January 17, 2011

More on Microfinance Morals

Muhammad Yunus, seen here admiring the positive effects of his microloans, is now chiming in, much as I did recently on the dark side of for-profit microlending, or rather, "commercialized" microlending as he puts it. For he claims his non-commercial Grameen Bank still turns a decent profit. Only that it's more interested in helping the poor than in maximizing profits. He thus says, there is a troubling mission drift in the microlending investment sector.

Here is the essence of his argument from his NYT op-ed:
"Commercialization has been a terrible wrong turn for microfinance, and it indicates a worrying “mission drift” in the motivation of those lending to the poor. Poverty should be eradicated, not seen as a money-making opportunity.
There are serious practical problems with treating microcredit as an ordinary profit-maximizing business. Instead of creating wholesale funds dedicated to lending money to microfinance institutions, as Bangladesh has done, these commercial organizations raise larger sums in volatile international financial markets, and then transmit financial risks to the poor.
Furthermore, it means commercial microcredit institutions are subject to demands for ever-increasing profits, which can only come in the form of higher interest rates charged to the poor, defeating the very purpose of the loans.
Some advocates of commercialization say it’s the only way to attract the money that’s needed to expand the availability of microcredit and to “liberate” the system from dependence on foundations and other charitable donors. But it is possible to harness investment in microcredit — and even make a profit — without working through either charities or global financial markets.
Grameen Bank, where I am managing director, has 2,500 branches in Bangladesh. It lends out more than $100 million a month, from loans of less than $10 for beggars in our “Struggling Members” program, to micro-enterprise loans of about $1,000. Most branches are financially self-reliant, dependent only on deposits from ordinary Bangladeshis. When borrowers join the bank, they open a savings account. All borrowers have savings accounts at the bank, many with balances larger than their loans. And every year, the bank’s profits are returned to the borrowers — 97 percent of them poor women — in the form of dividends.
More microcredit institutions should adopt this model. The community needs to reaffirm the original definition of microcredit, abandon commercialization and turn back to serving the poor."
This is certainly a compelling model and moral argument for mission-driven business. What a different world this would be if more businesses shared it. Nevertheless, there is still the argument that commercialized microlending provides more funds to those who need it than the more mission-driven model. But is it worth it, given how many borrowers are left not only bankrupt, but arguably worse off than they were initially after going to extreme lengths to pay exorbitant interest rates?

5 comments:

  1. We touched on this before, but a for-profit organization has but one mission - maximize profits. When push comes to shove, the borrower has to lose. Nothing personal - just business.

    A not-for-profit can have sundry other missions. In the case of Grameen, it's to help elevate the poor entrepreneurially. When push comes to shove, profits lose. Nothing business - just personal.

    That a for profit bank might also be helping people is a nice to have, but the mission is maximizing profit.

    That a not for profit, like Grameen, might turn a profit as they go about their business is great and all (if somewhat of an accounting challenge), but the mission is to help people.

    Thus if Grameen starts operating at a loss, they just go out and look for donations.

    But if a for profit starts operating at a loss, if it does not return to profitability, that concern goes out of business.

    The only way this is resolved - the way it used to be resolved in the 1920-1973 time frame - is when the interests of the for profit and the interests of its customers are aligned.

    If the interests of the for profit can be better served by gouging or squeezing its customers - which means, if its investors can stand it and if the for profit can always find customers elsewhere - then clearly its interests and that of its current customers are at variance, if not diametrically opposed.

    A great deal of American business' interests nowadays do not require that American customers do well. Thus we find ourselves where we find ourselves.

    Similarly, the poor we will have always with us. A loan shark - any loan shark, the for profit microlenders included - can thus always find customers. And if their customers do too well, they won't need the loan shark. Thus it is somewhat in their interest that their customers are bled just enough so that they don't die, but don't thrive either.

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  2. Could you say more about:

    "The only way this is resolved - the way it used to be resolved in the 1920-1973 time frame - is when the interests of the for profit and the interests of its customers are aligned."

    and how this might apply to this particular example?

