Microfinance Practice: RE: [MFP] Businesses Behaving Badly: The Troubling Parallels Between Microfinance and Facebook

Good observations Jeff.

In my experience, however, the cost of borrowing is of secondary importance relative to its cash-flow benefit. When the costs of borrowing are small, relative to fairly predictable net benefits the price is not important. Which is why small loans invested in rapid turnover, large-margin petty trade can absorb nominally usurious interest rates (whatever usurious means) . If I borrow $10 for one hour in a local market in Maputo to finance a quick 10-minute turnover of some product I can find 200 metres down the road and can make 50% on the trade, the fact that I pay $1 for the loan for 10 minutes is a marginal cost of doing business, with negligible effect on my outgoings – but is a spectacular annualised cost

Where this breaks down is when I don't need $10 for 1 hour but $5,000 for a year. Then my 10% for 1 hour is totally unsupportable. This is where there is no way your local ROSCA or VSLA can meet your needs. You need an institution that prices its loans in ways that your long-term cash-flow can support, which is where regulated financial institutions come in and whether you charge interest or fees and who owns the equity is of secondary importance to the net returns of your debt-based investment and its cashflow, when making the decision to borrow. Whether or not the costs are driven by interest or user fees is unlikely to be influential.

The question about the ethics of donor-financed institutions that calibrate their interest rates to maximise their personal returns in an uncompetitive market is another question entirely, and one that should probably be addressed to the donors.

Hugh

From: MicrofinancePractice@yahoogroups.com <MicrofinancePractice@yahoogroups..com>
Sent: 19 August 2020 18:10
To: MicrofinancePractice@yahoogroups.com; microfinancepractice@yahoogroups.com
Subject: Re: [MFP] Businesses Behaving Badly: The Troubling Parallels Between Microfinance and Facebook

Daniel,

Useful observation. Check cashing businesses are popular among the poor because the fees are posted and perceived to be fair, the cashiers deal with you as a person and in your language and the money is available immediately without waiting days for the check to clear. My students and I studied immigrant ROSCAS. I've been bowled over by their flexibility and (by in large) commitment to their members and their communities. While we strategist and ponder and worry about our institutions, untold millions of ROSCA organizers are going about their work with little payment (a tip when the money is distributed) without us. Disciplined savings, mutual support and accountability seem to be the keys. Then there are remittances - and least three times greater than all the development assistance put together and a lot better focused. Let's start by learning more about ROSCAS and remittances.

Yes we "graybeards" are creaking in our joints but the mind still still works and we have the luxury at our vast age of being able to think without the constraints and underlying agenda of the agencies we work for.

Jeff

-----Original Message-----
From: Daniel Rozas danrozas@yahoo.com [MicrofinancePractice] <MicrofinancePractice@yahoogroups.com>
To: microfinancepractice@yahoogroups.com <microfinancepractice@yahoogroups.com>
Sent: Wed, Aug 19, 2020 7:01 am
Subject: Re: [MFP] Businesses Behaving Badly: The Troubling Parallels Between Microfinance and Facebook

Ok, at the risk of bringing in ageism, there is a bit of a No Country For Old Men Here (and yeah, I'm quite aware I'm at best only a few decades behind some of the greybeards here). But there is also experience over time and what we used to call wisdom that arises from that venerable combination. I'm not one to ignore it.

Howard (it's nice to see another name from old times!) -- reading the musings from Chuck, Jeff, and Hugh, I don't just see the lament of profits here. There is also something else at work, I think. And this has been percolating in my head for a few years now.

The trouble with financial institutions driven by profits aren't the profits themselves, but the inexorable reliance on credit to generate those profits. You see this highlighted now, during covid -- MFIs forced to stop lending for a period of time are facing liquidity pressures, and if they don't start lending soon and at sufficient scale, they will face solvency issues too. It's the nature of an institution facing a repayment crisis -- financial distress is magnified when you stop lending. But I digress.

The point is, when it comes to generating revenue, financial products aren't equal. The easiest and fastest way to make money is through lending. Far harder to do it from savings or insurance. It's simply the nature of things, a lot of it very evident from behavioral economics. And that formula means that almost inevitably, institutions that are commercial will lean towards credit. And even nonprofit ones have to ensure that they do enough lending to generate the revenues needed to cover the savings and other services they provide. Imagine -- you're trying to encourage a client to save, but at the same time have to make sure that client also borrows enough to support the whole operation? What kind of a message does that send to the client? Saving is already hard enough. Instead, we wind up communicating another message -- we have easy money here, available for you when you need it. All the efforts at commitment savings demonstrate this -- yes, the commitments work, but the savings are tiny, paling in comparison to the types of cashflows that support credit operations.

