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.