For so long I was focused on the important but narrow question of what microfinance does to human beings. It was a good question to probe because a lot of people are interested in it, and various researchers and practitioners have contended over the answer.
In the course of my inquiry, I had to widen the angle of my lens. The real strength of the microfinance movement, it emerged, lay not in systematically lifting people out of poverty, but in building dynamic, self-sufficient institutions to mass-produce useful financial services to the poor. That's not to say this positive potential was always realized---eager lending has at times hurt clients and institutions alike---only that it seems to be microfinance's strongest constructive tendency and offer the most scope for good going forward.
Now that my book is done and I am slowly freeing myself from its constructs. I've come to appreciate that my view has still been too narrow. In particular, I've blurred the distinction between building microfinance institutions and building microfinance industries. Call it blinding insight or glaringly obvious: a healthy banking system is more than a bunch of banks. Also needed are regulators, supervisors, credit bureaus, dispute resolution mechanisms such as courts, and more. (OK, it's glaringly obvious.)
Likewise, a resilient micro-financial system, one aiming to serve the poor better, is more than a bunch of microfinance institutions. In the ideal, credit bureaus will help microlenders judge the full debt loads of potential borrowers in order to avoid overlending. Regulations on the explanation of interest and other costs will assure that clients receive such information in ways that help them make good decisions. Supervisors will monitor lending systems and portfolio quality to protect depositors whose money has been lent out. Perhaps deposit insurers will give added protection, in exchange for the power to take control of banks in times of trouble. Without such checks---without a rich ecosystem of institutions---financial service providers can easily veer off the safe path. Or in a more holistic perspective, the industry can veer off course as bad actors flourish.
Of course in developing countries (such as the United States...) the regulatory system is never perfect. Nor is it easily influenced by well-meaning outsiders (though influence is certainly not impossible). So the imperfections of the world seem to argue for a three-pronged strategy for those wanting to extend the financial system in safe, durable way to poor people:
- Do what you can to enrich the ecosystem, creating and fortifying those needed institutions of restraint. Channels include traditional “North-South” technical assistance and “South-South” learning activities such as those run by the Alliance for Financial Inclusion. (Perhaps countries such as Greece and the United States could benefit from some South-North learning.) In 2009, my colleague Liliana Rojas-Suarez convened a task force to codify policy principles for financial inclusion. It seems to have influenced a similar document from the G20, which can provide an agenda for this institution-building work.
- Recognize that the more impoverished the microfinance ecosystem, the more that microfinance institutions and their investors must internalize the need for restraint. The Smart Campaign, which seeks to define and monitor responsible lending, can be seen in this light. So can Beth Rhyne's comment that one source of trouble in India has been the inability of non-profits to hold shares and board seats of for-profit microfinance institutions. This structurally excludes advocates for the "social bottom line" from governance, handing control to profit seekers.
- Accept that the more impoverished the microfinance ecosystem, the lower is the safe rate of growth, which will sometimes mean that less investment in microfinance is more. I've blogged about that before, and argued that the investment industry needs an institution for self-restraint.
A couple of experiences sparked this modest bit of fresh thinking. One was an encounter with Catherine Duggan at the Harvard Business School after my talk up there. She said roughly: yes, microsavings is great, but what if there's a bank run? I reflected on how days before the life savings of my 96-year-old grandparents were rescued from a teetering bank by the FDIC, an agency founded by a president for whom they had voted twice in their youth. Indeed, a safe and durable banking system is more than a bunch of banks.
And Matthias Adler of the German development bank KfW drew my attention to the Microscope, an index that ranks 55 nations on their microfinance business environments. It is produced by the Economist Intelligence Unit and has mainly been sponsored by the Inter-American Development Bank's Multilateral Investment Fund. An old indexing hand, I appreciate the project not for the precision of its rankings, which involve a lot of arbitrariness and difficult judgment calls, but the way it neatly (and I think carefully) draws up a menu of policy factors such as accounting standards and credit bureaus. I could write a post just on that project. For now, here are the results. Perhaps they will intrigue you enough to read the report (see especially Appendix I. which details the criteria):