Democracy Lab

Beyond Business: Rethinking Microfinance

Banking can do more good for the poor than only helping entrepreneurs.

In just 30 years, the microfinance movement has reached 200 million people who had been deemed "unbankable." That's a stunning success. But the narrative that drove this success has implicitly shut the vast majority of the unbanked out of the system. That's why it's time to change the story, and our minds, on how microfinance works.

The rise of the microfinance industry has been driven by a simple narrative, most closely associated with Muhammad Yunus and the Grameen Bank, joint recipients of the Nobel Peace Prize in 2006: Get capital into the hands of competent but cash-starved entrepreneurs, who would need loans of just a few hundred dollars to start shops and other micro-enterprises. While this sort of lending is more complicated than that, microfinance has certainly worked in the sense that most loans in most countries are repaid on time, most lenders have steadily grown, and most investors have been happy with the results.

By keeping the focus on small businesses, this microfinance narrative keeps us in our comfort zone. We can intuit how small loans can make a big difference for tiny enterprises that would otherwise depend on local loan sharks or never start in the first place. More important, we can imagine how such loans could be repaid with interest, yet still benefit the poor. The problem is, by clinging to this concept, we have kept ourselves from seeing what a more inclusive approach could mean for the world's poor -- and what it is that actually makes the micro-loan model work reasonably well today.

Consider Selco, an Indian company that sells solar-powered lighting to people unable to connect to the grid, or for whom power outages are way too common. The aim of Harish Hande, the engineer who founded Selco,, was to give households an alternative to expensive, non-renewable power sources.

Customers liked the Selco lanterns, but many balked at the price -- about $140 for the cheapest system. Hande saw that customers would only be interested if they could make payments over time. So Selco built partnerships with banks, and customers can now acquire lanterns and solar panels by taking out loans payable in installments over 3-5 years. Since 1995, about 150,000 customers have received such financing to purchase solar-powered systems. As a result, their children can do their homework at night, the air in their houses is cleaner, and their businesses (if they have them) can stay open later.

A similar story can be told about WaterCredit, a non-profit organization dedicated to financing improvements in household sanitation. To date, WaterCredit has made 65,000+ loans that have brought access to clean water and safe sanitation to close to 400,000 people in India, Bangladesh, Kenya, and Uganda. The loans fund household water and sewerage connections, toilets and pit latrines, tubewells, and rainwater harvesting tanks.

Finance is the key to making Selco and WaterCredit work, but not the sort we associate with microfinance. Rather, it is that most basic of consumer banking services: Loans that break up payments for large purchases into small installments. Indeed, recent studies of microcredit from sites as diverse as Mongolia, Peru, Indonesia, and Bangladesh show that in a substantial proportion of cases, micro-loans are being used to meet goals other than business investment -- health care, school fees, housing improvements, or simply keeping food on the table in periods of financial drought. And while those of us in the banked half of the world take this sort of thing for granted, the lack of reasonably-priced services to smooth out volatile and uncertain household cash flows represents a huge problem for poor households.

Microfinance thus turns out to do for the poor much of what credit cards do for the banked half of the world. Your card allows you to make purchases even if you don't have the cash in hand. The card allows you to stretch out expenditures so that they become more manageable. It allows you to build up a credit profile, so that the more successful you are at repaying now, the more you will be able to borrow later. Your credit card also allows you to pay for things remotely, perhaps online or even in a foreign currency, thereby getting maximum value for your cash.

Yet the traditional microfinance story casts poor households as a class apart -- as frustrated entrepreneurs whose concerns about meeting household needs are left unspoken. If you view the financial needs of the poor through the wider lens of money management, a new world opens up. The potential customer base for finance is no longer limited to the self-employed. It now includes those who work for others -- agricultural laborers, maids, construction workers, and the like. In other words, it allows us to focus on the majority of the world's unbanked half, not just the comparatively small slice targeted by traditional microfinance.

Market-driven microfinance has not completely ignored these needs. Yunus' Grameen Bank, which (like many micro-lenders) has consistently maintained the narrative centered on loans for business investment, has nonetheless stretched the concept to include loans for education and for housing improvements. Recently, it even introduced loan products that explicitly provide ready cash for emergencies, like health crises and food shortages.

Still, the industry remains leery of seeking customers who are not self-employed, and for an understandable reason: Microfinance's success has only been possible because socially conscious investors opened their pocketbooks in response to the narrative of  financing entrepreneurs.  Most microfinance banks, even those that are nominally profitable, have been implicitly subsidized by investors happy to trade financial returns for presumed social ones.

That was, and still is, necessary: Delivering services to poor households is expensive, even with the cost-saving operational innovations introduced by micro-financiers such as meeting with village customers in groups rather than in brick-and-mortar branches. Serving poor customers well requires as much (or more) effort and oversight as serving much wealthier ones -- there is simply no way around that.

The change required to reach the unbanked half of the world is thus less about transforming current practice than about transforming how we think and talk about the financial needs of the poor. At the most fundamental level, those needs are centered on money management -- ways to borrow for a wide variety of purposes, ways to save, ways to manage risk, ways to transfer funds quickly and securely.

