happening in some corners of FaceBook and some actors in microfinance. In both, some examples of good progress, like companies this week pulling their ads from FaceBook until FaceBook gets its act together, and like Indian microfinance behaving better because the RBI forces them to behave better. When I think through thepositive changes, I see they are generally imposed by external stakeholders and threaten the profit margin of the business unless the business complies. Again, that is essential a lesson of "real life."

 

Until there is far more external pressue on both that resolves the large (and growing) pockets of bad consequences, I will continue my abstinence of both FaceBook and microfinance. And with the inevitable takeover by digital finance, I'm not holding out any hope for the microfinance side.

 

Chuck Waterfield

Active 30 years in Microfinance from 1985 until 2015

__._,_.___
Posted by: MALCOLM HARPER <malcolm.harper@btinternet.com>
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RE: [MFP] FaceBook and Microfinance - the parallels

 

I sent this out on an entirely different online conversation earlier today.  After what Chuck has had to say, I'm including it here.

 

Colleagues

 

Several years ago, under a Gates Foundation grant, we followed the performance of 331 Savings Groups (SGs) in Mali, Tanzania, Cambodia, Uganda, Malawi and Kenya.  We found that the average return on savings was 22%, all of which went back to the members.  We found that savings rates doubled after 3 years and that the participation of women climbed from 72% to 77%.  And we found that average loan sizes doubled.  After 4 years of independent operation, with no continuing NGO support the survival rate of these SGs was 89%.  In a subsequent study carried out by Datu Research in Uganda, we found that for every 'foundation group' that was left in place after a project ended, three years later there were, on average, an additional 2 groups (1.99 to be exact) and that 2/3 of these new groups were formed by the members themselves, with the rest being created by Community-based Trainers left behind by the projects..  They tended to serve a poorer segment of the population but produced a slightly higher rate of return than groups trained by CARE and CRS projects.  The rest, as they say, is history, and SGs are now a normal part of the financial landscape, existing comfortably (and competitively) alongside a myriad of other formal and informal offerings.  The self-replication phenomenon is of key strategic importance (although infrequently considered in programme design).

 

As the industry has become more vested in SGs it seems, however, to fall into the same, unimaginative track: assuming that the formal sector has the answers and that structured relationships between SGs and MFIs/banks will work to the benefit of both.  In my opinion this 'financial inclusion' model is overly simplistic, tending to ignore the natural tension (and frequent antagonism) that arises when a profit-maximising formal sector entity seeks to have a financial relationship to an SG (which is also profit-maximising, but on behalf of its member-shareholders).  It will seek to extract surplus through low returns on savings and high returns on lending, which puts it at odds with an SG that is used to maximising its own returns and sharing among its members virtually all of the income derived from lending – while retaining investment capital in the locality. Access, security, profitability and miniscule administrative costs remain decisive advantages.  But the most decisive is member ownership and investment.

 

If relationships between SGs and the formal sector are hard to engineer and loaded with risk, it begs the legitimate question as to how the evolving SG member, of an ambitious entrepreneurial bent, can access credit in larger amounts than their SGs can provide and reimbursable over a longer term.  The answer, I think, is to focus on a credit union approach, in which federated groups, made up of SG representatives, act like an SG in their procedures and transactions but offer loans on a longer-term basis – and return a significant part of their profits, through dividends, to their constituent groups.  This model is working effectively, so long as the scale is small (5-10 groups, among which everyone knows everyone else) and so long as transactions are regular and meeting-based.    Work done by Plan in Tanzania and by Oxfam UK in Nigeria, in very large-scale programmes, shows that this approach is profitable (15-20%), transparent and safe, with ready adoption by existing SGs. I can  make a summary report on Plan's results available on request

 

The reflexive notion that financial inclusion requires formal sector engagement and that SG members and their Federations do not represent a valid or legitimate form of inclusion needs to be debated and more than a single route to inclusion accepted.   As models of this sort gain traction, regulatory issues will need to be addressed, because these larger groupings are more visible, slightly more complex and their legal linkage to the individuals that comprise their total assembly more tenuous, but I believe that while we are transfixed by what technology and the formal sector dangles in front of us, there is a whole unexplored potential for self-managed models to be tested and further promoted – even though (maybe thankfully) there isn't a huge amount of money to be made by investors.

 

Hugh

 

From: MicrofinancePractice@yahoogroups.com <MicrofinancePractice@yahoogroups.com>
Sent: 30 June 2020 17:32
To: MFP <microfinancepractice@yahoogroups.com>
Subject: [MFP] FaceBook and Microfinance - the parallels

 

 

I left microfinance 5 years ago, I stopped using Facebook 3 years ago. The parallels between the two led me to the same decision with both.

 

These are the thoughts I had this morning as I was milking my goats, my new occupation, during which I usually enjoy the beautiful morning light and sounds and spend time with my animals. But the discussions of the past few days now force microfinance to percolate in my head even during milking time.

 

Here is my main point: I don't believe microfinance is rotton to the core; I don't believe FaceBook is an entirely evil conspiracy. But business pressures pushed both in the same directions and have created situations in which a large number of people who were formerly enthusiastic supporters have now left and forecast warnings that without external intervention things will do nothing but get worse.

