A Humble question to Muhammed Yunus

By Aloysius P. Fernandez,

Microfinance Focus, January 26, 2010: The business model of for profit MFI-NBFCs – some of whom claim to follow the Grameen Model – is increasingly being questioned as an effective tool for poverty alleviation.

In a previous post [ Link ] I had presented a case for two strategies:

1.    The SHG strategy (together with the SHG Bank Linkage program) which, from my experience over the past 27 years  is appropriate to include poor families into the growth trajectory and also to  increase their incomes in a sustained manner over a period of 6-8 years. Though the role of SHGs in the provision of credit has been highlighted, credit is only one factor; others are building self confidence and skills to negotiate and decide, joint action for lobbying to neutralize power relations which are oppressive and prevent entry into the growth trajectory (not only to credit institutions).These strengths are all incorporated in the word “empowerment” which well functioning SHGs generate. The dynamics of interaction among members generates the confidence and skills to take decisions and forge networks and federations of SHGs – these together provide the “power” to overcome hurdles and equip the poor to find entry into growth. The poor are in the status of “Pre-Clients” and need to equip themselves with the skills and resources required to be able to demand and access resources and entitlements which is the strength of “clients” who are the not poor.

However the SHG strategy (like any other strategy) cannot achieve its objective in isolation. It needs adequate investment in the area of operation  from the Govt., private sector  or NGOs which provides options for investment and/or reduces risk; it requires  various support services to support value creation; it also needs up front  investment in institutional capacity building (ICB) which includes training in at least 12 modules including how to analyse society, to foster participation, to arrive at consensus, to resolve conflict, what are the essential features of an SHG, the importance of  sanctions etc – all this training in ICB  takes time and money. Unfortunately this investment in ICB has been neglected in the rush to include the poor only in the financial system through no frills accounts etc. This is based on the mistaken assumption that the only reason to form SHGs is to access credit. Andhra Pradesh is a classic example of the rush to form SHGs and extend credit without adequate ICB and support services. Most of them were weak institutions. This was perhaps the major reason why the MFI-NBFC strategy to form JLGs - many of which were formed by poaching the SHGs - succeeded so well in the state.

2.    The for profit  MFI-NBFC model,   I dared to suggest, is more appropriate for the not poor who have difficulty to  access   credit from  formal institutions because of several reasons including distance to banks, long delays and paperwork required, no proper land records, previous defaults etc. They have the skills and resources - like good land 2-6 acres   often irrigated or in good rainfall areas and/or potential to invest in non farm activities; but   have to rely on money lenders who hold a monopoly situation. Apart from lack of access to formal credit, their major problems are poor infrastructure, corruption etc.

This   paper attempts to take a step further -  to raise a doubt that  the MFI-NBFC strategy as practised by the major MFI-NBFCs in India is  appropriate to create value even for the not poor. Since  many of  them claim to follow the Grameen Bank Model - more correctly the Grameen II model which was launched around 1999-2000  and which opened the door for the neo liberal features of Grameen Phase II - the question I raise is relevant. All evidence emerging from AP indicates that  under the pressure  from the neo liberal market forces and venture capital   to commercialise micro finance   - which means   to grow fast, to earn high profits and offer high salaries, with an eye on valuations and IPOs ,  all the while stressing that self help and privatization is the best strategy to eradicate poverty -  the business model of Grameen II  very quickly begins to  move from focusing on the objective of achieving  financial sustainability of the MFI-NBFC to one where profit is maximized. And if office bearers in our national institutions  support  this model  on the grounds that it is the fastest to include the poor in financial services and if the governance of these MFIs sees nothing amiss, then the business model becomes entirely  driven by the profit motive; without any effective regulatory framework the course is clear. Both the private sector and the MFIs sniffed profit at the bottom of the pyramid; both looked at the poor as opportunities rather than responsibilities  ; both ended up by catering to consumption aspirations and making profits higher than the most valued private banks.

