Stuart Rutherford's Insights into Microfinance (The Prism of History)

2009 brought an embarrassment of riches in readings on the impacts of microfinance: Portfolios of the Poor, two randomized studies of microcredit and one of microsavings, and---at least worthy of a footnote---my challenge, with Jonathan Morduch, of older, non-experimental microcredit impact studies.All that overshadowed what otherwise might have been the most important publication on microfinance this year: a typically understated volume by Stuart Rutherford called The Pledge: ASA, Peasant Politics, and Microfinance in the Development of Bangladesh. It's not obvious why a history of Bangladesh's third-largest microcreditor, ASA, should top your reading list. But this is written by a man who has been visiting Bangladesh for a quarter century, who started his own innovative microfinance institution there, who is fluent in Bangla, who has spent countless hours interviewing poor people on several continents about how they manage money, and who brings a careful intelligence to all he surveys. Almost inevitably, the book is shot through with insights about the history of microfinance and its practice today.I read this "biography of an NGO," to borrow from the title of the 1995 version of the work, as part of my labor on chapter 8, in which I am looking at success in microfinance as success in building organizations. I will not attempt to review the book. Rather, I will quote extensively from it, as I did last week from Beth Rhyne. In effect, this is a scattered, involuntary guest blog post. I hope you like it. I am sharing my highlighting with you.Some background on ASA: The Association for Social Advancement was founded in the mid-1970s by Shafiqual ("Shafiq") Haque Choudhury and other young Bangladeshi men who were inspired by Bangladesh's recently-won independence from Pakistan yet dismayed by the poverty of their nation and the incompetence of their government. ASA, then, arrived on the same historical wave as BRAC and the Grameen Bank. The three, along with many other non-governmental organizations (NGOs) were nurtured by ample charity from foreign donors, public and private, religious and secular, all moved to aid the nation Henry Kissinger called "the world's basket case." Unlike the economist Muhammad Yunus, Shafiq and the other ASA founders saw a political, even military, route to Bangladesh's salvation. In each village, the poor had to be taught (conscientized) to see themselves as belonging to a class whose interests were perpetually undermined by the rich and landed. So educated, the poor would then be organized to advance their own interests, such as in their right to farm land in the public domain, which rich farmers often grabbed for themselves. The poor would press their cause through protests, appeals to the police and courts, and perhaps even violence. Local groups would federate into regional ones, which would federate into a national one. And so a revolution would become inevitable.The inevitable didn't happen. The Pledge is the story of how ASA came to grips with that failure and then transformed from a left-wing social action group into the most efficient, business-like microfinance group on the planet---at least according to Forbes, which ranked ASA the #1 microfinance institution in the world in 2007. ASA not only copied the Grameen microcredit model; it improved on it in the 1990s, by dispensing with formal joint liability---officially freeing clients from liability for each other's loans---and offering flexible, voluntary savings accounts. In time Grameen would copy ASA's innovations and add its own. Put otherwise, The Pledge is the story of an organization abandoning the grand political theories on which it was founded in order to learn from the tinkerings of a curious economist, Yunus.It is also part of the story of a great aid success. For all their gullibility, sloth, and other sins, public and private donors appear to have fostered an extraordinary collection of NGOs in Bangladesh, the elite among which are being imitated in, or invited into, countries around the world. An analysis of what donors did right here would be interesting. (On the BRAC story, see yet another piece of the 2009 literary cornucopia, Ian Smillie's Freedom from Want.)In March 2008, I was privileged to tag along with Stuart for a day as he interviewed people for the completion of this book. Our party of four---me; Stuart; Stuart's longtime research partner S.K. Sinha; and Darbesh Ali, one of ASA's first employees---struck a bit west from Dhaka, in the district of Manikganj. Stuart's purpose was to find former members of the old "social action" ASA and pull them into conversations with members of the new microcredit ASA, maybe their own children or grandchildren. He thus hoped to draw them out on the pros and cons of each model. As things proceeded, I understood only what Stuart and Sinha found time to translate. But I can at least add to the account with some pictures (below). Herewith, my favorite passages. You'll see that many touch on themes in this blog, and in the wider microfinance conversation in 2009, such as the possibility of bubbles and what to make of impact studies.On the interplay between reality, ideology, marketing to donors, and donors themselves in ASA's social action era (p. 72):

A flaw in the presentation of tables of social actions [in the ASA annual reports] is that there is no clear indication of how many of these actions had successful outcomes. There are no surviving records of the success ratio in the ASA office today, and this information was probably never well known. There is very much a sense of the inherent, existential value of the social action exercise---that the very doing of it was a good in it s own right, irrespective of its outcome or of who gained or who was hurt by it. This is another attitude that has stood the test of time: as late as 2008, an officer in a bilateral aid office in Dhaka told me that funding support for an "empowerment" NGO could be justified in part because such work was "worthwhile in its own right," even though it is horribly hard to measure the outcomes. As we saw earlier in this chapter, our own delving into the memories of former ASA members suggests that the success rate was not high. The 1985 report states that 87 samities [groups] had been active in trying to get hold of government-owned land, and had, between them, gained 42.5 acres, but there are no other outcome statements beyond generalities.ASA's publications evidently lagged behind ASA thinking, because senior staff members were well aware of the many difficulties that beset the program of social actions, and were al ready devising new activities for the samities….Shafiq told me,

