The Guardian recently posted an article titled The Microfinance Delusion: who really wins? In the article, Jason Hickel, Professor of Anthropology at the London School of Economics, challenges the idea of microfinance being a panacea to lift people out of poverty. He challenges that it could actually lock people into a cycle of poverty or even experience greater marginalization as a result. Naturally, a debate ensued in the comments.
A reaction from Anuj Jain, Senior Fellow Microfinance and Development at St. Francis Xavier University, was particularly engaging:
Savings, insurance, pension, payment services, remittances, a larger suit [sic] of loans for education, housing, green tech and climate adaptation – a whole host of products and services are necessary and needed for poor as well as non-poor; and are increasingly offered by a variety of institutions in the marketplace – both formal and informal. There is a dire need to move from cliched analysis.[…] credit and loans seems [sic] to be the fascination of the capitalist world, where savings remain a predominant and much more popular product among most. When a wider range and a more complete set of financial products and services are made accessible, only then one can expect people to participate more equitably in the markets. And as we know, finance can only do so much and no more; eventually the markets must become friendlier to all to create more economically equal societies. Expecting miracles through micro-credit is a question that itself needs to be questioned, the promise of which has been over-sold by some, and often lapped up by media for it makes a [sic] good copy – give poor people some money and they will grow their business out of poverty. Give poor some grant [sic], and they will get out of poverty.
I would like to pick up on what Anuj said about those living in poverty (and the rest of us) needing to use a variety of financial services in order to meet idiosyncratic needs. David Roodman’s Portfolios of the Poor echos the importance of diversified services in order to address the challenges of reaching such a target consumer base. Over the past few weeks, I have been interviewing immigrants and learning about how their ROSCAS operate in the United States. What has impressed me is how they have efficiently, effectively and creatively dealt with so many issues that have plagued institutional lenders for so long. Of course, these are based on disciplined savings to avoid needing to go into debt in the first place. If one person is unable to pay the minimum quota of $100 per week – two join and pay $50 each. Want to save more? Pay $300 per week and get your payout at the end to reduce risk. Want to get your payout early? Negotiate with your group and you can usually get your payout early. Default on a payment and you will not only be blackballed from your saving group but also your social group as well. Why organize the group in the first place? You love to do it, you get the first payout and the others pay you a ‘tip’ in the form of a few dollars as a way to say “thank you.”
There is a vast invisible banking system thriving in the immigrant communities of America. It could even be a reason why immigrants are shift their socio-economic status within a generation. They are less likely to fall into the clutches of a money lender.
Over the past few decades we who have left institutional microfinance behind and building on what the poor were already doing in their ROSCAS (Rotating Savings and Credit Associations) have evolved into ASCAS (Accumulating Savings and Credit Associations) with more flexibility to savings amounts and easy access to loans and the possibility to earn on savings. With improved record keeping and greater transparency by saving in groups, most still continuing to save in ROSCAS.
If we took a grant out of the 31 billion surrounding financial inclusion every year – there could be savings groups in place in 2 million villages and urban slums worldwide, not to mention the possibility of spreading these groups in ‘developed’ countries. These groups have the potential to collectively mobilize and distribute 10 billion dollars every year of which 3 billion comes from the profits from the model. Those that needed larger loans could get them from local MFIs as individuals to not put the group’s assets at risk while many more would delink from MFIs because they found it better to save and borrow in their own groups. Improving the lot of what may be a couple of billion of the world’s poorest for a buck or two a head. Sounds like a winner to me.
There are two halves to achieve financial inclusion for all. The “institutional,” to which pro-poor microfinance practitioners have been gnashing our collective teeth about and the “community based” half where so much more could be accomplished with so little. “Community based” initiatives demonstrate the ability to continue functioning in the face of insurgencies, drought and crumbling institutions. They work because they capture the brainpower of people who want to improve their lives. Is this the only answer? Of course not. Should more resources be poured community based solutions? Of course. Should we spend our energy linking these groups to financial services? Perhaps not. Perhaps, the sector should just trust the capacity of smart people to create their own systems and then get out of their way.