    I suspect you meant to answer my concluding question on non-profit vs. commercial microlending, but I'm not seeing it very clearly.

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  3. Loansharks, in the classical sense of the term, are not members of the community upon which they prey. There are thus no consequences to them for the damage they wreak in the community upon which they prey.

    As such, they are free to consider their interaction with that community as one of pure theft - a win/lose calculation. You got it, I want it, I'll take it by what ever means available to me, you lump it.

    Non-profits, in the classical sense of the term, are very much either members of what they perceive to be the same community which they are attempting to aid. Me lending money to a guy who's been out of work for a year because he has kids in school that I don't wanna see suffer is related to my sense that those kids might remain "good kids" and not wreak havoc in my community. Or my donation to Bono to help people in Niger drop wells is related to my sense that a world of people relieved from crushing poverty and want is a safer world - or even a more just world - a better human community, to which I identify.

    The missions are quite different. The perceptions and goals are quite different. The INTERESTS are quite different.

    I claim that from 1920-1973/80, killing or draining the American host would be like killing or draining oneself. Beggaring thy customer would be the same as beggaring they worker, which ultimately would result in beggaring thyself. Bad for business.

    But, after 1980, egged on by a return to Malthusian economic understandings, and bailed out by Asian labor arbitrage - it became possible to drain the prey - the American consumer - while living on Asian labor.

    The incentive is removed to see to it that the American consumer has work. As long as the American consumer has access to capital - ie, lending, ie, housing - it matters not what their employment is. And, as Asian workers have access to employment - humble as it is - they can become the new consumers.

    And at some point, there will be other workers willing to work for less than even those workers, in which case they will be drained as well.

    Those non-profits trying to reeducate or rebuild America have that as their goal. Not the steely calculus of how to maximize profits by whatever means available.

    Back to micro-lending. Grameen started out trying to help the poor of Bangladesh, their own community. Commercial micro-lenders saw the potential for huge profits. Are the commercial micro-lenders in Bangladesh? Are they invested in the success of Bangladesh?

    No, primarily they are not. And even if they are, they are really part of "new elite" - gratia their financial windfall - and can move and/or be headquartered anywhere. NY. London. New Delhi. Shanghai. Singapore. Little Silver.

    As such, where they live, whom they hang out with, what they see on a daily basis, is divorced from the reality of the havoc they wreak.

    Can Grameen relocate anywhere else? Not if its charter, if its mission, is to help the poor of Bangladesh!

    Grameen will never relocate to Monte Carlo or Marin County if its mission is to help the poor, simply because they will be out of touch with the realities of the poor.

    There it is - the prime example of how the charter of the for-profit, the mission of the for-profit, militates against the benefit of the community upon which it preys.

    The non-profit, having as its mission to help strengthen the prey, cannot do that.

    Years ago, the for-profit had to strengthen the prey to survive.

    No more.

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  4. Your argument is essentially:

    "after 1980,.... it became possible to drain the prey - the American consumer - while living on Asian labor.

    The incentive is removed to see to it that the American consumer has work. As long as the American consumer has access to capital - ie, lending, ie, housing - it matters not what their employment is. And, as Asian workers have access to employment - humble as it is - they can become the new consumers."

    But it's also that the nominally U.S.-based multinationals are relying less and less on American consumers.

    Ultimately, there is no more social contract thinking to maintain any greater obligation to any particular country. So until us labor becomes competitive with that of the under-developed world, there is no economic solution to this problem.

    The only solution would be a political backlash empowering the government to force companies to behave differently and/or for heads of industry, shareholders, and consumers to change their minds. Ultimately, I argue in my book that all of these must happen.

    And at least some debate seems to be moving in this direction. See for example yesterday's NYT editorial:
    http://www.nytimes.com/2011/01/19/opinion/19wed1.html?_r=1&partner=rssnyt&emc=rss

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  5. From what I've read these commercial micro loan organizations operate very similarly to pay day advance and check cashing store fronts you see here in the states.

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