We found we didn't always have work. Once a year in a samity we might find one social action to carry out, or one issue to bargain over. Then we thought, "how will we survive?"---because donors may start asking awkward questions: "only one issue, two issues?---how are you justifying your salaries?" Then we thought we should have to do some continuous work in the samities---service delivery, preventive health, legal aid....

Despite Shafiq's concern, ASA continued to be well supported by its donors.

Similar concerns have been raised about India's self-help groups more recently.On the collision between leftist ideology and rural reality, the draw of service provision as a mode of operation, and the challenge even for locals to make a difference (pp. 92--93):

Elegantly written prescriptions for Freiresque techniques of consciousness raising may look very convincing when they are read in the comfort of the head office of the NGO in Dhaka or by the donors in Geneva or London. But in the Bangladesh countryside, poorly trained, poorly paid workers who have just tramped through thick mud for an hour may be forgiven for a certain lack of subtlety in their approach. They will make sure that the measurable parts of their job get done: getting the women to sign their names, filling up the passbooks, and so on. The more ineffable parts of the conscientization process may not receive quite the attention that a thoughtful reader of Freire might like. Anyway, the children are wailing and the women have to get home to cook lunch. And so does the worker.

On the fiction of joint liability and the true nature of social incentives for repayment (pp. 134--35):

ASA set joint liability aside and figured out more practical ways of making sure it collected on its loans. It was very much helped by the fact that microcredit clients usually want to make their repayments. They value the service and look forward to further loans. There is prestige in being invited to participate in this disciplined, "modern" activity, and they want to show village neighbors that they, too, know how to interact with the educated folk who come from the NGOs to serve them. A microcredit group meeting is a place for repaying loans in the same way that a mosque is a place for praying and a school a place for reciting lessons: it's what one does there. This doesn't mean that every meeting goes as smoothly as microlenders would have you believe when they release pictures of smiling women happily handing over their money. There are many reasons why some clients can't or won't repay, and all sorts of behaviors are used to apologized for or justify the failure, from staying away to bluster. Loan officers have evolved ways of dealing with such situations.Though Shafiq had said that strict weekly meetings need not be enforced, loan officers prefer to run meetings wherever they can because, even without joint liability contraacts, they can still harness peer pressure---inducing poor payers to find their repayments by exposing them to the risk of criticism by their fellow members---and the weekly meeting is the best place to do this. At the meeting there are other opportunities to solve the problem. For example, a loan officer may be able to persuade a member who is about to receive a loan that that, because she can afford it, she might temporarily lend money to another member who is short of cash. In the "moral economy" of the neighborhood it is hard for the better-placed member to refuse to give this help.The meeting also provides loan officers with an environment in which they can use their superior status to good effect. Loan officers are male (most of them), educated, and middle class. Members are women, poor, and largely illiterate. Members address the loan officer as "sir," and sit on mats looking up at him as he sits at a table covered in a white cloth that members have scrambled to put in place at the beginning of the meeting. The loan officer treats his samity members with gruff politeness, and if all the payments have not been made, he may be able to keep them sitting there until the money is produced.

Upon revisiting a longstanding ASA member, a nuanced view of how microcredit helped (pp. 137--38):

We had last spoken to Rasheda 13 years ago....She had joined ASA at the time it was turning to microcredit. Today, Rasheda is still an ASA member, and her household still poor. She and her husband Safi Fakir, who have three children and Safi's elderly mother to care for, are uneducated and lack skills. Safi works as an agricultural laborer, and his earnings...give them an average income of around a dollar a day per person for the six-person household....But Rasheda and Safi also have a cow that gives about a liter and a half of milk most days, which they can sell....They own a tiny patch of farmland---one-twelfth of an acre---on which they grow little rice for their own consumption.Rasheda hasn't escaped from poverty, but she doesn't see that as a failure of microcredit. She told that "NGOs are very useful for the village poor. The NGOs made the life of the poor women very active. Many poor families made better progress using NGO loans. ASA bank is very good for me. I have been able to use my loans in many good works and I have become benefited."The "good work" that Rasheda did with her loans included putting money toward buying the cow.......Rasheda has been in ASA for 13 years, borrowing once a year. What happened to the other loans? They bought metal roof sheets for their home, a one-room, dirt-floored hut with walls made of woven leaves on bamboo supports. They stocked up on supplies, above all rice, their staple. A lot of loan money went on health care for their children: they may not have spent the loan money directly at the drugstore or the doctor's office, because the ailments may not always have coincided with the annual rhythm of ASA loans, but the loans would be used to pay back debts taken from family and neighbors at the time of the illness. The same is true of spending on festivals, entertainment, and travel.

