“Although [microfinance] has promise on a small scale, history suggests that when scaled up, and especially when used as an instrument of government policy, it will likely create significant problems…
” So wrote distinguished economist Raguram Rajan in Fault Lines: How Hidden Fractures Still Threaten the World Economy –perhaps influenced most by his familiarity with Indian style microcredit.
A year ago I might have glazed over Professor Rajan’s comments. But I have followed closely the events that have unfolded among MFIs in Andhra Pradesh in India and with Professor Yunus at the Grameen Bank in Bangladesh over the past year. And I’ve had many conversations with those with insight into microfinance and the broader political economy in both India and Bangladesh.
Until recently, microfinance in India (really microcredit) had been driven by innovators and entrepreneurs, but also enabled by government policies such as of priority sector lending and regulatory restrictions prohibiting deposit mobilization for most MFIs. These policy prescriptions eased the flow of credit while cutting off options to innovate around deposit services. And a rapid expansion of credit-only MFIs occurred in a country that is a vibrant and hotly contested democracy. Competing parties and candidates fight tooth and nail for votes promising lower staple food prices, unemployment benefits, electricity, and other basic needs.
The recent months have taught me that I have tended to underestimate how important the broader political environment becomes as microfinance grows large. In hotly contested democracies interest rates and repayment terms can be manipulated as an instrument of populist politics. Should it be such a big surprise that credit extended to large numbers of poor people offers an irresistible temptation to lower interest or relax repayment discipline?
Like India, Bangladesh is a hotly contested and boisterous democracy. Grameen Bank has been beset with its own controversies this year, highlighted by the government’s efforts to remove Professor Yunus from a formal executive role in the Bank. Under pressure Professor Yunus recently resigned. And the government is reasserting greater control over Grameen Bank by appointing a new chairman, investigating the propriety of Grameen’s related companies and is now proposing to increase government shareholdings in the Bank.
Nevertheless – because Grameen Bank is a full financial intermediary holding more savings balances from the public than loan portfolio the situation is quite a bit more delicate. It would be difficult and costly, for example, for those controlling the bank to reduce Grameen Bank’s interest rates (already acknowledged to be the lowest in Bangladesh) or to relax loan terms. Any loss of margins or weakening of asset quality would make it more difficult and more costly for the Bank to meet its obligations to its depositors. Those in control of Grameen Bank are responsible for the safe keeping of the deposits of millions of Bangladeshis.
I can only speculate that it is the delicacy of this balancing act that has also pushed the government to try to bring Grameen Bank more directly under the supervision of Bangladesh’s central bank; a shift under the more technocratic supervision of a central bank would likely provide an added layer of protection from political manipulation. While the future of Grameen Bank still hangs in the balance, I hold out hope that it has a better chance of carrying forward a sustainable useful role in part because it already provides substantial deposit services.
This is not to say that deposit taking offers complete protection from populist interference. Or that all MFIs ought to be taking deposits. It is only to point out an additional factor to consider when examining the wider architecture and viability of a large scale microfinance industry. Providing basic deposit services might add a measure of protection from the short-term populist instincts of politicians.
I find it extremely fascinating to look at how microfinance is tied to the political world. Countries that have big microfinance industries, like India, are also democracies. How is this volatility reflected exactly in savings accounts? I would be interested in learning more about how the effect of political volatility affects different nations differently. Does anyone have insight into this?
As an intern with Opportunity International this summer, I have been learning a lot about the microfinance industry as a whole. Opportunity especially stresses the importance of savings accounts for their clients. You can read more about the exact details and incentives at opportunity.org. I believe this is a good way to make sure clients don’t spiral into debt along with other precautions. With that being said, how does this idea of having savings accounts relate to the politics of a nation? I am wondering whether this is a sustainable method in a politically volatile nation.
The observations of Raghuram Rajan are very true. But, these have come too late and they are too soft also. In India, when the SHG Bank linkage prog started in Feb 1992, no govt noticed it. Once, it picked up momentum, enthusiastic bereaucracy in various states started designing their local versions and started implementing them by converting the hitherto dormant Women and Child Development Department into Women Development Corporations. Thus, Mahalir Thittam in Tamil Nadu, Kudumbashree in Kerala, Dwcra groups in AP etc., were aggressively promoted. Later, the AP model was converted into SGSY at the national level. But, during these years, none of the organisations like NABARD, RBI, SIDBI made any effort to stop the interference of politicians and bereaucracies in tweeking the original SHG concept and damaging its very spirit. Even now, in some states, SHGs promoted under SGSY are called BPL groups (Below Poverty Line) and those formed outside SGSY are called APL groups (Above Poverty Line). With the announcement of National Rural LIvelihood Mission (NRLM)recently, the damage has been completed as it wants the SHGs to form federations from the beginning. So, the damage has been done to the programme more by the bureaucrats in various states and at the national level who misled the politicians to believe that SHGs would be vote catching strategies. If we look through the pages of news papers at various points of time in the past, one would observe the ruling political parties used to claim that they promoted SHGs in their states. Once a particular party which claimed ownership to SHGs in that state is dethroned, the new party that comes to the power would start claiming that ownership to the concept of SHG promotion in that state. Thus the story goes on in India and the SHG linkage programme is reaching new lows year after year. Even now, none of these institutions have objected to the government interference, as the NRLM wants SHG federations to be the focal point for delivery of various services without realising that there are not many who have understood the dynamics of SHGs and SHG federations. So, RR’s observations will be only of academic interest.
Thanks for this interesting post.Could it be that precisely because Grameen holds the deposits of millions, it becomes an attractive proposition for the Government to control it? And in that sense, could savings make MFIs even more important and prone to political interest?
It is perhaps inevitable that organizations which touch the lives of millions of poor people, like the Grameen Bank, attract attention from many. Including from the government, and perhaps especially so in hotly contested democracies. Politicians see votes. And bureaucrats see “development” as their domain and responsibility.
I suppose in this sense Grameen Bank reaching the lives of millions of borrower or savers might not be too different. What is different, maybe, is that Grameen Bank holds the deposits of the poor people as safe keeping for them. So the popular thing to do would be to protect those deposits carefully.
Credit-only providers have the opposite equation. In this equation the clients hold the assets of the institution – in other words they owe back the principal and interest to the institution. This provides a tempting target to either lower the interest burden or to relax (in some cases waive altogether) repayment obligations. Popular in the short run, maybe, but ensuring the institution itself must be saved in order for it to carry forward. Often these organizations just disappear.
The proposition I am making is that if there is at least a mix of deposits held with the institution that the dangers of seeking short term popular measures must at least be weighed against the damage or cost that might be incurred to depositors.