|Meeting the moment: Microfinance and the social exclusion agenda.|
Paper presented to Accounting SIG, Business School, University of North London, 9th December, 1998.
Professor of Organisation and Development Management
The Business School
University of North London
Microfinance is an idea whose time has come: it meets the moment when Government attention has fallen upon the social exclusion of those on low income from banking and savings services. Interest in microfinance in the developed world has been fueled by the attention received and success achieved by microfinance in the developing world. The success of the Grameen Bank in Bangladesh which lends to very small borrowers - the female agricultural workforce of rural area - has been much heralded and with Hilary Clinton's visit to the Grameen Bank US policy makers began to consider the applicability of this experiment to the low income, inner city neighbourhoods of the United States. At its advent, the technology of the Grameen Bank was largely social: it developed strong enforcement structures through group lending and borrowing which ensured a high rate of repayment. Of late, the Bank has made use of the advances in new information technologies which enable better contact with borrowers in the field and the better monitoring of repayment. The development of new information communication technologies appropriate for streamlining microfinance and making it more attractive to high street banks, combined with the proven success of microfinance in other locations and the British Government's social exclusion agenda to extend financial services to those on low income make this the moment fo a serious consideration of the prospect of developing microfinance with the low income communities of the United Kingdom. Already grass roots micro finance initiatives have developed within the United Kingdom such as Full Circle in Norwich and the Rebuilding Society Network in Birmingham. The purpose of this presentation is to see how this movement can be furthered by linking developments in new business and banking technologies to grass roots initiatives.
Recently, with great public noise about the Social Exclusion Agenda, attention has settled on the importance of ensuring the access of low income individuals and communities to financial services. In the modern world and the globalising economy, the traditional moral infrastructures of low income communities are seen as eroding and the focus has come to fall upon the problems of ‘sink estates' in the United Kingdom and the relationship between poverty and corruption in the world's poorest states.
The tale told by ‘expert' outsiders rarely engages with the authentic history of social capital amongst the poor and equally rarely does it track or trace the persistence of self-help structures amongst those with the fewest of resources. Hidden from history are the many self organised financial structures of the working class in the low income world of the west: within the East End of London it was common practice for families to run their own ‘loan clubs' where borrowing and lending was confined to family members and ‘social kin' (Grieco, 1996). Shaping financial services which operated within the framework of kinship ensured the ability of the group to enforce repayment by the individual and the flexibility of the group to adapt the rules of repayment when unexpected hardship or extraordinary difficulties occurred.
Similarly, within the developing world (Ardener and Burman, 1996), there is substantial evidence of the self organisation of finance amongst the poor and vulnerable. In Africa, there is a strong relationship between gender and involvement in rotating box credits or loan clubs. Women are substantial users of self organised financial services in Africa primarily because they are excluded from access to the conventional sources of credit. Women's weak property rights in terms of entitlement to own land and other restrictions upon their economic operations have consequences for their ability to borrow from conventional sources: they rarely have the security necessary.
In the present, just as attention in the developed world has fallen upon the need to radically improve the access of low income communities and individuals to financial services, so within development policy for the developing world, we now see an increasing recognition that women's access to financial services must be greatly expanded. The key example in this field has been that of the Grameen Bank (Yunus and Jolis, 1998) in Bangladesh. The Grameen Bank has developed a large scale program of small borrowing and lending activity based upon social group enforcement of repayments within the rural fields of Bangladesh ( Grameen Bank web site) The social group enforcement structures previously associated with self organised microfinance activities are now incorporated into a new form of banking structure: borrowing is no longer from within the group but is rather by the group, similarly the lending decision lies outside of the self-organised structures of local social capital.
2. Grass roots organisation and moral enforcement: social capital and microfinance.
Currently, microfinance or microbanking is used to refer to both those structures which are completely self organised and to those structures where it is the social enforcement structures that are primarily self organised. There are many arguments to be made as to the benefits of total autonomy in the arena of microfinance, however, a major problem is the limitations that this model places on access to external capital. For many low income communities and regions, the available local capital is too restricted to meet their needs and the resort to external sources is a necessary one. New information communication technologies and associated banking software make it possible for low income communities, financial institutions and development agencies to rethink the relationships around small loan provision and repayment. At present, the terrain is still new and much of the social analysis of what relationships could and should be in play is muddled and confused: currently, for example, concerns have been expressed that making use of groups in the social enforcement of repayments is an exploitative and extreme step. At the other side, in the absence of the social enforcement of repayment, it is clear that the continued access to capital for local investment would be threatened.
It may very well be that new information communication technologies can lift some of the social pressure to enforce repayment off the group by providing a rapid and detailed tracking of payment and default by individual clients. The use of social capital protocols - for that is what group enforcement is - to ensure repayment may be more the outcome of the previous difficulties in tracking repayments on small sums in terms of surveillance and expense rather than a necessary social process and may with the advent of new technologies whither away. For the present and in ending this section, we note that both old and new forms of microfinance have a strong dependence on social capital structures within the poor for their operation: social capacity has to be already present for microfinance to work.
The detailed analysis of local social capital structures - or the grass roots - is essential in designing any microfinance system or provision. Rules and procedures which work in one location are not guaranteed to work in another. Take the issue of family and kinship structures: in some communities, males and females have separate income and expenditure streams even where they share a household. In such a context, women may be better able to protect their earnings and savings from encroachment by their male partners: they may, therefore, be better organised to borrow and guarantee repayment. In other communities, males may be ready to stand guarantor to women who have no security in their own right: this gender situation will have its effect on the operation and sturdiness of microfinance systems. The organisation of both gender roles and kinship roles has consequences for the shape of social capital in any particular community and the shape of this social capital has great consequences in the present for the operation of the microfinance institutions.
