Presentation by Christopher Dunford
President, Freedom from Hunger

Global Dialogue on Microfinance and Human Development
1-3 April 1998, Stockholm, Sweden

There is more to life than making a living. You might say that is the basic premise of the Business Forum, of which our meeting is a part. And certainly making a living depends on more than having access to financial services. So why all the attention and resources to microfinance?

Here is a summary answer in three parts:

First, microfinance provides credit for investment in small-scale self-employment activities chosen by the poor themselves.

Second, these loans seem to increase income and savings for the poor. But also the taking, investing and repaying of loans seems to empower the poor through a personal transformation from a feeling of "I cannot" to one of "I can." I can do something about my poverty.

Third, if you're a good program manager, you could make microfinance pay for itself with the interest earned from your loans to the poor.

In theory at least, this self-financing feature allows for massive expansion of microfinance to reach tens if not hundreds of millions of underserved people. For most populations, this strategy seems to have the broadest utility and the least cost per beneficiary. If you had to choose just one development intervention, you would accomplish the most by helping people gain access to financial services.

This is what I call the Microfinance Orthodoxy, and I am one of the Believers, but I also know that embracing the possibility of Heaven raises the prospect of Hell-in which we reach millions families, only to discover that we reached the wrong ones or did little good for those we did reach, maybe even some harm. Unless we're very careful, the road to that Hell will be paved with our good intentions.

By itself, the term "microfinance" refers only to a vehicle without saying who is in it or where they are going. We Believers respond "The Poor! That's who's in the vehicle, and they're on their way out of poverty!" Well, hang on a minute. Just who are the poor? And what does "out of poverty" mean?

A major cause of debate and disagreement in the development community is the imprecision of the term "poor." We argue passionately over what will help the poor without realizing that often we're talking past each other about very different people we label "poor" who differ dramatically from each other in their strengths and weaknesses.

So-exactly for whom and for what purpose do we offer "microfinance" to the "poor?"

We of the Microfinance Community-practitioners, donors, investors and other supporters-must be far more clear in our answers to these questions. But sadly, there is a growing fascination among us with the mechanics of microfinance, with the vehicle. There is less and less concern about the passengers and their destination. Unless we turn our attention back to the passengers and the destination of that vehicle, we will lose our way - and then the prospect of arriving in Microfinance Hell becomes very real!

The mechanics of microfinance are indeed fascinating! There are three levels of operation: the borrowers who take loans and invest them in their own micro-businesses, the loan delivery and recovery system, and the institution that fuels and manages that delivery system.

Nowadays, there is a bewildering variety of types and combinations of borrowers, delivery systems, and institutional structures. To oversimplify, for the sake of clarity rather than accuracy, let me offer you two general categories that align with two general theories of the best way to help the poor by providing access to financial services.

One is favored by people focusing on the need for economic efficiency to achieve broad, long-term economic and social development. Their objective tends to be small or micro-business formation and growth by the not-so-poor, which is assumed to create jobs, not self-employment per se, for the very poor. This is, in effect, a trickle-down approach, albeit starting at a very low level. The center of attention is the "business."

The other theory is favored by those focusing on social equity, rather than economic efficiency, to more immediately alleviate the daily burden of poverty, as a first step to helping people escape poverty in the long term. Their objective tends to be self-employment of the poorest of the economically active poor, especially women, whose control of modest income and savings is assumed to empower them to improve the conditions of life for themselves and their children. The center of attention is the "family."

Obviously, there are fundamental differences between these two categories of microfinance-in their objectives, structure, and clients; and they require distinctly different program designs. Let me emphasize-the two viewpoints are equally valid and both approaches are needed, desperately, in combination wherever possible.

There is much talk and promotion of "best practices" by the international microfinance donors and investors. Their intentions are pure, I'm sure, but the effect is pernicious. The term "best practices" begs the question: "best" for whom and for what purpose? On first examination, it seems that "best practices" means "best" for economic efficiency with little concern for social equity. The donors are strongly biased in favor of one theory and category over the other-the not-so-poor over the very poor. There is very little recognition of the legitimate diversity within the microfinance practitioner community.

But deeper examination reveals something much worse. The "best" in "best practices" means best for microfinance institutions, for financial performance. The total emphasis is on building large-scale financial service systems with remarkably little regard for how or to whom services are delivered. The donor-investor community has been co-opted by its fascination with the engineering of the microfinance vehicle. They seem to have forgotten that microfinance is not a destination. And large numbers of microfinance practitioners have forgotten as well.

It's time to step back and reflect on the original motivation for microfinance.

It was born of the NGO community, so it may be instructive to examine the broad brush strokes to see what fundamentally motivates NGOs and their allies. We are distinguished not by non-profit status, not by non-governmental status, not by grassroots activism. We and our allies are driven by values, strongly held priorities linked in our minds to a higher purpose.

The point upon which we in the NGO community, and even the whole development community, can most broadly agree is this: continuation of human societies, and even more their progress, depends fundamentally on the children, their physical well-being, their emotional health, and their education. There are indirect ways to support children, as far removed as international trade to foster economic growth. And there are very direct ways to help, to the point of actually removing individual children from abusive homes. But to emphasize either extreme is totally inappropriate.

We are (or should be) child-centered, but we also recognize that children with a future are reared by families operating within communities and cultures dependent on national and international economies. We need to intervene at the levels of economy, culture, community and family in order to ensure that children have a future. Microfinance is only one among many necessary development interventions or actions.

