As an analyst, I like to get to the roots of things, be they mathematical or historical. That’s why one chapter of my book delves into the history of financial services for the masses up to about 1950, and another trace the threads thereafter. At one point in the latter, I recount how the US Agency for International Development (USAID) and the non-profit Acción International became seriously involved with what would eventually be called microcredit. I based my account on the telling of Accion’s Beth Rhyne:
In the 1960s and 1970s, USAID had tried various combinations of credit, technical advice, and equipment provision to support small businesses in poor countries. Frustrated with the perpetually weak results, it hired Acción in 1979 to scour the globe for methods that worked. Acción in turn tasked the young Jeffrey Ashe, who had worked with credit cooperatives in Ecuador as a Peace Corps volunteer and to this day exudes infectious enthusiasm for financial services that work. Sadly, back then, most examples his team found were emblematic of failed aid: “just awful—ill-conceived, expensive, paternalistic, top down. We’d see sewing machines covered in cobwebs,” Ashe reported. But the team also found a few gems. These tended to focus on doing one thing well: providing finance. In Manila, the Philippines, a bank called the Money Shop made small loans out of stalls set up at the city’s markets. In the main market of San Salvador, the capital of El Salvador, a credit cooperative called Fedecrédito lent to grupos solidarios (“solidarity groups”) of jointly liable clients. Just as in the fledgling Grameen Project, which the team also visited, the Fedecrédito groups had five members.
That USAID program had a name: PISCES (Program for Investment in the Small Capital Enterprise Sector). Its findings were gathered in a 400-page report in 1981, which included an introduction by USAID project head Michael Farbman, a summary and synthesis by Jeff Ashe, and case studies by others at Acción as well as people at the Development Gap for Alternative Policies (DGAP) and Partnership for Productivity (PfP). This pre-Internet document, however, languished in obscurity. I had never seen it.
That was unfortunate for historians of microfinance---all two of us---because this report is essentially the Genesis of U.S. involvement in the field. (Admittedly, Opportunity International and Accion had already made a few small loans while the Ford Foundation had already supported the Grameen Project.)
Shari Berenbach worked at
AID PfP as a young woman not so long after that PISCES report on PISCES II; she is back at AID running its Microenterprise Development Office. In September, she kindly shared her copy of the PISCES volume, as well as the follow-up PISCES II reports of 1985. I had them copied. Then I scanned, OCR’d, and posted them on my history bibliography (search the page for “PISCES”). Now you can read them too.
Three things struck me in perusing the PISCES I volume:
- The project was framed as a search for what worked in “Assisting the Smallest Economic Activities of the Urban Poor,” not just in making loans to them. No reference to financial services appears on the cover. Yet microcredit quickly surges to the fore once you crack open the volume. (Though not in name: “microcredit” hadn’t been coined yet.) Why? One reason is that credit seemed to be what people surviving in the informal economy most needed. Business advice, another commonly offered service, looked less effective in practice. Jeff wrote:
Once it is recognized that business owners are the best qualified to decide how to use the credit provided and that business advice will be provided informally by other business owners in the community, the process of designing programs translates largely into how to provide the right amount of credit to the small business owners quickly and economically while ensuring that the loans are paid back promptly.
I think another reason credit rose to the top is that when the PISCES team combed the continents for proven programs, it was the credit ones that exhibited the most vitality. Poor people were lining up to use—and pay for—the service, and that brought viability and growth to the programs. In this way, microcredit emerged from the bottom up, unlike the massive subsidized rural credit programs of the 1960s and 1970s that were designed and implemented from the top down. In Phase II of PISCES II, which switched from gathering examples to piloting scalable approaches, credit was the thing most tried.
- Most themes are familiar: Many observations in this 30-year-old document have been echoed unknowingly in recent years by people working to understand microfinance, including your correspondent. Microcredit improves on the moneylender in many ways, including being cheaper. Lenders that break even can grow to serve more people. What defines the best staff is not training in business, but a passion for serving others. Vigorous, businesslike pursuit of repayment is essential to survival. Etc.
- In contrast, the assessment of the impact of microcredit is charmingly naïve by today’s standards: “Evidence from several programs indicates that in many cases incomes of assisted businesses increased significantly. Most of the respondents from programs studied in the Philippines agreed that without these loans their income probably would not have increased much faster than the inflation rate. In many cases their income more than doubled.” To be fair, the report does not pass off this conclusion as based on rigorous evaluation. But neither does it note potential biases from reversal causality, attrition of less successful borrowers, and so on.
As I mentioned, USAID went on in PISCES II to learn how it could best support the kinds of interventions uncovered in PISCES I. It has been involved in microfinance ever since. As James Hochschwender explained to me last April, the American microfinance scene grew in substantial part from that seed. With USAID funding, Acción International and Opportunity International became, essentially, microfinance groups, while FINCA was created. Important figures such as Rich Rosenberg, Beth Rhyne, Kate McKee, and Monique Cohen passed through the agency. With support from USAID, among others, the first transformation of a microfinance non-profit into a for-profit bank for the poor, would take place in Bolivia, Rich Rosenberg would go on to help found CGAP.
There was one other major strand of development: the movement started almost single-handedly by Sam Daley-Harris of RESULTS and, later, the Microcredit Summit Campaign. He first learned of the Grameen Bank and Muhammad Yunus, I believe in the late 1980s, and went on to make microcredit popular with politicians and the public.
The Microcredit Summit Campaign and the image of microfinance that it did so much to create are well-known. Most of this USAID-related history, however, has hardly been recorded. Certainly it is not in my book. Why? USAID has not been as good as the other microfinance groups at telling its own story.
In a conversation yesterday with CGD’s new visiting fellow Dennis Whittle (inevitably a treat), Dennis pointed out how rare and good an example the PISCES project set. A major aid donor began its effort to make a difference in a new area by humbly seeking to learn from those who had gone before. Not only did gather lessons into a report—which happens often enough in the aid business—but it acted on those lessons over a period of five or so years. So often, “lessons learned” are quickly unlearned as officials in aid agencies chase their own ideas or comply with directives from above. The incentives impinging on aid agencies are complex---fear of public exposure of mistakes, micromanagement through laws written 30 years ago, geopolitical imperatives, fads driven from the top. Compared to these, the incentive to learn is weak.
I hope to interview Michael Farbman soon. Then, maybe I’ll learn how he broke the mold with PISCES.