Muhammed Yunus has done a fantastic job, but the Grameen bank he founded in 1983 is not the one that emerged after the Grameen II  Project which was launched  around 1999-2000. Though the ownership of the capital structure did not change, the delivery model did.  Under the Grameen II framework,  Phase II commercialized the business model: the poor have to pull themselves up by their bootstraps and by implication Government should keep its distance . Music to the ears of neo liberals and columnists who are given prominence in the Indian newspapers. Savings became compulsory – and compulsion whether of savings or in repayments adds a new dimension of power to the MFI. Commercial relations were established with MNCs like Telenor and Danone which surely rubbed off on Grameen since their representatives surely had a greater impact on governance than the client share holders.  Yunus himself began to distance himself from  day to day involvement in GB which came under others who did not share his convictions. Today GB   is no longer eradicating poverty but bringing financial services to people many of whom are not poor.  The original social mission of  Muhammed Yunus  has been consigned to the museum, not poverty. My question to Muhammed Yunus is this:

“ Why did you not react strongly to Grameen II –or Grameen Phase II when it had begun to develop  all the markings of a neo liberal  product...  and  when it was aggressively promoted  as a model to be replicated all over the world?”

Perhaps Yunus did not react because he thought that good governance and commitment to the poor which characterized the first 15 years of GB  would balance or neutralise these neo liberal structural features. But my experience is that once you plant an ‘Aam’ (mango) you will not get an Anaar (pomegranate) no matter how much you want one.  You may say all the prayers and apply all types of fertilizer but you will still get a mango. So what do the supporters of Grameen II do? They paint the mango like an anaar. This can throw dust in peoples eyes for some time with aggressive PR - and GB has it - besides there are too many reputations in international financial institutions at stake; but the rains do come and the paint washes off and you are back to the mango!

It is easy to say as some international organizations promoting micro finance do: “Let us learn from the mistakes and move on”. Unfortunately they have not learned from their mistakes as is clear from their reaction to Mexico’s Compartamos experience as recently as   2007.   Apart from continuing to aggressively promote the business model which maximizes profits, there are increasing signs that funds will start to pour in to AP from abroad to rescue the MFI-NBFCs without any structural change in the model being required. There is no evidence that international organizations are learning from the mistakes; no structural changes in the model are being envisaged; a few superficial changes will suffice ; the aam will again be painted like an anaar This is perhaps  a bigger threat  than the crisis that emerged a few months ago. The structural changes required are mentioned below.

The experience in AP adds weight to my position. In 2004-05 when the Krishna District  crisis emerged, the MFI- NBFCs all agreed to change some features of their business model. A code of conduct was drawn up and agreed to. Did they observe it? No. ACCION and CGAP were involved in coming up with similar codes earlier as a fall out of their experience with Banco Sol and Compartemos. But their subsequent actions did not show that the code had any impact on the structure of the MFIs.  In AP, as soon as funds started flowing again after the Krishna crisis, initially leveraged by private capital, the code of conduct was consigned to the museum.  My contention is that the very structure (or business model) of the MFI NBFCs lends itself to the features which precipitated the Krishna crisis as well as the crisis in 2010 and will continue to lead to further crises in future if structural features are not addressed.

The major structural features of the NBFC- MFI model which lead to these crisis because it  is inappropriate even for the not poor are:

1.    The inability of the Grameen II model to cope with diversity because  of standardisation  – same size loans to all and same intervals ; if small differences are made  in the second round it is mainly due to confidence levels in the client not on the potential for income from the activity proposed; the same repayment period for loans whether for agriculture, business or off farm activities . This in turn is conditioned by the software (ICT) which is often been promoted as a solution to most of the woes faced by the sector. So far ICT has helped to cut costs of the MFI; on the other hand it has imposed a standardised system on the clients (yet we celebrate diversity in other sectors). Together with standardisation, comes speed –including topping up with similar amounts which will be discussed later. In a second part of this post I will give some profiles of the livelihood strategy of SHG members who started out as poor but came out of poverty after 6-8 years; these livelihood strategies  indicate that the requirements in all  cases are diverse and that it takes at least 6-8 years  with around 15 loans  for various purposes and of various sizes amounting to Rs 2-4 lacs before people are firmly into the growth trajectory.The software of MFIs has to  be made compatible with the diversity reflected in the livelihood strategies of the poor.

