Judging from his comments made during his Kenya visit for the Microcredit Summit, better don’t let Nobel Laureate and Grameen Bank founder Prof Yunus anywhere near big finance. Andrea’s weekly column for the Star.
I watched Professor Mohammad Yunus, Founder of the Grameen Bank, Nobel Laureate, and in town for the Microcredit Summit, with bemusement: He was holding forth on The End of Poverty and yes, rode in on that mythical beast, the Global Financial Crisis: “We should redesign the financial system so that nobody is denied access to financial services because MFIs have proved how resilient they can be.’ he said. And also: ‘While the big banks which were handing out billions in loans and holding billions in collateral were collapsing, MFIs which don’t require collateral were flourishing.” A little sweeping perhaps, I felt.
Ironically, underlying the recent crisis was the fact that mortgages were given to, in fact, poor people whose financial situation clearly made it impossible that they would ever be able to repay them. And not all MFIs lend without collateral, nor are, more importantly, all MFIs ‘flourishing’ – a great many depend on donor subsidies.
Minor quibbles? Let’s see what he suggests next: ‘So one of the lessons of these dark days: we need to reinvent banking. And microcredit provides the direction in which we have to go.’ Now, I think that parts of the financial industry most certainly need to get looked at again: Regulators clearly missed something if things could get out of control so much that the US government had to prepare a rescue package with so many zeros that I literally can’t grasp it. Part of the problem is that finance has become so complex that regulators often struggle to keep up. How you can address this – balancing scope for innovation with protecting consumers and safeguarding the stability of the system – is a difficult question. It’s an incredibly technical question. It is not, however, a question that will be resolved by microfinance.
There are, I learn from Professor Yunus, more problems: ‘Lack of microcredit laws in many African countries is denying millions of the continent's poor access to loans.’ Again, a little sweeping for a continent with more than 50 countries.
Right next door, Uganda has spent a lot of time (and donor money) developing a legal and regulatory framework for microfinance, and much of it ended up, in fact, being modeled on the traditional banking sector, with some tweaks: For example, higher capital requirements to offset the risks that many microfinance lenders do indeed try to work with more flexible collateral requirements. Developing this legal framework was a long discussion, and aside from the politics in it, a technical discussion. Much of the concern centred, in fact, not on lending. Knock yourself out lending! It’s savings enter that concern the regulator, especially the intermediation of savings – and this is something that Yunus doesn’t really talk about. If you take savings, and you intermediate them, i.e. take a risk in lending them to other people, or invest them elsewhere, then you have to comply with certain requirements on ownership, licensing, capital, provisioning, and so on.
Some NGOs have worked to formalise their microlending outfits so that they can accept savings as well. For many NGOs, this is out of reach, neither within their technical or financial scope, and often also not within their organizational culture. But my concern is that a lot of the microfinance debate still focuses on the credit side – the event isn’t called MicroCredit Summit for nothing – and not on savings. Underlying this is the assumption that if credit is made available, all poor people will miraculously turn into business people. That is unrealistic, and some studies recently have substantiated this: Credit can even out financial inflows and outflows, which is helpful – but only a very limited number of microloans actually grow tiny personal ventures into enterprises. Savings, in contrast, can fulfill a similar function, and the saver incurs fewer risks, and has no interest obligations to keep up with.
Yunus blames the lack of supportive regulation for the fact that much of microlending is still left to NGOs, but then puts forward this odd proposition: ‘That is what microcredit is all about: business to change the world. Not making money. We can change the world by making businesses for healthcare, for environment, for housing, for drinking water, whatever problem we have.’ That’s when my brain started feeling mushy.
While Uganda was and is overrun with donors and NGOs falling over themselves to do microfinance, Kenya has generally treated microfinance with a lot more sobriety: Largely because its banking system is generally better developed, but also because it traditionally had a stronger SACCO network. In recent years, banks have made a strong push into the retail market. And there’s MPESA: Not a full financial service product, but enough to keep money safe and make payments. Safer than under a mattress, easier and cheaper than taking cash to a bank. All of which means: Financial services are run as a business proper, not as some vaguely defined non-NGO, but also non-profit ‘business’.
Reprinted with kind permission from the Star.
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