Time for the hard questions
Microfinance is at a critical juncture, and as we reflect on how we got here, I suggest that we challenge ourselves to ask: What makes us different from what was previously done through the ages, since coins were first established as a medium of exchange? And how do we maintain what’s different and avoid slipping into the well-worn paths that emerge when we examine the history of usury?
Making loans to the poor has always been a commercial activity, but one that was generally shunned by the broader society. It was an activity of usurers, and one did not fraternize with usurers. Today, it is an activity of pawnshops and payday lenders, and they don’t get awarded Nobel Prizes.
Should we as a field transition into more commercial approaches to lending? If so, how do we avoid becoming indistinguishable from modern day usurers?
St. Francis, Dante, and Machiavelli
What we call microfinance—the modern microcredit movement–is about 40 years old. But lending to the poor is thousands of years old. I am on five-week bicycle trip, a trip that is heavily symbolic for me. I started at the Roman Forum, and I will end my trip in Valladolid, Spain, at the Microcredit Summit. My route is designed to look at some of the microfinance practices of the last 1,000 years.
My first stop was Assisi, where St. Francis, born in 1182, established that we should practice the values of humility, poverty, and simplicity, and we should serve the poor. These were radical ideas even at the time, yet he inspired many to practice these same vows. He refused the common paths of money and power, and yet it resulted in a life that made great moral influence. In his life, the means he chose were aligned with the ends he hoped for. Can we in microfinance define some core principles of compassion and respect for others that are able to withstand the greater influences of wealth and power that surround us in the world?
The next day, I went to Perugia, where two hundred years after Francis’ death, in 1463, his society started the first “Monte de Pieta,” created to give the poor an alternative to the moneylenders. The term “monte” meant that the capital came as a “pile of money” donated by the wealthier in society to enable the organization to then lend that money out to the poor. The loans were initially at zero-interest, and then later at modest interest charges determined necessary to sustain the institution. The poor would bring collateral to be held during the term of their loan. In other words, these were “compassionate” pawn shops. These organizations still operate, 500 years later, but the more “commercial” variety of pawn shops that maximize profit, are much more common.
And today I am in Florence, where Dante, writing just shortly after St. Francis’ time, put the moneylenders in the seventh circle of hell, and where Machiavelli, two hundred years later, wrote “The Prince” arguing for manipulation and cunning because “the ends justifies the means.” (Machiavelli is still widely read in college, St. Francis is not.)
Commercialization? Or Responsible Commercialization?
The “Occupy Wall Street” movement is spreading fast, not only in the U.S. People all around the world are challenging current profit-maximizing approaches to financial services.
Meanwhile the field of microfinance is finding it difficult to answer the questions of how we can claim to be compassionate when some of us loan money to the poor at very high margins and make profits so large that the conventional finance world looks twice. How have we distinguished what we are doing from what the moneylender offers?
We sought commercialization without taking the necessary and challenging step of articulating a definition of responsible commercialization. We need clear definitions, we need clear practices for which we can be held accountable, we need lines that distinguish microfinance from moneylending, we need better transparency and we need better awareness of the implications of following such practices. Opacity is convenient for profit-maximizing businesses. Transparency burns off the fog and puts an MFI in a glass house. Let the world see what you are doing, and why, and your behaviors and decisions will change accordingly.
Two examples of the dangers of commercialization
I believe that Mexico and South Africa offer two examples of what happens when profit-maximizing practices are promoted or tolerated.88888 Mexico is an example of uncontrolled commercialization and the damage that comes. The microfinance industry spent a decade working to attract the attention of the conventional commercial finance world. But when you open yourself up to any investor, you can no longer be selective. In Mexico, most of the Compartamos IPO stock was bought up by hedge fund managers who don’t ask about empowerment and gender issues. They only ask about quick returns.
Compartamos argues that they pursued a high-growth, high-profit strategy to attract the attention of the business world and draw in investors, so that more poor would have access to credit. Since the IPO, while hundreds of new micro-lenders have started up, relatively few are connected to our microfinance industry. Most are profit-maximizing start-ups. The supply of credit has grown extremely fast, and over-indebtedness is a serious risk. Surely this is not aligned with our original vision of microfinance?
South Africa has also followed a very commercial path. While South Africa has less than ten conventional microfinance organizations, there is a large supply of credit targeted to the poor, through several thousand “payday lenders,” consumer lenders focused mainly on people with paychecks, not the self-employed. Clients get fast loans, but at very high prices, averaging around 200% a year. The payday lenders call themselves “microfinance.” Are they? What distinguishes us from them? When we look at South Africa and Mexico, are we looking at our future?
We must take action
If we don’t force dialogue and set standards, profit-maximizing at the “Bottom of the Pyramid” will take the wrong path. If we don’t continue our current efforts to establish systems to protect the poor, to define responsible microfinance, and draw lines between those who adhere to those standards and those who don’t, microfinance in 20 years will be nothing but an obscure article in Wikipedia.
Dear Chuck, thanks for sharing this outstanding and timely reflection on the trend of commercialization in world MF industry. Your subject is very pertinent and this is the moment to bring it out. Hoping that current Microcredit Summit in Spain may be the pertinent forum to make it very visible and that compassionate and responsible Microfinance colleagues can influence this well known movement to take strong and significant actions to tackle this subject.
Dear Chuck, I enjoyed reading your article. The key question for me is: why are commercial microfinance and the traditional practices of money-lending so much more wide-spread than the truly ethical forms of finance? Since you have been digging into philosophical and even religious ideas, one wonders whether it is human nature that makes one form of finance always succeed over the other.