Given the popularity of last week’s posts on microfinance (see here and here), I continue blogging about the topic this week and the next.
This week, however, I am blogging about microfinance as seen from within the industry. As such, I am blogging the five-point response a friend of my wife’s and mine — whom I refer to by the pseudonym “Chad” — has made to my previous two posts.
Chad works for a microfinance private equity firm and used to work for a leading online microfinance website. He has studied in the very best universities for both his undergraduate and subsequent professional degrees. More importantly, Chad has traveled extensively to the field to meet with stakeholders along the microfinance supply chain. See here and here for his first two points.
Chad’s third point was:
“I disagree that microfinance is only for entrepreneurs but I think the industry is partially to blame as this is how it is often portrayed. Ultimately, microfinance is about the provision of the same type and quality of financial services to those that currently do not have access to it. So while some will use it for businesses, others will use it for emergencies, education expenses and yes, for personal consumption. I don’t think this invalidates the thrust of microfinance. The poor deserve to have access to the same levels of services we do at affordable costs, particularly when they typically are paying a higher percentage of their income on basic things such as water, electricity and financial services. That being said, microfinance institutions (MFIs) need to make sure that the individual has the ability to repay and more importantly, have a code of ethics and an incentive model that ensures client officers don’t force loans onto clients to hit bonus targets that strictly are based on portfolio volume.”
I did not know microfinance loans could be knowingly given for consumption expenditures. I agree that this is probably because MFIs always portray themselves as making small business loans.
It is true by definition that the poor pay a higher percentage of their income for many things. A poor household’s budget share of food, for example, is often greater than 75 percent.
I agree that the poor need access to clean water. Without clean water, hygiene worsens, diseases proliferate, and eventually people get sick or die. So given the spillover effects of one person’s access to clean water on others’ well-being, a good public-health case can be made for subsidizing access to clean water in developing countries.
Do the poor deserve electricity or financial services? I am sure they deserve these goods, but I don’t know whether we should make those a priority. The poorest people I have ever encountered looked as though they needed food and shelter (I am thinking of the urban poor I have seen in Madagascar) and basic health care (I am thinking of a child I saw in rural Ethiopia who was too sick to chase away the flies that were eating his secretions).
So in a world of infinite wants and finite resources, my sense is that we should aim at providing the poor with necessities before we provide them with normal goods (i.e., goods whose consumption increases with income).
As for Chad’s last point about making sure borrowers have a decent chance of repaying and ensuring that client officers don’t force loans onto clients just so as to hit some target, I am in full agreement. After all, this is pretty much what caused the housing bubble in the US and then left my wife and me with a house that is now worth 11 percent less than what we paid for it.