2.    MFIs do not have the space or time to provide support to ensure that even the non poor have the services and information required to make investments productive.  MFIs need to provide this support themselves from their profits or partner with others who can - like NGOs, Private sector or  government institutions. The high rates of failure in income generating activities is due to this lack of timely, appropriate and adequate support. The present approach of MFIs however is entirely driven by competition - not by partnership and by speed to provide the next loan. I am not referring here to the practice of some MFIs to start health programs to present a soft and caring image to clients. This does not change the model. Rather the model must include partners who can add value to the investment.

3.    The potential for rapid growth and high profits of the business model reduces the interest from financial institutions in investing in second level institutions which takes time, has higher risks and is not as profitable.  Yet second level institutions to aggregate and add value to various farm products and to develop linkages with industry for design and marketing of farm and off farm products are a crucial step to sustain growth. This gap is increasing daily and must be addressed if growth in the rural sector is to take off. Financial institutions need to give this priority.

4.    The MFI practice of  weekly/monthly repayments at the doorstep (or nearby) does not jell with the cash flow of income activities which is lumpy. This in turn forces them  to take up daily wage  labour or petty business or borrow from one MFI to pay another—most resort to the last option. This structural feature results in multiple borrowing. The doorstep offer which is touted as a major plus is a double ended sword especially when there is pressure from the MFI to grow rapidly backed up by incentives to staff. As a result multiple lending has been a feature in every country where the Grameen II model (or prior to it the commercialised model) has been introduced be it Mexico, Boliva or Bangladesh and now India. In the SHGs, (the real ones), there is no such pressure from incentives and further at least a third of the common fund is owned by the group in the form of savings and interest, hence they  assess each loan request carefully and make sure that here is no multiple borrowing which will affect their group interests.

5.    The pressure exerted by MFI staff on clients to repay; one study has identified 9  ways in which MFI staff  exercised   pressure  which need not be described here .  This is not socially acceptable and will continue to cause negative reactions from society. There are only four sources which exert pressure to repay: a) physical collateral; b) affinity among members which exists prior to MFI entry and which needs to be discovered by the MFI - on the basis of which SHGs are formed; the members self select themselves.  This affinity is  a strength  and is further developed by institutional capacity building and management of a group common fund consisting of their own  savings, interest earned on loans, fines, donations; the pressure to repay comes from the group. When social pressure does not work  the group decides to go further ;there are several examples of the SHG group lodging police complaints against defaulters, seizing assets like agri or horticultural commodities  or bullocks ; but because it was the group that acted there was no  reaction from society; this shows that pressure may be required at times but the source of the pressure must be from the peoples institutions and d) the expectations of another loan within a short time even though there is no potential for investment.

6.    MFI-NBFCS hide under the myth that JLGs which are formed by MFIs who select the members provide  joint liability and build social solidarity. The question is - if the JLGs worked effectively (as the MFIs claim) why did the staff have to exert pressure. Further in many cases the clients who are members of JLGs are forced to pay up when others default; it does not come willingly; and in such cases the JLG breaks up.

7.    Very high interest rates (often well hidden) on the grounds that transaction costs in micro lending are high. The experience of a Not For profit MFI called Sangamithra over the past 10 years does not validate this. I do not have the expertise or resources to conduct further studies on the reasons behind high interest rates. But I was referred to one study made by a D. Richardson who studied the high interest rates in Compartemos. He found that the  high interest, bonuses etc, were required mainly to ensure that high salaries and other allowances   were paid to senior management and share holders (“Compartemos IPO issues”). There needs to be a regulatory cap on interest rates.


*The author is Chairperson, Nabard Financial Services and Member Secretary Myrada; the views expressed here are personal .

