On Thursday, September 24 from 6:45 p.m. to 7:45 p.m., the Jewish Federation of the Berkshires welcomes economists Paul DiLeo and Ira Lieberman, who will talk about the subject of the new book they co-edited (along with Todd A. Watkins and Anna Kanze), The Future of Microfinance.
Please check your emails from Federation to find the necessary links, or visit our calendar of events online at www.jewishberkshires.org.
The first provider of microfinance services to receive attention was the Grameen Bank in Bangladesh, started in 1983 by Muhammad Yunus, who won the Nobel Peace Prize for his accomplishments in 2006. From the book description: “Over the past four decades, microfinance — the provision of loans, savings, and insurance to small businesses and entrepreneurs shut out of traditional capital markets — has grown from a niche service in Bangladesh and a few other countries to a significant global source of financing. Some 200 million people globally now receive support from microfinance institutions, with most of the recipients in the developing world. In the beginning, much of the microfinance industry was managed by non-governmental organizations, but today the majority of these institutions are commercial and regulated by governments, and they provide safe places for the poor to save, as well as offering much-needed capital and other financial services.”
In their program, DiLeo and Lieberman will chart the development of microfinance, explain its role in the worldwide financial market, and explore its future in a world economy changed by technology and the pressures of coping with the coronavirus pandemic.
Paul DiLeo is the founder of Grassroots Capital Management PBC based in Plainfield, MA, and has over three decades of experience in development finance and 20 years of experience in the microfinance sector. Paul has worked extensively in Russia, Nicaragua, India, Argentina, Bosnia, Nigeria and many other countries, and for the U.S. Treasury and Federal Reserve Bank of New York.
Ira Lieberman worked for the World Bank from 1994 to 2003, and was founding director of the CGAP Secretariat, the de facto administrative office of the microfinance sector globally. His last book, In Good Times Prepare for Crisis, is a sweeping historical analysis of the reasons why nations, in good times, don’t really do enough to prepare for the next crisis.
Both have homes in the Berkshires, and spoke in August with the BJV about some of the themes they’ll cover in their September 24 Zoom presentation. The conversation has been edited for clarity and length.
Berkshire Jewish Voice: Tell us a little about the origins of microfinance.
Ira Lieberman: The concept of microfinance is an old concept but the way it got started in current era is really through Mohammad Yunus. He started funding women throughout Bangladesh through Grameen Bank and giving them small loans for self-employment opportunities. A lot of the women were on their own because the husbands were off in the Middle East and other places sending back remittances; but women still had to support their family on an ongoing basis. People [who] knew anything about microfinance at the beginning knew BRAC [International], also in Bangladesh, which is still today probably the best national NGO operating in the world. They knew Bank Rakayat Indonesia (BRI), which was assisted by the Harvard Institute of Development and became famous for mobilizing savings from the poor throughout Indonesia. We have found that the poor need working capital loans to support their businesses, but they also need a safe place to save. Today, microfinance is all over the developing world and everywhere in the transition world – meaning the former socialist countries, particularly in the poorer ones in Central Asia. It’s very big in China, and that's been driven by technology to a great degree, and it's rising very strongly in India hopefully not damaged too badly by the current crisis.
BJV: As I read your description, it seems as if microfinance institutions as originally construed operated more like NGOs (non-governmental organization) and could not operate without subsidy. Has that changed?
Lieberman: Almost all the microfinance institutions were NGOs when I started running CGAP and then, over about a 10-year period from 1995 to 2005, many of the larger institutions converted to become commercial banks operating as microfinance banks for small, but not medium-sized business. Much of their lending was group lending, where you had a group of five to ten people, and each member of the group guaranteed the other members of the group – so if I was sick and I couldn't pay, other members of the group backstopped me and paid my loans. That's how Grameen started and [its method] spread most over the world.
Now the bigger institutions primarily in lend on an individual basis. Group lending constrains the more successful of the borrowers and so it limits with their ability to borrow. Many of the NGOs converted to banks. But you have a wide array today of institutions: you have NGOs , you have cooperatives (mainly in West Africa), you have commercial banks and you have credit unions so there are a wide number of institutional sources but the commercial banks who also mobilize savings are the dominant institutions in terms of loan volume and assets held.
Most of the microfinance institutions started that way and even if they converted to banks, they mostly do small business lending. But they also have provided diversify products like housing rehabilitation, education loans. They hooked up with insurance carriers to do microinsurance – that was very big in Africa when AIDS was so prevalent. Insurance was financing funerals, or used against people's deaths if they had loans. My hope, my expectations were the diversity of products would grow significantly. They haven't become that significant as a percentage of the portfolio, but they become meaningful in the sense that it gives people some other financial products to draw upon when necessary.
