Banks & microbanks
Just came across a fascinating study by Jonathan Morduch & co-authors, who find that an increased presence of formal banks in a given economy pushes “commercially-oriented” (for-profit) microbanks towards serving a poorer segment of clients. I find this simultaneously intuitive and counter-intuitive: intuitive that competition pushes banks to expand their target market, but rather surprising that the expansion of large banks (who are generally seen as bystanders in discussions of financial access for the poor) may increase access to financial services in the end. Interestingly, the authors believe this to be one of the first studies of competition between microbanks & formal banks, pointing to a fantastic avenue for research as the microfinance sector continues to grow & formalize.
Also, my favorite phrase from this paper? “Informationally challenged borrowers,” i.e. those who lack the appropriate documentation (ID, land titles, etc.) to obtain a formal bank loan.
The flu, feminism, and Africa
So my immune system apparently decided that it was due a well-earned holiday after keeping me perfectly healthy in Rwanda & the Congo for a year, and I currently have some unpleasant flu-like thing for the third time in three weeks. I was clicking around my bookmarks last night, fever-fogged and too tired to do any productive work, and stumbled across a list of several feminist blogs that I once regularly read, several years ago, right around the time when I really started paying attention to news from Africa. And I didn’t see any connection between these subject areas at the time. Africa was this huge conglomeration of histories and politics and economics and cultures and stories that I was doggedly trying to make some sense of (and still am), in the face of a lifetime’s worth of misinformation on the topic, and US-focused feminist blogs were just an interesting way to learn something new and pass the time during my off-term. But reading posts like this one last night, even if I didn’t fully agree, made me see the subterranean connection between Western feminism & Africa: that the best strains of feminist thought all boil down to respecting people who are not like oneself in one or more noticeable & materially relevant ways. More specifically, they emphasize listening to the voices of people whose voices have historically not been heard, and understanding that differences don’t have to be understood as scaled – that being “different from” in no way has to map to “better than” or “inferior to.” Without knowing it, I think I’ve been trying to read this as a roadmap for being a Westerner working with people from Africa, respectfully and productively, for quite some time. (Not that I always get it right. Just that I’m trying.)
And for me, that’s everything development should be: a series of mutually respectful, genuinely productive partnerships between developing nations and developed ones. This doesn’t have to mean that everyone has to be happy at all times. This doesn’t have to mean that “development to Western standards” must be accomplished overnight or the entire process is a failure. But being respectful does mean being careful when one is the bearer of a huge power imbalance, and is working in a historico-politico-socio-economic situation that is well outside one’s personal experience & understanding of the world, because it is far too easy to damage things in that situation. (And no, it is not respectful to say that you didn’t know you were damaging anything, because being uninformed about the place where you’re working and the people who are carrying out their lives there is not an excuse.) Being productive, well, that’s a more complicated question – long term vs. short, who benefits, and how? In the end, though, I think the feminist-derived insistence on understanding experiences other than one’s own is absolutely imperative to making development work more effectively.
(In case you’re interested: I have yet to find a feminist blog that posts primarily & consistently on topics that interest me, unlike several Africa & development blogs I could name. The blogs linked in the first paragraph are rather mixed bags, and I’ve always skimmed them more often than I do with Africa/development blogs. However, I would encourage you to click over and wander around for a bit to see if you find anything interesting. I’m also fascinated by two blogs I just found on the intersection of disability & feminism: FWD & three rivers fog.)