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re: A Humble question to Muhammed Yunus

Dear Aloysis,

I broadly agree with the issues highlighted by you but i also find a slight a negative bias against the NBFC MFIs which i believe hold the promise to 'financial inclusion'. I agree SHGs model as evolved and demonstrated by Myrada and a few others is a slow but a sureshot model to strike at many facets of socio-economic problems that poor face. I also agree that the commercial microfinance is not meant for the ultra poor. But even if we leave aside the ultra-poor, there is a huge band of unserved population which needs finance as one of the key inputs to start building their economic independence. In my view the following must happen:
1. NGOs/Government institutions should promote SHGs with ultra poor and conceive of programs that have strong linkage with the social and economic entitlements (read government schemes) for i believe that leave aside credit and mutual help if we could organise poor around entitlement alone, there is a great service we are doing to the poor.
2. NBFC MFIs serve the not so poor but this large band available to them that can be profitably served.
3. Increase technological innovation, build transparency, encourage product development, enhance customer service and ensure customer protection - build strong regulatory and development measures around these
4. Encourage competition here with an appropriate regulatory oversight, prudential regulation that anticipate the predatory, skim pricing strategies and take policy action. But the regulation should not be through interest or margin caps. Let the mix of competition, innovation and incentives make sure that interest rates are in line with the public perception and clients ability to pay.

I think privatized movement built on market principles can alone take the challenge to bring innovation and serve this large unserved market composed of 'not so poor' and provide them too a dignified life.

Meanwhile the poor and ultra poor should become 'not so poor' through their continued access to entitlements, credit and mutual help which is when they are ready to become clients of institutions like banks and NBFC MFIs.

Continued contradictions in Microfinance

Dear Sir,

The Indian subcontinent shows for decades several important contradictions on Microfinance, its definition, goals and how to achieve them.

These contradictions can be seen in NABARD as such, an organisation evolved out of the central bank (RBI), responsible for regulating, supervising, funding, technically supporting and attracting further financial and political support for Microfinance.

Never, even when criticised, does anyone seem to stand still and question what it is that poor people want from financial services. Most people on the Indian subcontinent belong to the POOREST of the world, living on less than 3 US$ a day which also in the three countries is very little by whatever standard, and they work and live in an environment that at best does not recognise them, at least despises them. The wealthy and political opportunists see in the invisible poor masses only a role for their redemption.

Let me enlighten you as GrameenBank II was enlightened 12 years ago. Especially the poorest need, first and foremost, safe and accessible deposit services, then rapid and affordable transfer and payment services and, third, Loans. They thus need professional banking institutions (banks or NBFCs) that they can trust and that consider them clients as any other citizen.

As you are surely a banker by training or by experience, you will understand that over time a stable relationship will develop between client and deposit-taking banking institution. As these are funded by deposits, the loans are also priced much lower than when "bought" from other sources. In such situation, clients also have a much stronger bargaining power. And in this situation, it is more likely that they will learn and understand the bank's actiivties, how to manage "THEIR" money, to thus be able to best use their bargaining power. Experience WORLDWIDE, as with GrameenBank II, shows that there will be many more depositors and deposits than there will be borrowers and loans (in GB its balance sheet transformed totally since 2004).

That SHGs are ineffective and produce many important flaws in the MicroCREDIT system is known for over a decade by your institution's management.

To build a financial system that is coherent and consistent, the only possible way to allow the integration of poorest people and allow them to become NON-POOR (you seem to suggest that MFIs and SHG can only serve the poorest and thus have an interest to not have their clients get out of poverty and prove it!, which is surely terrible), the country requires a long-term strategy that is adopted and monitored by its top executive government. Only that would ensure a national long-term policy which effectively coordinates the role that many stakeholders have. The successful implementation of such policy should be ensured through effective coordination, supported central performance and by a detailed legal framework. And the full compliance of that legal framework needs to be ensured by a strong and impartial supervisor that has adequate resources.

In such a framework, it is important that Non-financial and purely social services are separated from Financial services. A bank supervisor is no enterprise expert and no social expert. Such expert partners need to be integrated in the above policy of building an inclusive financial sector, but with a promise to not hinder or frustrate the financial sector development process.

The current regional crisis and its effects up to the government, into other regions and abroad can be regarded as an opportunity. At the same time, the start of the automatized ID may represent a coincidental potentially important tool in your quest to emancipate the poor masses and give them an individual face with enforceable unalienable rights.

I wish you wisdom and commitment. Regards, Peter

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