Why Doesn’t Microfinance Work? The Destructive Rise of Local Neoliberalism by Milford Bateman, published by Zed Books Ltd. in London, England
Introduction
One of the hardest working volunteers I knew during my Peace Corps experience was named Sam. The first time I met Sam, we went through all the normal questions PCVs talk about like “Why did you decide to do Peace Corps?” and “What did you do before?” When I asked him, “What will you do when you finish?” he had a quick answer.
“Have you ever heard of Kiva?”
I hadn’t, but I have heard a lot more about it since he introduced me to the microfinance concept. Right now, Sam is in Tajikistan looking for clients for Kiva. He is traveling and making new friends. For some reason, I was automatically suspicious of the microfinance concept. Just how much good he could be doing there, I wondered.
With Why Doesn’t Microfinance Work? on the list of books to review, I was presented with an opportunity to examine my suspicions through the eyes of economic development consultant Milford Bateman.
Thesis
In the book, Milford Bateman takes a strong stance against microfinance. He considers it a strongly neoliberal concept that has turned out to be a complete fraud—a fraud perpetrated on the most vulnerable in our societies: The poor.
In the book, Bateman takes us step-by-step through his view of microfinance beginning with Mohammad Yunus’s realization while walking the streets of Bangladesh through the introduction of the “new wave” models of the 1980s through the Compartamos scandal to the Great Recession. He walks us through his criticisms of the system highlighting the damaging effects that can destroy the lives of the individuals that are claimed to be served. He concludes the book with a list of alternatives that have been tried and found successful around the world.
Summary
In the 70s, Mohammad Yunus returned from working abroad to his native Bangladesh. He heard tales of people having their land taken by loan agents when families were unable to repay what they borrowed. When approached by a group of women for help to keep their homes, he asked how much they needed. For the entire group, their loans totaled less than $30, less money than Yunus had in his pocket at the time. He gave them the money to repay their loans on the spot. An idea has been born, though. Mr. Yunus saw low interest microloans as a way out of poverty for the extremely poor. With a small loan, people could increase their income generating activities and begin to move out of poverty.
Yunus began experimenting with microloans in the village of Jobra. He found that almost all loans were repaid. When he investigated, he found that his female loanees had formed “solidarity circles” where they all chipped in to help each other pay off their loans. He was impressed with this community-based monitoring of loans. It wasn’t long before he decided to expand his loan activities forming the Grameen Bank as an NGO in 1983. He triumphantly announced that poverty would be eliminated in a generation…that children would have to learn about it by going to a museum.
By most accounts, initially the Grameen Bank was a success, a success that was mirrored in other countries with extreme poverty issues. Unfortunately, according to Bateman, a problem was detected in the fact that these banks always needed infusions of new capital. No matter how good the repayment rate, if it wasn’t 100%, the firm could not be self-sufficient. A neoliberal point of view came into the microfinance industry (MFI) concept. For them, the solution was clear. These non-profit NGO banks needed to become for-profit enterprises. With market-based loans and pushes to sell more loan services, the much sought-after self-sustainability could be achieved. Upon hearing these ideas, the international development community latched onto them and effectively transformed the industry into commercial lending institutions by the 1990s.
In 2007, a shakeup occurred. Mexican MFI Compartamos filed for an IPO. Because of disclosure rules for IPOs, people got their first good look into how MFIs were run. Industry heavyweights like Yunus were stunned. Compartamos often charged interest rates over 100% of their mostly female clients. With these huge returns, managers and executives paid themselves “Wall Street”-style salaries. When the company went public, overnight these people were turned into multimillionaires.
Yunus immediately decried this event saying that the poor should not be who you step on to become rich. The MFI industry tried to defend itself, though, saying if they limited the potential to make huge sums, they wouldn’t be a capitalistic enterprise. They also told of the difficulty working with poor individuals and the need to charge high interest rates to offset those who did not or could not repay.
