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Mohammed Yunus and Michael Chu debate commercialization

The World Microfinance Forum in Geneva just put on a conference, and I might say, a quite successful one: over 300 investors and others paid their money to attend, and the presentations were well received. I was asked to moderate a debate between Prof. Yunus and Michael Chu. Michael, for those who don't know him, was a big-wig investment banker who then spent a few years on microfinance as President of ACCION. He's now teaching at Harvard Business School, and has stayed close to our field since he stepped down from running ACCION.

The debaters argued about whether commercialization (let's define it as the entry of investors whose primary motive is financial rather than social) is good for microfinance. Yunus thinks that it's immoral to make money off the poor, and that the only kinds of investors needed in microfinance are ones who are willing to accept very limited profits for the sake of keeping as much money as possible in the pockets of the borrowers. Michael thinks that we can't meet the worldwide demand for poor people's financial services unless we can draw in private, profit-oriented capital, and that eventual competition can be counted on to bring interest rates and profits down to consumer-friendly levels in most markets.

It will surprise no one to hear that they didn't work their way to an agreement after an hour and a half. But the audience response was amazingly enthusiastic. I suspect part of what the audience liked (certainly the biggest thing that I liked) was listening to two industry heavyweights talking over these contested issues face to face, and respectfully. I confess that I've been disappointed for years that we conduct so many discussions of these hot issues by lobbing rhetorical grenades over the wall at each other. Even when consensus isn't reached, it's so much more satisfying, not to mention productive, when people are in a room talking to each other, and laying out issues instead of attacking each other's motives.

I had one more reflection after the event. As I listened to and thought over the issues, it became clear to me that a core question in this argument is a factual one: is there enough government and socially-oriented capital to meet eventual worldwide demand for microfinance, or is there not? Neither debater had much to offer by way of evidence to support their opposing assertions about this. Michael did present a back-of-the-envelope dollar demand guesstimate. But Malika Anand and I wrote a paper a few months ago looking at demand estimates, and I'd think that the assumptions behind Michael's, like the assumptions behind all the others I've seen, are probably way too optimistic, at least when compared with the empirical data points that we have so far. Anyway, even if we knew what the demand would be, that gets us toward an answer only if we also have some kind of fix on how much subsidized and soft money is floating around out there. Neither debater had anything to offer on that one. I don't either. As I write this, it occurs to me that some of my CGAP colleagues in our Paris office have invested tons of work in gathering data on donor and investor flows. Maybe I'll give them a call next week to see what light they can shed.

Richard Rosenberg, cross-posted on the CGAP Microfinance Blog.

Comments

Raising socially oriented capital for microfinance in a scalable manner is a big challenge, and perhaps the biggest challenge facing microfinance. Our organization http://www.unitedprosperity.org will allow the general public to offer guarantees on our website. These guarantees, which are really a form of social capital, will be used to free up a considerable amount of commercial capital worldwide. We believe that there is a considerable amount of social capital, it is just that we do not have means of tapping into it. Our website to make guarantees is now ready and we hope to sign our first partnership agreement with a bank and an MFI and launch very soon.

Submitted by Amer Khan on
Hi Richard, I am a PhD student and also looking for data on "donor and investor flows".... tried asking for that info on Microfinance Practice yahoogroup but to no avail. Could you please share the results of your search for data? Thanks Amer

It is asked “is there enough government and socially-oriented capital to meet eventual worldwide demand for microfinance, or is there not?” For a starter, to have a chance to answer that question constructively, we need to separate microfinance for entrepreneurial activities and microfinance that is simply disguised consumer financing. If we analyze for instance the equivalent of consumer financing in a developed country, like the United States, where credit discrimination based on non-transparent credit scores is allowed, just because this permits to corner more people willing to pay those higher interest rates that help to cover for those who do not repay, then we could conclude that consumer financing might, in the US, be a source of inequality far bigger than what frequently many attribute to globalization.

In the networked era, altruism is a competitive force along with pricing (i.e. interest rates). I hope that Michael Chu is pointing this out as part of his argument. For my explanation of this, grab my ebook, "Introducing Social Capital Value Add" at www.socialcapitalvalueadd.com.

I think that rather than taking this issue in a dialectical way (social vs. private interest rates), both alternatives should be considered part of the solution as components of a two tier microfinance system. Microfinance à la Yunus should be the first tier, as it's a proven and efficient way of practicing welfare measures in less developed countries. Microfinance à la Chu (or CGAP?) should also be promoted, though its target group will probably not serve that well people living bellow the $1 a day poverty line. I think it could better serve those who can successfully graduate from the first tier.

I go back to a simple mathematical principle. Change a core rule of a game and you compound opposite outcomes. Microcredit is a game that was mapped in 1976 by Yunus and 4 co-founders round the social business model of serve the poorest customers by also making them owners of both the banks and future sustainability goals for the community - poverty's failed system involving both personal and community traps. Mathematically, Compartamos is trying to pass itself off as something it is systemised to destroy. So for me the most interesting question becomes: when you open source an end poverty solution to help over 100 million poorest people, how do you network enough observers to give early alerts to when the rules are being locally broken by system ignorance or specifically manipulation. We support the Yunus inspired idea that youth worldwide can be the most open observers. To celebrate the 2nd anniversary of Microcredit's Nobel prize for ending poverty we are sending out 10000 dvds to youth with 25 good news video conversation starters from Dr Yunus and the founding 4 of microcredit so that youth dilaogues can brand the 34 years of social and economic intelligence that true microcredit cultivates. Join us if you know of a youth group willing to replay this transparency game.

Submitted by Jeffrey Ashe on
Richard, Sounds like a great debate. We know in the case of Mexico that rates do not need to be so high since the credit unions provide services incuding savings at a much lower rate (if I remember right about half). Compartamos can charge what it does because there is no competititon. I would like to have the opportunity to organize self help groups in the same villages where Compartamos is working. The women might find that saving $100 and using it while earning a return is a lot better than borrowing $100 and paying 100% interst on it. The great untapped source of capital could be remittances. What I would like to see is the "Juan to Juana" model where Juan sends his remittance to Juana who uses part of it for consumption and invests the rest in her group so the women who do not receive remittances have access to capital to build their businesses. A win win situation with no institutional involvmement. Finally it seems from postings that I have seen over the past few days that the sources of international capital (and local capital) for MFI loan funds are drying up with the global financial crisis. Any thoughts on this? Jeff Jeffrey Ashe Director of Community Finance Oxfam America

Submitted by Richard Rosenberg on
Jeff Ashe correctly notes that credit unions in Mexico charge lower interest rates than Compartamos does. What is not so clear is how comparable the services are. But whatever the answer to that question, there's no doubt that a very high profit has been built into Compartamos's rate, at least as of last year. Compartamos faced little direct competition for most of its history, but that appears to be changing quite fast now. My impression is that rates there are continuing to move downward. I agree with Jeff that it would be interesting to offer Compartamos clients the alternative of member-managed self-help savings and loan groups. My own unreliable guess is that clients would use both services. Jeff and Hugh Allen will correct me if I'm wrong, but my impression is that savings-financed loans within member-managed groups tend on average to be smaller, simpler, and sometimes shorter-term than MFI loans.

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