The good news is that progress has been made on all those fronts, with the introduction of innovative products along with the research to show they are viable. Mobile banking, made practical by the surprisingly rapid penetration of cell phones in developing countries, is especially promising as a financial platform that reduces costs and offers a wider range of services. The big question is whether social investors will prove as willing to help low-income households spread the payments for, say, electric lighting (or, as important, to manage the complicated task of making ends meet each day) as they have been to fund boot-strapping female entrepreneurs. For this is always going to be a business in which doing good is as important as doing well.    

QAIS USYAN/AFP/Getty Images)

Argument

Walking the Talk

How Pope Francis can really help the poor -- and why he'll help the Catholic Church, too, in the process.

In the days since Pope Francis I was elected by the Papal Conclave, he has been quizzed on everything from his stance on the Falkland Islands to his role in Argentina's "dirty war." He has had to navigate diplomatic minefields -- why was Zimbabwe's President Robert Mugabe at his inauguration, while British Prime Minister David Cameron wasn't? And he has faced scrutiny over his position on social issues like marriage equality and women in the church. But at his inaugural mass last Tuesday, Francis showed once again where his focus has been since he first took his vows, and where he wants it to remain.

The pontiff, Francis told the hundreds of thousands in attendance, "must open his arms to protect all of God's people and embrace with tender affection the whole of humanity, especially the poorest, the weakest, the least important."

It's a message that's more relevant than ever: Francis's papacy begins at a time when the globe has never been more socially unequal, economically volatile, or environmentally unsustainable. This is a world where 870 million men, women, and children go to bed hungry every night, and where nearly one billion have no access to clean water; a world where whole countries are threatened with bankruptcy and seemingly stable regimes can collapse because of the price of grain; a world of manmade climate change and the plundering of creation for the few at the expense of the many.

The Roman Catholic Church, throughout its history, has worked for and alongside the poorest people in the world. Francis -- a man with a strong history of working for the poorest in his home country of Argentina -- now has the opportunity to reaffirm this focus, as well as expand the church's engagement on issues of poverty. But what can he actually hope to accomplish?

Much of the Catholic Church's work on poverty takes place at the ground level: It provides an estimated 25 percent of the care worldwide for people living with HIV and AIDS. It runs more than 5,000 hospitals, with nearly half of those located in the Africa and the Americas -- the Catholic Health Association of the United States is also the largest group of non-profit health care providers in the country. The church runs nearly 20,000 clinics around the world, more than 15,000 homes for the elderly, those who are terminally ill, and the disabled, and nearly 10,000 orphanages, mainly in Asia.

But there is always room for the church to do more. Because it spans the world and stands outside the market, business, and government, it is well placed to look at the world afresh -- especially at the beginning of a new papacy. It has the ability to offer a unique perspective on both the challenges of the poor and the actions of the rich that can cause poverty, from environmental degradation to the activities of global corporations. As pope, Francis can take advantage of the church's tremendous reach and influence to open up new conversations with different sectors of society on how to tackle these challenges productively.

Pope Benedict took a step toward this goal with a 2009 encyclical -- a letter sent by the pope to his bishops -- called Caritas in Veritate, or "Charity in Truth." In it, he warned of the dangers of unbalanced economic growth and against the pursuit of profit for its own sake. The encyclical had practical impact: The Catholic Church of England and Wales, for example, followed with a 2012 conference that brought major players in the business world -- McKinsey, Barclays, and Unilever, among others -- for a discussion on how business could better serve society.

At Francis's inaugural, he spoke directly to the many powerful people in attendance -- "those who have positions of responsibility in economic, political, and social life" -- asking them to "be protectors of creation, protectors of God's plan inscribed in nature, protectors of one another, and of the environment." It's a sign that he plans to continue to following the path that Benedict started down.

A renewed focus on social justice isn't just at the heart of the church's central purpose, in accordance with its faith and the teachings of Jesus Christ. It's also a vital component of the renewal and re-energization many claim is necessary for the modern church.

The new pope's emphasis on a church "that is poor and is for the poor" will resonate strongly with Catholic communities around the world. The majority of the world's 1.2 billion Catholics live outside Europe and North America. In ensuring the Catholic Church is responding to their priorities, Pope Francis can demonstrate to burgeoning congregations in Africa and the traditional stronghold of Latin America that he is a pontiff in touch with the immense challenges faced by ordinary people. And he also has a chance to engage new audiences in the increasingly secular developed world, who are looking for something more than the worship of material wealth and possessions.

Although an emphasis on care for the poor may be important for how the church is viewed by the rest of the world, this isn't a "reformist" agenda -- the Catholic Church has worked for and with the poor throughout its history. Recent popes have challenged Western society's acceptance of the inevitability of poverty. Pope Benedict told us that the market was not the master of us all, but rather a tool that had to be used for the benefit of everyone, and that every human has the right to flourish to his or her furthest potential.

Francis's papacy can build on these previous teachings to further enhance the church's support for the world's poorest. In the words of our new pope's namesake, St. Francis of Assisi: "It is no use walking anywhere to preach unless our walking is our preaching."

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