But microfinance has captured the imagination of the NGO community - because it provides poor families, particularly the women with primary child-rearing responsibility, with a very practical, multiple-use resource: cash. The genius represented by Muhammad Yunus and John Hatch lies in their "banking" on people's character, as determined by their peers in a group-based mechanism for delivering cash - and getting it back! - with interest, no less! And this mechanism has shown itself to be conducive, in a handful of Asian countries anyway, to massive expansion to serve very large numbers of very poor people. This is exciting stuff, to say the least. Microfinance seems like a wonderful compromise between the extremely direct and extremely indirect ways of helping children. But is it so wonderful?

Who rides in that microfinance vehicle and where it takes them depends critically on the vehicle's design. People like Muhammad Yunus and John Hatch pioneered a design breakthrough, no question. But there has been surprisingly little interest in innovation since. Donors have driven practitioners to scramble for profitable mass production of just a few designs. But there is little interest in the designs themselves in terms of impact on people.

There is probably a lot more innovation out there than we are aware of. If we don't see it, it's because we're not looking for it. There is industry "lock-in" around Banco Sol, BRI and Grameen and around mass production of microfinance services. That doesn't mean other models don't exist, just that they're flying under our radar. For example, a World Bank survey of microfinance institutions did not account for several thousand microfinance institutions (not dozens, not hundreds, but thousands). How can they really claim to know what's going on and what the issues are?

In short, the intellectual leadership of the microfinance donor community is stifling design innovation in the name of promoting "best practices." I can assure you that "best" in "best practices" is not linked to best impact on kids. It is oriented to operations and numbers of clients supposed to be poor, not impact. "Best practices" increasingly means adopting the performance standards of the commercial banking industry! Now there's a wonderful irony! We the NGOs are starting to emulate the standards of the very industry that created the failure of the market to meet the enormous demand of the poor for financial services!

But we NGOs have done little to challenge this hocus-pocus. We whine that it's "too hard" to meet these banking standards, but that totally misses the point. Microfinance must be business-like. We must adopt banking standards of performance - to the extent they don't stifle the ability of the poor to really benefit. But where the risk-averse standards of the banking industry tip the scales away from our value-driven mission for the poor, we are destined to abandon the very poor in favor of serving the more profitable not-so-poor, and maybe not even them. That is the history of banking worldwide - market failure for the poor.

So why are we not demanding and getting impact evaluation, not just "performance" statistics? Why are we not exploring new designs - for delivering services in ways that help the truly poor translate financial services into "children with a future?" There is so much to be done before we can assume a linkage between program design and impact on the poor.

In all the world, I know of only three programs where studies have conclusively shown positive impact on kids - meeting the standards of scientific inquiry - Grameen Bank and BRAC in Bangladesh and the Lower Pra Rural Bank in Ghana. How representative of the rest of the world are these programs? Is it just a coincidence that all three have integrated a broader educational agenda into their programs - while still achieving very high levels of financial self-sufficiency? I don't think so, but I don't really know. There's so much more work to be done.

Replication of the few huge Asian success stories, primarily in India, Bangladesh, and Indonesia, has proved elusive elsewhere. Why? We need thoughtful answers that reflect understanding of the peculiar circumstances in the success-story countries.

Can existing banking institutions incorporate microfinance (even integrated with education of clients)? Freedom from Hunger's experience in West Africa, with credit unions and local commercial banks like the Lower Pra Rural Bank, shows that some types of banking institutions can incorporate microfinance as a new line of business without abandoning the very poor. Which types of banks can do this? Do we have to build a whole new microfinance infrastructure in parallel to the existing banking and credit union systems, as some donors would have us believe?

There are so many important questions that are just glibly dismissed by the current intellectual leadership of the microfinance donor community. And frankly, their intellectual arrogance makes me angry! But what right do I have to be angry? I and other NGO leaders have allowed this glib dismissal to go unanswered. We've been silent or acquiescent.

We NGOs have a responsibility to regain the intellectual leadership of this movement and keep it in line with its founding values. We also have a responsibility to recognize the arrogance of some among us as characteristic of a youthful movement. As it matures with experience, we will discover that microfinance is no easier to build institutionally and sustain financially - and at the same time render truly valuable to the poor - than any of the other interdependent sectors of international development action. Adopting the ways of bankers is no substitute for thinking and learning our way through to the solutions that have evaded bankers and development strategists for so many generations before us.

Part of the genius of the microfinance movement is its view of the poor as a market. They will pay, even from their paltry resources, for that which they perceive to be of real value to them. To serve this market, we need to be both value-driven and business-minded. That means starting our thinking with the market we seek to serve - the very, very poor - rather than with the product we have to sell - the microfinance vehicle we've learned how to build. We have to identify our target market segment in each country - the truly poor whose children cannot survive, much less flourish, without targeted assistance - and then design a vehicle that will provide the value they seek, that will take them where they want to go.

This kind of market-oriented design work is still in its infancy. We have to pick up where Yunus and Hatch and other pioneers have left off. There is so much to be done.

In closing, I say "Yes," we desperately need the financial engineers. We welcome the partnership of the business community, particularly those experienced in for-profit financial services. But the work is too important to be left to them alone. We value-driven NGOs must regain leadership of this exciting new movement.

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Hari Srinivas - hsrinivas@gdrc.org
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