Microfinance, subprime loans and baseball

Is Microfinance the New Subprime?

That’s the provocative title of a new article in the Harvard Business Review by financial journalist Barbara Kiviat and New York University economist (and author of Portfolios of the Poor) Jonathan Morduch.

The subtext of the question is the implication that, like those sub-prime mortgage loans in the U.S. that turned out to be a catastrophic house of cards, some approaches to microfinance are starting to also look like another way for financial whizzes to make money off poor people.

I’ve been posting for the past few weeks on this increasingly heated debate surrounding “profit-maximizing” microfinance and the resulting turmoil in the field. It’s a debate that many organizations in Seattle, where microfinance is big, are watching keenly.

Kiviat and Morduch write about the explosion of microfinance in India:

As microfinance institutions have quickly grown, profit-seeking money has flooded into the sector. Loans to poor households have kept pace, with the number of borrowers surging from 8 million to more than 20 million over the past three years.

Kiviat and Morduch go on to compare and analyze the backlash against “profit-seeking” microfinance institutions in India and those mortgage lending practices in the U.S. that many say helped cause the global economic meltdown. They basically end up answering their own headline in the negative. But more importantly, they seem to me to miss the main point.

It is the “profit-seeking money” that’s behind much of the growth and which is causing all the fuss in microfinance (though I believe the profit-seekers are actually people, not dollar bills). The mortgage lending business is just a business. Microfinance is supposed to be more than that.

Also seeming a bit off the mark was the Financial Times in an op-ed a while back, in which the British newspaper’s editorial board criticized the Indian government’s “political” response to allegations of abuse in its microfinance industry and said the solution is better regulation:

Rapid growth has made it a target for politicians, particularly in a country where much of the financial system remains in the grip of the state.

Anyone familiar with Indian politics will have no doubt that there are probably many different angles on this flap in Andhra Pradesh and no shortage of opportunistic politicians.

But what both these articles neglect to focus on is that the primary struggle in microfinance appears to be about what it’s supposed to accomplish.

It’s supposed to be about helping poor people. It’s not supposed to be just another financial service, or an industry that deserves public (or political) support just because it’s, well, an industry generating money.

The big problem for microfinance today, many experts say, is that as a field it lacks a standard measure of its social impact. They can measure the dollars going in, going out, the interest rates charge, the return on “investment” and all the financial stuff.

But are they helping the poor get out of poverty?

That’s the real question, which brings us to baseball.

Here’s a post from Alex Counts, president of the Grameen Foundation, called “The Importance of Keeping Score in Microfinance.” Counts and the Grameen Foundation (named after Muhammad Yunus‘ pioneering Grameen Bank) have long been pushing for just such a measure:

My strong sense, based on more than two decades in this field, is this — some (microfinance institutions) that are marginally profitable are having a significant impact on poverty, while others that are highly profitable are not making much of a dent in this terrible societal problem.

Yet many of the profit-maximizing microfinance organizations (like SKS, the one currently in hot water in India) argue that financial performance should be the only measure. Or, more accurately, that the financial performance is an adequate proxy for assessing social impact.

That’s like a baseball game with no scorecard, Counts says (though he credits another fellow for coming up with the analogy).

Given that the purpose of microfinance is supposed to be about reducing poverty, he says failing to measure social impact, “Would be like a sports team that didn’t keep score in the games it played, or didn’t track wins and losses.”

Share.

About Author

Editor Tom Paulson is founder and lead journalist at Humanosphere. Prior to operating this online news site, he reported on science,  medicine, health policy, aid and development for the Seattle Post-Intelligencer. Contact him at tom-at-humanosphere.org, follow him on Twitter @tompaulson and/or send a comment below.