Development wishlist
One of the fun parts of doing the job hunt/grad school application thing is that it gives you a structured opportunity to articulate what you’d like to see the development community doing, and how you’d like to participate in it. After straining out all the things that will actually be going into personal statements, everything that’s left is being added to my only moderately unrealistic economic development wishlist:
- I want to see more economic development practitioners talking to economic historians. There’s a strong share of immediacy in much dialogue on international economic development – the demand to stop dithering and end poverty now. I think this is a moderately useful moral statement, and a nearly useless policy formulation for engendering broad & sustainable increases in the incomes of the poor. Frankly, it promotes a strain of analysis that approaches successful, present-day Western economic policies as if they developed in a vacuum, and often gives short shrift to the historical quirks, accidents, and forethought that went into their development – the messy, long-term process of actualizing beneficial policy. I’d love to see more practitioners drawing from research into historical processes of economic development (such as De Soto’s work on the Homestead Act in the US), and much less poorly-considered application of Western present-day policies to non-Western situations. (Another great example is Roodman’s work on microfinance in Europe & the US as long ago as 1800. Which brings me to my next point…)
- I want to discourse on innovation balanced with discourse on not reinventing the wheel. I’m obviously not anti-innovation. People are doing some great thinking on how the constraints of poverty both necessitate and facilitate innovation. But I’ve also come to realize that, if you’re a smart & dedicated person and have an innovative idea, there’s a significant chance that at least one other smart & dedicated person has had a similar idea. At this point in your promotion of said innovative idea, you (generally) could A) seek out other people working on it and collaborate, B) learn about the shortcomings of the other idea and compete with an improved product, or C) independently develop & fund multiple small duplicative non-competing projects based on the same idea. I don’t mean to pick on stove projects uniquely – I think they’re tackling an important issue, and they were the first example that came to mind rather than the most egregious. But I do wonder how much of the time & how many of the resources spent on social enterprise product development (or program development more broadly) is genuinely productive, and how much goes to needlessly reinventing the wheel instead of learning from existing examples. (See also Easterly’s critique of learning in aid programs since 1938.)
- I want to see less programmatic emphasis on solving every problem simultaneously, and more on sequential implementation in increasing order of difficulty. You could equally rephrase this as, “it’s not always wise to do the hardest thing first.” There’s a lot of value in starting with a feasible goal, learning by doing, and expanding into implementation of more complex or wide-ranging programs later – and it’s much more likely to be successful.
I’d love to know, dear readers: what’s on your wishlists?
Microfinance in the short & long term
It’s been a matter of some curiosity to me that the debate over for-profit vs. non-profit microfinance has remained quite vociferous over the past few months, even whilst more balanced views of the social role played by microloans have been gaining acceptance. It’s clear that a good deal of the heat generated by this particular debate is attributable to the inclusion of market-based anything – as Amanda recently wrote, “people conflate ‘market’ with ‘unfair and exploitative’ all the time,” which is obviously a sensitive issue when one is talking about banking with the poor. But then, MFIs by their very nature – even non-profit ones – are committed to helping clients participate in business and markets. A purely market-based critique falls a bit short of explaining all the differences between the two sides.
I was thinking about this when I read Matt’s recent post on arbitrary deadlines in development. The most insightful observation was that it’s “highly likely that the types of policies we should implement when thinking about poverty for the next 100 years differ significantly from those we would use when thinking about poverty for the next 20, or 5 years.” And this, I think, goes straight to the heart of the microfinance debate: there is often a temporal mismatch between the effective goals of for-profit MFIs and non-profit MFIs. For-profit MFIs, whose clients appear to be on average less poor than those of non-profits, fit into an economic space where real growth at least seems possible over the long run. Non-profit MFIs, on the other hand, are often better suited to meet the immediate consumption-smoothing needs of poorer clients, rather than long-term investment needs. The goal that one prioritizes probably indicates where one stands on the for- vs. non- debate as well.
This temporal perspective also goes a long way towards explaining certain criticisms that each side has launched at the other. For instance, among the various non-profit complaints about the Compartamos IPO is the valid criticism that poor clients who are left behind by a privatizing MFI may not have access to another financial institution. The subtext is, is short-term harm to poor people worth longer-term growth for their descendants? Conversely, one also finds criticisms of non-profits for funding small businesses that fail to generate jobs or economic growth – an interesting moralizing critique of MFIs that use their capital inefficiently, and perhaps help fewer people than they ultimately could in the long run.
