#28 - Microfinance: Small Loans, Big Dreams & Suicides

Without leaps of imagination, or dreaming, we lose the excitement of possibilities. Dreaming, after all, is a form of planning. – Gloria Steinem

YUNUS, THE GREAT?

In 2006, Professor Muhammad Yunus, the founder of the Grameen Bank, received the Nobel Prize for Peace. Instantly, microfinance became a global phenomenon – the solution for global poverty. But it is increasingly difficult to distinguish between hype and reality.

The first time, I read about microfinance was around 1998. I was working as an asset manager allocating 30% of the portfolio to alternative investments (hedge funds). Reading the articles about the Grameen Bank and Yunus, I became sold on the concept of microfinance. I started to dig deeper to see if I could allocate 2% - 3.5% of the assets in micro-finance - a new asset class.

As I dug deeper my positive perception started to erode a little. For me, it became clear that micro-finance was (is) a great philosophy but that the execution of the concept is complex. I decided to wait and see. Around that time I changed companies and the idea settled itself in the back of my mind. Still, the seeds were sown. I wanted to combine finance and poverty reduction.

POWER OF SMALL LOANS

The Peoples' Impact Philosophy is now on firm ground and I am looking for existing solutions to complement our platform. Microfinance seems like a natural ally for our platform. I started reading an article in SSIR by Alex Courts Microfinance and the Backlash, an excerpt from his book Small Loans, Big Dreams

At its core, microfinance—the provision of loans, savings, and insurance to underserved populations—is pretty simple, but there are layers of complexity and nuance below the surface. Like most human endeavors, it can be practiced well or poorly. So what exactly is Grameen-style microfinance? First and foremost, it is the rare anti-poverty approach based on the strengths of poor people rather than their deficiencies. Some call these strengths “survival skills,” and they are honed in the process of eking out a living outside the mainstream economy in clever, creative ways.

In a disappointing article, Courts seems to be hellbent on keeping the big Yunus dream alive. I have no problem acknowledging the greatness of Yunus. The man did an extraordinary job but microfinance is now way bigger than Yunus and the Grameen bank. I started googling other recent articles and stumbled upon a Bloomberg article with the title Big Money Backs Tiny Loans That Lead to Debt, Despair and Even Suicide.

Suicides, debtors’ prisons, and delinquent borrowers forced to sell their land—the grim social costs linked to microfinance a decade ago were supposed to be a relic of the past. But efforts to clean up the industry lost momentum, and today billions of dollars are flooding into a system that promises the world’s poor a better life while often compounding their misery.

Government aid agencies, commercial banks, nonprofits, and socially minded investment firms are pouring record amounts—more than $50 billion of committed funds in 2020, industry data show—into an international array of lenders. The infusion of capital has continued despite annualized interest rates that can top 100% and aggressive debt-collection tactics that have left some borrowers homeless.

WHAT TO BELIEVE?

In a time where crazy-assed Trumpians surpass themselves in concocting one pathetic conspiracy theory after one another, it would be comforting if there were areas where decent scientific investigations would inform us about the state of the world in a clear way so that we could build a strong foundation for our belief systems.

If those areas do exist, microfinance is not one of them. Based on ‘scientific research", opinions are all over the place. So what to believe? I do believe there are many flaws in the execution of microfinance. Unfortunately but execution is always a problem; and most can be solved.

The aspect that is critical for us is whether these execution flaws are inherent of the theoretical foundation of microfinance. And how can we innovate microfinance on the platform in order to offer quality microfinance? What do we have to do in order to avoid the negatives of Yunus' Big Dream?

To be continued.

THE END