3. Distant markets, extended access: a role for the high street banks.
New information communication technologies and banking software packages extend the potential reach of conventional banking systems to low income and far distant communities. Risks can now be readily monitored over distance (on the technologies and soft ware already available see : Microfinance Systems http://www.verkoyen.org/mfsoftw.html) . Historically, the development of British industry was associated with the development of a strong insurance industry - at the heart of British insurance developments was the concept of reinsurance coupled with the necessity of a diversified portfolio in spatial and sectoral terms. In the development of agricultural banks for Africa, the principles which stood the development of British industry in good stead have been largely ignored. Clients and bank are all concentrated in the same region; bad weather conditions produce a failure of the harvest and a failure of the harvest frequently results in the failure of the agricultural bank. Indeed, a critique which can be made of the Grameen Bank in the present is that its client base is concentrated in the same region exposing all to the same risk at the same time.
New information communication technologies with their associated banking software packages can change this relationship. The agricultural sector of a region can be part of the risk portfolio of an agency located elsewhere - there is nothing to stop British High Street Banks operating as Bankers to rural Ghana. A failure of the harvest in such circumstances need not lead to regional collapse. Through new information technologies both banks and the agricultural work force of developing regions can achieve a level of social and institutional diversification that can protect from extreme risk. Historically, considerations of distance meant that matching customers and institutions was a very local process but the advances of information technology based home banking radically alter that relationship. Development home banking is a real prospect and the evidence is that banking institutions, client organisations such as credit unions and credit and saving organisation and technology developers are all increasingly aware of the potential of this new trend.
But the ability of the new information technology to extend its reach to new client bases is not limited to the potential markets and opportunities of the developing world: practically, accessibility problems are not simply problems of gross geographical distance. As the UK government has come to realise, low income communities are severely restricted in their access to financial services. Financial organisations have historically been involved in red lining particular neighbourhoods and areas in respect of the access to financial services enjoyed by the inhabitants of these areas. Frequently redlined areas have a host of social and transport difficulties which resulted in the development of enclaves of deprivation: individuals from such areas find it hard to get jobs, credit and other resources sealing them into a situation of enforced localism. Financial agencies historically used blanket information on areas rather than precise information on the detailed risks associated with any particular customer. The speed and range of new information processing technologies reduces the need for red lining in the determination of ‘bad risks' in much the same way as we have suggested that the need for the social group as an enforcement agency may soon be outgrown.
The advent of new technologies coupled with a policy environment which wishes to radically enlarge the access of the socially excluded to greater income earning and own business opportunties seems set to create both the pace and the potential for the extension of risks from the financial centres of the developed world into the rural communities of the developing world and, remarkably, into the inner city areas and socially excluded enclaves of the first world itself.
4. Full circle: client feed back and socially inclusive banking.
In our discussion, so far we have indicated that it seems probable that the social group basis of ‘social banking' will disappear given the data manipulation capabilities of the new technology and its capacity for aggregating and disaggregating individual data items almost instantaneously. This high level data manipulation capacity creates a capability for very robust financial surveillance of any particular client or risk. Changes in consumption patterns, changes in savings patterns and changes in level of transactions by an individual are evident at the touch of a button. But the surveillance capabilities of the new technology are not all in the one direction.
The new information communication technologies associated with social banking can enable customers to feed back preferences, informations and complaints to banks so as to bring about improvements and change. Developing consumer associations which monitor the performance of social banks is clearly within the capabilities of the technologies: the previously socially excluded can gain a position which allows them to require changes that assist them make the most of the services which a social bank can offer.
Some of the home banking services already available have begun to make use of client feedback to great benefit but the feedback function can extend to the development of the collective view of social bank clients on the investment directions the bank can take. Banks which are specifically dedicated to the microfinance or social banking function may gain particular benefits from developing in this direction.
5. Positive directions, intelligent administration: building on the new information communication technologies
At present, the boundaries between clients and financial institutions still retain their conventional forms but the stage does seem set for changes to occur and client power is a likely outcome of the transparency and potential for collective action and advocacy that the new technology delivers. The new information communication technologies allow new forms of intelligent administration which permit clients to enter the operational discourse of banks without necessarily disrupting the daily action of the institution.
Already development banks such as the World Bank have opened up their electronic discourse with clients on line. The transparency embedded in such action necessarily pushes the administrative and development agenda itself in new directions. The electronic change which is upon us all, whether in the rural fields of Bangladesh, or connecting up to health knowledge through the Internet in Africa, or receiving social security payments through Smart Cards in the developed world, bodes the end of the old boundaries between client and bank, between socially excluded and government, between access and distance. Within this frame, and with the new technology, small needs should be as easily serviced as large: administering small loans should no longer be any more expensive than managing large accounts. The time has come for the socially excluded to borrow money on the same low rates as the wealthy: technology will play one part in determining how fast we see the change, social capital will play the other.
Ardener, S. and Burman, S (Editors) (1996) Money-Go-Rounds : The Importance of Rotating Savings and Credit Associations for Women (Cross Cultural Perspectives on Women Series)Berg.
Grieco, M. (1996) Workers' dilemmas: recruitment, reliability and repeated exchange. Routledge.
Yunus, M. and Jolis,A.(1998) Banker to the poor: the autobiography of Muhammad Yunus, founder of the Grameen Bank. Aurum