Other people in the industry like David Richardson began research. He found that the owners of Compartamos happened to be board members of large bank in Mexico (SOFOL). Four individuals on the board controlled 6% of the NGO behind Compartamos. Plainly, it was in their best interest for Compartamos to make as much money as possible. The fact that this was happening while poor women worked to repay loans with 100%+ interest rates only focused the crisis. Codes of conduct arrived for MFIs. For Bateman, it was too, too late.
Bateman features long passages on why microfinance is bad for the poor. First, the push to repay means people constantly take out new loans to repay old loans. This habit is encouraged by the MFI. If they try to break this new cycle of debt, they must go to family or “solidarity circles” for funds. This strains and can eventually break relationships within the community. There is also the problem of economic displacement. If 10 people in a village make money by husking rice when the new MFI comes to town, soon, it might be 30 people. Without an increase in the rice harvest, some of those people will not find success from their MFI funded activity, yet MFIs have no real interest in what work the people do. They only want to sell a loan and see it repaid. Third, this lack of interest in what activities the loans are used for can cause problems. One of the easiest ways for people to make money is cross-border trade. In the case of Nigeria in the mid2000s, when their borders were closed to Benin, hundreds of MFI financed traders were out of work. In a third example, Grameen Bank launched a telephony initiative where women could take a microfinance loan, buy a cell phone and sell access to it in their community. Initially there was positive progress, but Grameen’s partner, the Norwegian Telenor saw more profit potential. Soon there were over 50,000 women selling cell phone access across Bangladesh with none of them making any money. By setting areas of service for each participant, this problem could have been avoided, but that was not in the best interest of the profit-making people in charge.
Bateman also has a very big problem with focusing on microlending instead of lending for small and medium enterprises (SME). He notes how microloans contribute to the deindustrialization of countries. In post-Soviet societies where much infrastructure lies fallow, he argues that SME capital to restart these industries is much more useful than microloans.
As it stands now, Bateman has damning words. He says the current MFIs are no different than American payday lenders, those storefronts in strip malls that front the poor a little money to get them by until their next paycheck…for a price, of course.
In the end, he does hope the light Compartamos shone on the MFI industry causes people to reevaluate their motives and work. He lists many examples of countries that got things right using the idea of microfinance, but with cooperatives, credit unions, federal banks and supportive local governments as the way into the future.
Key Ideas and Objectives
Not knowing much about microfinance before reading his book, Bateman taught me a lot. I think that was his intent. The book is incredibly readable. As you work your way through, you find several moments where you pause reading and think, “They thought that would work?”
Bateman lays out his critique logically and each point flows into the next. Thankfully, he doesn’t feel the need to oversell his points. They do that job just fine without his help. I think Bateman hopes his book really will change some hearts. Currently working in the Balkans, he states how many stories he heard of MFIs gone wrong.
Critique
Bateman is almost rabid in his attack on neoliberalism. While I haven’t studied the theory in depth, I have read regularly about how terrible it has been. While Bateman’s job is not to provide both sides of his argument, surely he could have included a few nods in their direction. Had he done so, he would have strengthened his own stance. It seems as though he feels he is the lone man trying to change a corrupt system.
He has a high level of criticism for Mohammad Yunus, as well. Mr. Yunus and his Nobel Prize seem to stick in Mr. Bateman’s craw. Even though Mr. Yunus has admitted some of his and Grameen’s failings, Bateman still singles him out for being something of a neoliberal lapdog. While we know how the saying goes about good intentions, I think Mr. Yunus has always had the poor of the world in mind. While it doesn’t put him above criticism, Mr. Bateman’s ire could definitely be felt about Grameen and the industry it sparked.
Observations
Why Doesn’t Microfinance Work? educated me a great deal. It was a course on microfinance in a digestible size. The way MFIs have used the poor is both stunning and staggering. Whether the future will lead to a reformed MFI sector or a collapse of that industry and the rise of cooperatives, we must not forget about these people and their daily struggles. While the implementation might have been flawed, Mohammad Yunus’s dream is a valid one. There is still time to see his vision of a Museum of Poverty realized.