 

The beginnings

At their inception, both were envisioned as innovative ways to reach the masses and provide them with services they would value; both told us that the services were very affordable compared to the alternatives, both told us that their mission was to create a path to viability, but they didn't say anything about plans to get ridiculous rich. The creation of FaceBook may have been motivated primarily by greed, but microfinance was absolutely never envisioned as something that would be lucrative. There was little hope of even covering expenses. We didn't measure ROE, we measured what percentage of our expenses were actually paid by income and were proud when we would be over 50%.

 

In their early days, both attracted smart, dedicated people who were drawn by the exciting idea of helping create something that had never been done and that could "change the world." Most chose to take salaries below what their market potential was, because they considered this a noble pursuit.

 

The transition

Both ended up reaching much higher scale than imagined. They both drew more public attention and they both drew in more professionals. The new wave of people came for a blend of motivations, and the clarity of the original vision began to blur.

 

With growth, management in both had to figure out how to make the numbers work. Scale was increasing, but expenses were increasing faster than income. Both went out in search of MBA-types to bring in and create solutions. Microfinance also invested in developing business skills internally, such as was done with my Microfin software and the 3,200 microfinance professionals that attended my 126 Business Planning courses from 1997 until 2013.

 

Both FaceBook and microfinance decided that increasing income was far easier than controlling expenses. FaceBook went big into advertisements and developed systems to spy on everything we did when inside FaceBook and even when not. And we users were for the most part unaware at the beginning. Microfinance decided hiding the true price was a no-brainer. In most countries, there were no rules against hiding the price, so true prices escalated while not appearing to do so. It got so confusing that even people inside the industry did not know what prices were truly being charged, or which MFIs in a market were less expensive.

 

FaceBook went from a being a financial puzzle - a nice idea with no viable future - to one of the most profitable businesses on the planet.. Microfinance went from being a nice idea with no viable future to a strategy where institutions subsidize the early start-up years with free grant money and then flip from NGO project to a for-profit business cash cow where a handful of insider investors get stunningly rich without having had to take any prior risk.

 

And the problems escalate

FaceBook never anticipated becoming a tool used for manipulation and profiteering by groups of racists, scammers, terrorists, and political idealogues. Microfinance never anticipated becoming a home and a nameplate for the very payday lenders and userers that the industry was created to displace..

 

For example, the 400 payday lending businesses in South Africa, many quite large and quite profitable, create Micro Finance South Africa association (MFSA). Their average price charged is 350%. The dozen very small, struggling "true MFIs" (who charge prices "only" in the low- 100% range, create their own separate associaton.

 

A group of those involved early in creating FaceBook start to make noise about the shifts, the damage already being done, and the potential greater damage that could happen in the future. Those involved early in microfinance do the same. The debates started in the early 2000's with the "poverty lending" group vs the "massification" group. All hell broke lose in April 2007 with the 100% cashout IPO of Compartamos creating a 350-to-1 ROI for the tiny group of insider investors.

 

The search for solutions

In both FaceBook and microfinance, early warning arguments attracted a lot of attention and initiated a small number of initiatives for mid-course adjustments. But the power of money won hands-down in both cases, at least has won so far. Those making the money argued for "free speech" in the case of FaceBook and for "free markets" in the case of microfinance.

 

You can do an internet search (I refuse to say "google") and find hundreds of articles with proposed solutions for Facebook, ranging from:

               • having FaceBook leadership make internal decisions to create increased societal good with lower short-term profit levels, or

               • creating a social media industry self-regulation group to make rules that limit the damage the members are inflicting, or

               • creating government regulation to define what is allowed and what is prohibited.

 

You can do the same search for solutions for microfinance, and you will find options like:

               • expect leadership of each institution to continue to show self-restraint, even though a few of their friends decided to get rich

               • have the industry collect data and publish it and expect peer pressure to motivate self-restraint

               • have the industry self-regulate and create a boundary between the ethical and the profiteers

               • change our name to financial inclusion so we don't get lumped together with the bad guys the media has labeled microfinance

               • finally start educating the regulators that we have been intentionally keeping in the dark because powerful industry people thought they would just "cause trouble"

 

With prolonged damage that went uncorrected, many professionals who were drawn to work in FaceBook and microfinance for their original visions began to walk away. Others chose to stay because of the portions of FaceBook and microfinance that still had positive impact. In both sectors, the focus on financial returns took priority over dealing with the collateral damage. FaceBook is still more than problematic; microfinance still is a muddle. Both have decisionmaking structures driven heavily by profit targets. Both might consider reducing social damage if it wouldn't reduce their profit-taking quite so much. In "real life," whether you call yourself double, triple, or even quadruple bottom line (e.g., Compartamos), when profit is one of those bottom lines it carries about 90% of the weight in decision making.

 

So lots of talk, lots of hand wringing, lots of clear examples of ugly things happening in some corners of FaceBook and some actors in microfinance. In both, some examples of good progress, like companies this week pulling their ads from FaceBook until FaceBook gets its act together, and like Indian microfinance behaving better because the RBI forces them to behave better. When I think through thepositive changes, I see they are generally imposed by external stakeholders and threaten the profit margin of the business unless the business complies. Again, that is essential a lesson of "real life."

 

Until there is far more external pressue on both that resolves the large (and growing) pockets of bad consequences, I will continue my abstinence of both FaceBook and microfinance. And with the inevitable takeover by digital finance, I'm not holding out any hope for the microfinance side.

 

Chuck Waterfield

Active 30 years in Microfinance from 1985 until 2015

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Posted by: <hugh@vsla.net>
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