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
Posted by: <hugh@vsla.net>
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