Our recent blog post criticising Muhammad Yunus for his blanket criticism of for-profit investment in microlending has sparked a lively debate, especially in the Twittersphere. The influential @socialedge called the post “must read”. @andrewsprung called it a “pitch-perfect rebuttal to Yunus”.
On the other hand, @KimberleyCanada protested “Oh pls. some respect. the man is brilliant and RIGHT.” @LiamABlack struck a similar note of criticism, demanding for Mr Yunus “some respect please. He has 30 years experience on the ground making change for millions possible. you?” (Actually, though obviously not in Mr Yunus’s league, we are not complete neophytes when it comes to microlending. Matthew (aka @mattbish), the co-author of this blog, was a member of the Advisors Group to the UN International Year of Microcredit 2005, while the other co-author, Michael (@shepleygreen) funded and managed microfinance projects during his time working for the British government’s Department for International Development.)
Others found the entire debate a dangerous diversion from repelling the government of Bangladesh’s attack on Mr Yunus (which we denounced in an earlier post): “in these times of turmoil for Mr Yunus and Microcredit, let’s save the better instead of fearing the worst,” urged @thepennylistt, seemingly forgetting that in this battle over for-profit microfinance it was Mr Yunus who cast the first stone.
In longer form, Reuters blogger Felix Salmon was Mr Yunus’s main champion. If microfinance is to serve the poor, he argues, it needs to stick firmly to a charitable model based on free or cheap capital from donors. Now, hey, we’re the philanthrocapitalism guys who think that giving is an important and growing force that is changing the world. But even in the most optimistic scenario for philanthropy, it seems inconceivable to us that there will be enough charitable capital to meet the demand for microfinance from the world’s poor any time soon.
Felix is ready for this argument, however, and offers the ingenious claim that : “If the world of for-profit microfinance institutions dried up, then maybe all those philanthrocapitalists might be more inclined to simply donate startup capital to non-profit institutions instead.” Now this is just plain weird. True, Mr Yunus’s Grameen Bank got going thanks in part to significant grant support from foundations and governments (which, as David Roodman of the Center for Global Development rightly points out, means that Grameen is a bad counter-example for Mr Yunus to use when handing down judgement on other microfinance institutions born without such silver spoons). Yet it was the failure over many decades to scale adequately the nonprofit model of microcredit to meet massive unmet demand that drove the search for alternative, for-profit solutions. Charity alone cannot do the job; relying on charity because we are squeamish about making profits from serving poor people will mean more poor people going without or having to use real-life loan sharks, who are far more expensive and unpleasant to deal with than any recognised for-profit microfinance institution.
Again Felix is ready for us, chuntering at our argument that only 150 million of the 1 billion or so people in the world living in extreme poverty currently have access to microcredit. Well, if anything we were understating our case by limiting it only to those living on less than a dollar a day. If we expand the definition of poor people to those living on less than $2 a day (let alone the poor in rich countries who are starting to be served by microfinance) then the unserved market is even larger. You need look no further than the continuing prevalence of real-life loan sharks throughout the world, charging obscene levels of interest (often 1% a day) and sometimes enforcing their loans through violence and intimidation, to see that there is massive unmet demand for modern microfinance.
That is not to say that for-profit microfinance providers are always perfect or that for-profit should be the only model. Indeed, there is a good argument made by Bhagwan Chowdhry that microsavings and other innovations could help build financial access for the poor without relying on expensive capital from international investors. We are also excited about the potential of mobile banking (something, at least, that we can agree on with Felix). Like microfinance, these are disruptive technologies that will challenge vested interests and generate political resistance, particularly in countries with high corruption and poor accountability.
Nor do we deny that regulation is needed to ensure that microfinance operates to make life better for poor people. But it needs to be the right sort of regulation, such as rigorous anti-trust policy to promote competition. Alas, there is plenty of evidence that capping interest rates hurts the poor by limiting the supply of the capital they need. The right sort of regulation is the kind recommended by Matthew and other members of the Advisors Group to the UN International Year of Microcredit in their concluding statement (starting at paragraph 15). Here are three key points made by Matthew and his fellow Advisors.
“Regarding consumer protection, there are at least three areas in which government can play a helpful, enabling role. First, we recommend that lenders be required to inform borrowers clearly of the full cost of their borrowing, including interest rates and any other fees. Such a requirement ought not to impose significant costs on either lenders or regulators. Secondly, we are concerned that, in some countries, laws to protect privacy are preventing the emergence of credit bureaus. Such credit bureaus can greatly reduce the cost of lending – and thus increase the overall supply of loans – by giving lenders better information about the creditworthiness of borrowers. Some rich countries have managed to combine strong, effective privacy protection with sufficient freedom to share financial information to enable viable credit bureaus, and we recommend that poor countries follow their example and take measures to facilitate and encourage the establishment of credit bureaus. Furthermore, we encourage efforts to help microfinance providers improve their information systems, not least so that these bureaus can receive relevant information. Third, deposit protection is often woefully inadequate in poor countries. Although deposit protection schemes, such as insurance, can have some downsides, including a heavy regulatory burden and the creation of a moral hazard that can make savers careless of who they entrust with their money, combined with effective but light regulation such schemes can greatly increase consumer confidence in the financial system. A lack of such confidence is often – and not unreasonably – a serious constraint on the growth of financial systems. We recommend that governments explore whether they can sensibly and cost-effectively introduce deposit insurance or other protection scheme for savings accounts provided to poor people.”
Our complaint against Mr Yunus is not that he thinks mistakes are being made, or that he wants proper regulation of microfinance. We agree with him on those points. It is that rather than making a justified warning against mission drift by for-profit microfinance institutions, he is making sweeping generalisations that seem to be ideological rather than grounded in reality. The danger is that his public attacks on microfinance models that are not the same as his own will play into the hands of vested interests who want to resist changes that benefit the poor.