Which raises the question -- what if we flip the thing on its head? What if we change finance and stop charging "interest", and instead focus on providing fee-based services? Savings, credit, insurance -- all fee-based? This is much closer to the mechanics of many informal finance relationships, including ROSCAs. If what you're after is providing facilities for cashflow smoothing, there should be little reason to prefer money advances (credit) over money collections (savings) -- as Stuart Rutherford pointed out over 2 decades ago, the cashflows from a cyclical borrower are no different than cashflows from a cyclical saver -- money goes out in small increments and comes in in larger ones. If you were to lose track of time and look only at cashflows, you wouldn't even know which product you're seeing.

Indeed, to a large extent I'm describing SafeSave's model here. But I think this could be scaled -- and not just in poor countries, but in rich ones too, where banks have shown themselves to be quite incapable and entirely uninterested in really serving the needs of low-income customers.

Forget credit, forget savings -- call it cashflow banking, on which you can build a rich tapestry of behavior-oriented services, based on the client's profile, needs, etc.

Open to ideas here.

Cheers.

Daniel

On Wednesday, August 19, 2020, 2:47:57 PM GMT+2, howardjfinkelstein@gmail.com [MicrofinancePractice] <microfinancepractice@yahoogroups.com> wrote:

You know this used to be a useful group, but now it has turned into a whining session for frustrated socialists. Profits are evil. Ownership is dangerous. Means of production should be in the hands of those who don't know what to do with them. Feel like I am reading about 1920 not 2020. So unlike all of you complainers, I'm not going to complain. Just leave. Bye all.

From: MicrofinancePractice@yahoogroups.com <MicrofinancePractice@yahoogroups.com>
Sent: Tuesday, August 18, 2020 11:57 PM
To: MicrofinancePractice@yahoogroups.com; microfinancepractice@yahoogroups.com
Subject: Re: [MFP] Businesses Behaving Badly: The Troubling Parallels Between Microfinance and Facebook

Chuck,

Thanks for the piece you wrote for Bottom Billion. You and I were there from the start of microfinance and it is distressing to see how such a wonderful idea became corrupted by greed. After two decades in the microfinance (more accurately the micro credit) trenches)I jumped ship once I found savings groups in Nepal and later India and Zimbabwe. Savings groups showed that it was possible to jettison the MFI infrastructure and train groups to save and lend. Today there are around a million groups plus millions of self-help groups in India.

My recent trip to Nepal (2018) showed me that microfinance was still relevant. It was possible to serve the poor (but not the poorest) using a quasi Grameen model while charging 18% per year on a declining basis. The one credit union I looked at was able to achieve all this while generating sufficient profits to push into more distant regions and providing training. With that said most of the easily accessible villages had ten or MFIs looking for customers and then there was the issue 1% interest the issues of an over saturated market and too much debt are the same as is true with microfinance around the world

During this same study in Nepal I interviewed a Dalit (untouchable caste) woman. She organized other Dalit women in her village into a dhikuti (ROSCA). No outside training or support and the amount they saved was substantial. It occurred that with a tiny bit of support (perhaps $30 per month, this woman could organize similar dhikutis in nearby villages. Hundreds of such women networked virtually and through face to face meetings could bring basic financial services to the very poorest women in Nepal. We call them "community geniuses" with a nod to the MacArthur Foundation's geniuses awards. A pilot project starting with 100 of these women would cost only $50,000 and reach 10,000 women at a cost of $5 each.

It's tune to try something new,

Thanks Chuck,

Jeff

-----Original Message-----
From: Chuck Waterfield chuck.waterfield@gmail.com [MicrofinancePractice] <MicrofinancePractice@yahoogroups.com>
To: MFP <microfinancepractice@yahoogroups.com>
Sent: Tue, Aug 18, 2020 4:02 am
Subject: [MFP] Businesses Behaving Badly: The Troubling Parallels Between Microfinance and Facebook

Six weeks ago, I posted some thoughts on MFP about how microfinance and Facebook both became vehicles for activity that violated their original intents. Nextbillion has now posted an edited version of my post. Here is their intro paragraph and a link to the article:

Chuck Waterfield left microfinance five years ago, after working in the sector for three decades. He stopped using Facebook three years ago, after using the platform for about 10 years. As he explains, the troubling parallels between the two drove his decision to leave both. He explores how their business models have grown increasingly problematic over time – and why, without external intervention, things are likely to get worse.

https://nextbillion.net/businesses-microfinance-and-facebook/

Regards,

Chuck Waterfield

__._,_.___

Posted by: <hugh@vsla.net>

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