[Lieberman explained how, in the past decade, microfinance institutions (MFI) have been less highly subsidized and expected to sustain their operations through the businesses and investments they are engaged in. The donor world has moved toward a broader concept called financial inclusion, which is geared toward helping the poor use diversified financial products. He has written that a primary utility of microfinance is preventing the poor from moving into deeper poverty, rather than it being a way of eliminating poverty, a promise that he says was “oversold” by early proponents like Muhammad Yunus. When asked what he believes is the lasting benefit of financial inclusion, he answered:]
My experience in visiting microfinance institutions throughout the world, particularly villages in Mexico, was that mothers would always tell you “at least the kids are being educated.” And so I took it as a next generation issue – meaning the people who are borrowing and building and small businesses today are not the ones coming out of poverty, but they're not going into deep poverty. It's in the next generation being educated on the back of microfinance loans and savings that are going to come out just like our parents and grandparents if they immigrated from Eastern Europe. This is my own view, which is not necessarily widely espoused, but I think we're going to see subsequent generations coming up and benefiting greatly.
Paul DiLeo: There is a fair amount of recent research that seems to show that if you take the average of all the microfinance clients, the impact on poverty and wealth accumulation is quite modest. But certain groups seem to benefit quite a bit, so when you start segregating, you find that in fact the average is masking very disparate experiences. A lot of the attention now is focused on trying to figure out how to best target microfinance – it clearly has benefits in terms of cash management pretty much for everybody, and it's one more instrument that poor people can use in managing what turns out to be very complex financial lives; and so that benefit seems to apply to everybody. But in terms of poverty reduction and wealth accumulation, the benefits there seem to be concentrated among certain clients, and so a lot of the work now is focused on targeting the financial products offered by microfinance institutions to those clients who would benefit.
BJV: How do politics figure in to the microfinance world, and what kinds of political pressure may be applied to people making decisions within the industry?
DiLeo: There were some very dramatic episodes, like in Nicaragua or in the state of Andhra Pradesh in India, where microfinance started to be used as a political issue. And you can imagine that for a politician trying to generate headlines or trying to capture a superficial mantle of populist good will by saying that they going to forgive all debts or cap interest rates, that can can make for a nice headline.
I suppose after that's always sort of a background threat, that a politician will pick up on that and try to run with it; and the consequences can be very damaging. But I think on a more sort of universal level the interplay of politics has followed the trajectory of microfinance from a fairly small scale, mostly nonprofit activity that really fell below radar of regulatory authorities and politicians you know is really ignored for the most part and nobody really took it very seriously.
When it really started to gain scale and demonstrate that it could be done on a profitable self-sustaining basis, around the world politicians and regulators have recognized that microfinance in an important part of the financial systems in most countries. In some countries it's a very important part – in Bolivia, the largest bank is in microfinance. Even where portfolios relative to the total assets of the financial system are small, in terms of clients it is very important. So I think it sort of gained a certain measure of respect and appreciation and is treated as one more institutional feature of the financial system, which I think is generally positive.
Lieberman: By the way there have been very few crises in microfinance. They've been relatively small scale. They haven’t been universal, they've been institution-particular. There have been some national crises, but you have been had a universal banking crisis in microfinance and the loss rate until this current crisis has generally been under one per cent. That’s an incredible achievement.
BJV: What do advances in technology – for example, smartphones giving people the power to access information and to connect globally – hold for microfinance?
DiLeo: Multiple factors are at play pretty much universally. As they are able, microfinance institutions are trying to incorporate digital technologies into their operations. That could be simply eliminating the paper of loan applications, or having field officers outfitted with handheld devices that allow them to enter information that goes directly into the loan accounting system to incorporating mobile payments so borrowers don't have to actually physically hand over cash. At the far end of the spectrum you have fintech (financial technology companies) that have no loan officers at all, that are fully algorithmic doing everything with machine and artificial intelligence.
But there is a challenge in terms of the culture of microfinance institutions. A few of the institutions that have tried to move very quickly and aggressively towards incorporating these various digital tools into their processes have found that it poses a real challenge to the culture of the institution. You're going from reliance on loan officers and their knowledge of the communities where they operate to a more centralized machine-driven process, and this can be a very difficult transition to manage. It also, in many cases, requires parallel systems. You have that whole traditional system [of personal contact through loan officers and “brick and mortar” offices] and then, in parallel, they're building a digital system. So in many cases, instead of efficiencies being gained, you might actually see costs go up.
Many institutions are struggling to find the balance between [technology] what's referred to as sort of the “high touch” traditional approach of microfinance, where you really are trying to build a loan officer/client relationship that is believed to be an important factor in ensuring those low default rates.
I was on a call not that long ago with the CEOs of some very large Indian microfinance institutions, and I was surprised at how vigorously they argued that the essential value of their institutions lay in the relationships the human relationships with the clients. They felt without exception that they have to preserve that if their institutions were to have any future. The last factor I would mention is that the digital technologies affect different types of clients. Young urban clients tend to take to digital technologies very quickly and to appreciate the convenience and take full advantage, whereas at the other end of the spectrum, older rural women can be excluded if these technologies supplant the more traditional channels of relationship.
The Future of Microfinance (Edited by Ira W. Lieberman, Paul DiLeo, Todd A. Watkins, and Anna Kanze) is available through the Brookings Institution website at www.brookings.edu/book/the-future-of-microfinance/. The book is based on the results of a workshop at Lehigh University among thirty-four leaders in the industry. The editors, working with contributions from more than a dozen leading authorities in the field, tell the important story of how microfinance developed, how it has met the needs of hundreds of millions of people, and they address key questions about how it can continue to meet those needs in the future.