23 January 2011

The Failure of Microfinance

The failure of microfinance in India has been much in the news of late. I am hoping to do a bit more of a case study consideration of this over time. I really do not understand enough to say much yet, but I am fascinated. I have been immersed in (obsessed with) music over the past several days and my thoughts are even messier than usual. I am just going to associatively skim the surface of this for now.

I am sure most of you know what microfinance is and probably know much more about it than I do, in many cases. For those of who do not, here is a rough picture, distorted by my own prejudices and ignorance.

Dr. Mohamed Yunus was teaching economics at a university in Bangladesh. Every day he would walk home through a village. He began to notice that what was happening in the village did not seem to match what he was teaching at the university. I feel this is important. Many of us might feel or see something about the immediate conflict that arises when 'parts' of our world come together. How do we deal with that moment of arising conflict? Consider your own strategies in the matter. Each moment of our lives is a potential moment of such reflection. Each moment. We have fragmented and continue to fragment ourselves and the world. We treat such fragmentation as our given condition. Initially moments of conflict arise when our strategy of fragmentation fails in some moment. How are we in those moments?

Dr. Yunus got curious. He began to actively inquire into the difference and felt conflict. He discovered that the village through which he walked everyday was enacting a system of debt. A majority of families were in debt. The interest rates were such that it was more or less a perpetual state of debt. The lenders were local loan sharks. The debtors were local families, who had no means to repay their debt at such interest rates. I suspect that the interest rates were themselves calculated to create exactly that condition, since that is the conditional requirement for the sustainability of the system of debt itself. Something about this may sound oddly familiar to some of us.

So Dr. Yunus researched the scale of the local economy and the size of the debt for the entire village. I forget the total amount. It was something like USD$32.00 for the entire village. Discovering this what do you do? Well, of course you simply pay the debt. Of course, the system that created the debt is completely in tact, so what is predictable about that? Dr. Yunus continued to look into this. He made an attempt to create an alternative system. The telos or purpose of this alternative system is to end poverty. Dr. Yunus holds in his heart a world without poverty. As he tells it he looked at the traditional banking system and simply did the opposite of what the banks do. He leant almost exclusively to women. He required no collateral. He made tiny loans. He emphasized social fabric and transparency. Instead of a one dimensional system of profit maximization (and consolidation) he emphasized the relations, values and meanings of the endeavor. The system does not negate 'markets', but rather creates a dimensionality and more complete set of valuations for market activity. This worked amazingly well and Bangladesh has a fantastic record with regard to poverty alleviation. Dr. Yunus won a Nobel prize.

This way of working expanded to include local businesses. The first sort of crisis of expansion was the realization that scaled efforts collapsed due to transaction costs. In the Philippines a system using direct mobile phone payments and reporting was innovated to navigate this crisis and was then widely adopted. A social fabric known as Self Help Groups (SHGs) groups arose. These are ways of locally organizing to both run the bank, create support for the business activities associated with loans and repay the loans themselves.

So what happened and why is the 'failure' of microfinance 'in the news?' I am trying to understand this. Dr. Yunus has spoken on this and I am still trying to understand that. Here are my very simplistic initial thoughts.

The system became official in India. People began to think "how can we use such a system to create profit?" The effort became scaled and institutionalized in that context. The cost base changed. Interest rates changed. It is very odd. It is almost as if the system of microfinance were somehow a carrier for the original underlying loan shark system and created a means by which that could become 'official', 'legal', scaled and vastly more profitable. Essentially as an institution what was called 'micro' finance is no longer micro, except in the amounts of the loans and the market being made of people in a state of poverty. The systemic context shifted from one of poverty alleviation (through a means other than the twin horses of charity and profit maximization) to one of the impoverished as a scaled market place *for* profit maximization and consolidation. Perhaps you can see why I am fascinated with this? We could think things like "oh, it was bad people who did that", or "it is just human nature" and such things. Possible, but for me really insufficient, in great part because such attributions (as if separate from me) allow me to simply dismiss the reflection.

Of course I am remembering the contextual shift from the Republic that I posted here: (http://ifelthat.blogspot.com/2010/12/socrates-and-necessity.html). I feel I really need to consider the nature of this shift, which seems present to me in the microfinance case and come to understand more clearly where it is in the moments of my own life. What is the moment when I am in and participating in this? What does that look and feel like?

Glaucon says 'You have given them no relish for their meal.' What does that mean? How does one relish life? What is required for that? What necessity is asserted? Where exactly does the shift take place, in which apparently I somehow suddenly, or chronically have some moment of not relishing my life? Why is the food bland? Why do I not enjoy it? In what context is that occurring? Consider this with food and your own diet. For me this is an interesting consideration that can be broadly extrapolated. Before I cast stones about 'those-evil-people-who-have-ruined-microfinance-for-everyone-else' I have a feeling I need to understand something about the moment of that shift to an apparent lack of relish, to the asserted need for relish more clearly in my own life. I am fairly certain that in my living I am supporting 'those-evil-people-who-have-ruined-microfinance-for-everyone-else' as much as I am supporting the efforts at poverty alleviation, itself a teleologically flawed context. I feel that if we take the constructed state of needing to add relish as the given state and then try to fix or solve it, the consequences of that we will end up again and again and again in this place where microfinance is failing.

I plan to look into this more, both in my own life, and to try to understand more clearly what is happening with microfinance.

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