I am, of course, generalizing to some degree about the characteristics of for-profit and non-profit MFIs. This is based on my current understanding of the debate, but I wouldn’t wish anyone to accept this uncritically, as I’m sure there’s a non-negligible number of MFIs out there for whom these descriptions would be wrong. (I’ll even point to the first one myself – FINCA-DRC is a for-profit institution that’s quite committed to small group lending with women, which is a short-term consumption-smoothing tool if ever there were one.) But the larger take-away here is that we as practitioners need to look more closely at the temporality of economic growth and poverty reduction, and discuss our allocation of resources between the short and long terms more explicitly. I’m guessing there’s a place for both types of MFI in most, if possibly not all, markets.
Content-free update
I have not fallen off the face of the earth, but I have been rather swamped with wrapping up my research for FINCA & moving to a new, sadly internet-free apartment in Chicago. Regular posting to resume at some point in the near future!
On microloans & credit cards
Ah, I have so much to write about after 2.5 months with FINCA in the DRC, and so little free time in which to do it! But one comment that I’ve been turning over in my mind for some time now is something my father said to me when I was explaining the concept of group microlending to him. I pointed out that most clients don’t borrow for discrete events, like buying a car or paying for college, but rather take out multiple sequential small loans to finance everything from business activities to children’s educations. (Granted, many microfinance clients aren’t supposed to be using loans for consumption purposes, but even the social pressure of group lending can’t always prevent this.) My father’s response was that this type of lending sounded much more analogous to owning a credit card than taking out a “traditional” Western loan. And I’ve been increasingly fascinated with this idea as its implications have sunk in.
Consider the long-dominant narrative of microloans as a pathway out of poverty, now coming up against a more nuanced narrative of microloans as consumption smoothing tools whose efficacy in moving borrowers out of poverty is also dependent on the individual borrower. (See the end of this post for more on individual variation.) I don’t actually find these positions contradictory, just varying in their levels of nuance, but for those who do find them mutually exclusive, I think the credit-card-vs.-traditional-loan idea may resolve many of the apparent contradictions here. “Traditional” loans are usually aimed at smoothing consumption around the type of significant investments that provide positive, and lasting, long-term shocks to income levels. Borrowing to finance a university education is a good example of this. Credit card companies, on the other hand, make few claims about their beneficial effects on one’s long-term financial health – and are better served overall when a portion of their customers spend themselves into debt and pay hefty fees for the privilege. The whole point is to smooth consumption of inexpensive-to-midrange products & services, and few people consider them a substitute for a larger “traditional” loan unless they’ve no other choice. (Have you discussed putting a $180,000 undergraduate education on a credit card with your friendly local admissions officer? [Hello, Dartmouth, you expensive old dear.] I didn’t think so.)
In short, the “pathway out of poverty” narrative expects microloans to function similarly to “traditional” Western loans, and play a significant investment and capacity-building function on a personal level. The consumption smoothing narrative, on the other hand, is redefining microloans as something closer to cash-only versions of credit cards. (Without so many options for punitive fees for defaulters, and with a greater risk of an angry group of Congolese women coming to your house at 6 am to repossess all your plastic chairs as punishment for a missed payment.) There are a thousand interesting directions one could go with this thought, but what I think it mostly points to is the fact that the formal economic structures of microfinance are still going through a dramatic period of evolution. There aren’t many Western banks that wake up wondering if their primary product is a mortgage loan or perhaps really a credit card, after all. And that leads into implications for product design, and the unbanked’s perceptions of and interactions with formal banking institutions, and on and on into what I’m sure will be many future blog posts.
Citing sources
Hello from Kinshasa! After giving it some thought, I’ve decided that I will go back and add links to all of the studies I’ve cited in my previous posts. The citation-free format was appropriate for my purposes when I was blogging solely for my own recollection, but as the blog has become more of a public forum now, I think citations are entirely appropriate. (Granted, this probably won’t happen until I’ve left the DRC, so hold off until late August or so to look for them!)
Hiatus
I’m going to be moving to Kinshasa, DR Congo, in a few days, and I expect that my internet access may be patchy at the best of times, so this blog will probably be quiet from June to August. I’ll be back in action after that!
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