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The Yunus Debate, continued

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.

0 replies on “The Yunus Debate, continued”

Thank you for providing crucial perspective on the need for investment capital in microfinance, the limitations of donor funds, and the essentials of effective regulation. I would only add that not all informal money lenders should be tarred with the “loan shark” brush. Daryl Collins et al point out in Portfolios of the Poor several ways in which some moneylenders and other informal financial service providers furnish needed services in ways that are not always predatory. For example, $10 loaned on a week’s term with $10.25 due at term’s end works out to an APR of 261%. Moneylenders often tolerate irregular payback, and such forbearance is effectively priced into their loans. Finally, some providers of private means of saving charge a to us astonishing fee (or negative interest rate) of over 3% per month, but there is still a real demand for a safe place to hold savings at this price. None of this is to suggest that microfinance providers should not be under pressure (preferably market pressure)to bring rates as low as possible, or that failures in MF consumer protection should be tolerated. Still, we need to be careful in condemning prices and practices that seem predatory by unexamined standards.

You can not pillore Prof Yunus like this. The post advocates in some ways same old menaces for which Grameen Model had emerged decades back.

In support of Dr Yunus, let me please offer a perspective from Eastern Europe. One of the most successful aspects of what was known as the Tomsk Regional Initiative was the creation of a community microfinance bank based on the ‘moral collateral’ loan circle approach pioneered by Grameen. It was run by Finca, as I’m informed, with a $6 million investment from USAID achieving repayment and business survival rates, typical of this approach. This allowed those who had no collateral whereas in contrast, commercial lenders typically served business and those able to provide material collateral. Essentially, they don’t lend money to poor people.

As can be read in the proposal for a follow on initiative for the Crimean Tatar community, there was no means for poor people to start a business. EBRD and Credo had material collateral based schemes with high interest rates, commercial microloans were made only to existing business where often they were absorbed by an increase in protection racketeering. When Dr Yunus was intervied last year at the RSA one member of the audience related to him that her organisation had introduced a microfinance scheme for women in Ukraine and found that “all the money went to the mafia”.

http://www.p-ced.com/1/projects/ukraine/crimea/

To our knowledge the only really successful approach in Eastern Europe was ‘full cost recovery’ and non commercial. It was to become the standard approach for the Russian Microfinance Centre founded in 2002.

Yunus himself has said that “once a SE operate at 100% or beyond the cost recovery point he has entered the business world with limitless possibilities. This is a moment worth celebrating. He has overcome the gravitational force of financial dependence and now is ready for space flight ! This is the critical moment of significant institutional transformation. He has moved from the world of philanthropy to the world of business.”

It;s not making a profit that’s the issue. it’s what’s done with that profit, whether distributed in dividend to shareholders or re-invested to serve further social innovation to effect a move toward capitalism for social benefit driven bottom-up.

“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..”

This is because you are not paying attention to what is developing under your feet. CHIRA ( http://www.chirausa.com ) is a domestic, pre-tax micro-financing plan involving just donors and charities. No commercialization and with proposed legislation allowing non-usury loans, CHIRA offers enormous monetary velocity for American charities.

Here is an apropos piece I wrote in response to an article written in Bloomberg News by William Pesek in August of last year. It is as relevant in the Muhammed Cronus debate today as it was in response to the article 6 months ago.

Background: Co-founder of Dignity Fund, former director of Unitus, founding sponsor of Unitus Capital, Chair of the Advisory Board of the Microcredit Summit, founder of Race4Change.org.

From: Steven Funk
Sent: Friday, August 13, 2010 1:04 PM
To: ‘wpesek@bloomberg.net’
Cc: ‘jgreiff@bloomberg.net’
Subject: You might like to publish this about the poor, microfinance investors, SKS, or the Simpsons

Dear William and James,

For whatever involvement you might have had in the article the “ ‘Simpsons’ Farce,” I should be proper enough to send this note to both of you fine people.

Let me start by saying how poorly toned your article was. Then, let me say that I am an Iowa poor farm boy that grew up to become a multimillionaire and am a major supporter of microfinance, both of time and money. I am the Chair of the Advisory Board to the Microcredit Summit, I am a founding director of Unitus, founding financier of Unitus Capital and have a major league dedication for major league microfinance related players (not money related) that I spend a great deal of time with. We don’t always agree, but I am not unsure of my views – by experience and real life development.

Why are you wrong? The simplest answer, the elevator talk, is that money begets money. You loan to a poor person and give them respect and dignity and they pay you back. Microfinance is the gift that keeps on giving. It is sustainable. It is a helping hand up, not a demoralizing hand down.

My father was one of those people needing a helping hand up as a poor Iowa farmer literally telling me we couldn’t afford the toilet paper I too piled into my hand to wipe my bottom. He got a “micro” loan borrowed from a bank and he paid the bank back and the bank grew. I assure you that even the most illiterate beggar understands the lowest cost source of capital. She borrows, she pays back and the lender grows and lends to more people. When the lender does so successfully, and not all microfinance organizations do, it grows and those that risked their capital get repaid or, in the case of SKS, they hit a home run of a return on their founding risk capital. Presumably and often those investors were the kind of people that invested because they cared about microfinance first and foremost, so maybe they’ll do it again.

MAY I TELL YOU WHAT WILL HAPPEN FOR SURE! IF ONE CAN MAKE A PROFIT, AND THIS DOES NOT ALWAYS HAPPEN IN MICROFINANCE, MORE PEOPLE WILL INVEST IN THE SECTOR. SKS HAS BEEN ALMOST ABNORMALLY GOOD AT GROWTH AND SUCCESS HOWEVER YOU WISH TO MEASURE IT. BECAUSE OF THIS, MANY, MANY MORE WILL BE ENTICED TO INVEST, AND SOME WITH DEEP POCKETS – BANKS, PENSION FUNDS, TRUSTS, COMMERCIAL INVESTMENT MANAGERS, AND SO ON. YOU CAN SEE IT HAPPENING BEFORE YOUR VERY EYES THE LAST 5 YEARS. FINANCIAL REWARD BRINGS FINANCIAL ABUNDANCE – FOR MY FATHER, FOR AN INVESTOR, AND FOR THE POOR AND THE VERY POOREST OF THE POOR. FINANCIAL ABUNDANCE TO MICROFINANCE INCREASES COMPETITION, REDUCES BORROWING COSTS, AND FORCES INCREASED EFFICIENCIES AND TRANSPARENCY. IT ALSO INCREASES THE RISK AN INVESTOR WILL BE EXPOSED TO BY INVESTING IN THE “NEXT SKS” (SHHHHHH – DON’T TELL OR MONEY TO THE SECTOR MAY SLOW).

You, and Muhammed Yunus, who as a “granddaddy” of microfinance preached “no grants or handouts” and now preaches that one who profits from microfinance is nothing but a new form loan shark, HAVE IT ALL WRONG. Profit brings capital. To make just a dent in poverty, certainly by way of microfinance, we need to mobilize immense capital, not put a “governor” on the throttle of capital formation for the poor. When a big “win” happens, like with SKS for its investors, praise them.

Where were you when the first SKS money was funded? Where are you now in investing in the alleviation of poverty? Your pen can perpetuate conflict and need or it can be, as microfinance is, a power for peace and prosperity. I know where a lot of people who care about microfinance (or are just now learning about it) will be – looking for an investment in microfinance institutions. That is a very good thing indeed.

Kindly,

Steven Funk

The Article:

Hedge Funds Gamble on Poor in ‘Simpsons’ Farce: William Pesek
2010-08-04 19:00:00.0 GMT

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