On revisiting another old member, one who was deep in debt for the dowry for her eldest daughter's marriage, and yet was grateful for microcredit, in part for its small, regular payments (pp. 139--40):

Kulsum said she was "passing [her] time with serious anxieties." She told us at once that she'd left ASA six years back, "due to financial crisis. When I found it would not be possible to make my weekly kisti [installment payment] at all [her husband had been ill and off work], I decided to close my ASA account. We had no regular income and still we have no regular income."...Kulsum's main problems were the irregular and unreliable income of her frail husband and the need to find husbands for the four remaining girls, starting immediately with Jasmine, now just out of school after studying up to grade eight. Kulsum commented that "among the women, those who took NGO loans, some couldn't make good progress because they couldn't use their loan properly. Now they are in trouble, like me."Kulsum then surprised us by announcing that she had since become a member of both Grameen Bank and BRAC....All of these loans were used to help repay private loans taken for Mariom's marriage. But she has four more daughters still to wed. Meanwhile she has to find 320 taka a week to service her current...loans: her passbook shows that this has been a struggle....She thought that with Allah's help---and maybe some help from her daughter and son-in-law---she might pull through.When we put it to Kulsum that taking NGO microcredit loans had simply put her dangerously deeper into debt, she vehemently disagreed. "In this world nothing can be done without money," she said, and went on to argue that without the NGOs her choices would have been even fewer: "I would have to try to get more loans in the village, and if I failed then I would be quite unable to find husbands for my daughters. Then where would I be? It's easier to repay NGO loans...because they make you pay back some every week.

On the administrative cost of offering voluntary, liquid savings, which ASA did beginning in 1997 (p. 144):

ASA had been warned by one sympathetic international observer to expect an initial "great sucking sound" as members satisfied their long-stifled wish to withdraw some part of their savings, but that this would subside, to be followed by a period of growth in savings. Broadly, that is what happened: withdrawals were fierce, but by late 1999, the average member was depositing two-and-a-half times as much as she had been in early 1997, before the rules were changed. But she was also taking it out again: the savings balance per member was exactly the same in December 1999 as it had been in January 1997. ASA had satisfied its members, and it didn't suffer from angry protests [as Grameen had, over lack of access to forced savings]. But it had added considerably to the work in the branches and the ratio of its savings to its outstanding loans had not improved.

A treat for me is Stuart's account of the March 2008 trip that I joined. I have just posted pictures from the day. I hot-linked the pictures to the text: if you browse them, look for hotlinks in the captions and tags to the relevant passages in The Pledge. Here's one excerpt from the book in which I link the other way. It describes our encounter with a family that escaped poverty with the aid of credit (pp. 175--76):

We settled ourselves comfortably in the courtyard of the a prosperous-looking homestead and quizzed Zigir Ali, his wife, one of his sons, and his daughters-in-law. Zigir had been a member of an early social mobilization samity....As a young married man he was poor, trying to bring up a family on day laboring wages: like many in those days, they couldn't always manage three meals a day, sometimes not even two. Now, asked to describe his economic condition, he demurs, but his wife Fulmeher, says, "We've become middle class now." It's her samity, the microfinance once, that they keep talking about...not his old social action one....They have four well-built, timber-and-tin-sheet rooms arranged around courtyard [where we sat]. We are invited into one of them and find a modern color TV, DVD player, a fridge, and nicely carved timber furniture. All four of the rooms, and most of their contents, are new, and all were paid for by their two sons, one by remittances from Saudi Arabia and the other from income he earns as a truck driver....the family keeps in touch with the son in Saudi Arabia through the three mobile phones in the household. When I say that it looks as if their prosperity is all based on the hard work of their family, and has little to do with ASA's loans, Fulmeher laughs. "Don't you know how much it costs to pay the bribe for a permanent driving job with a good company? 30,000 taka. And we needed 160,000 [$2,300] to send the other boy to Saudi. Where do you think that all came from? And how do you think we put them through school, or found husbands for our daughters?...The 160,000 taka for the Saudi trip was made up of 50,000 from the boy's parents-in-law (effectively, it was the dowry...), 20,000 from selling the family's savings in gold jewelry, some loans from cousins and neighbors, and the balance from a string of ASA loans taken by Fulmeher, her daughter and daughters-in-law. Subsequent ASA loans then repaid the private loans and helped the household rebuild its savings. The microcredit borrowing gave continuity and stability to the whole sequence of transactions....All these are funded by the remittances of the son in Saudi Arabia.

What struck me about this story is the way that credit had allowed Zigir's family to escape poverty not through microenterprise but by hitching to the broader forces of economic transformation at work in Bangladesh: sending a son abroad, even paying a bribe for formal employment.On interpretation of microcredit impact studies (p. 187):

Many of microfinance's most important effects are indirect, and surveys like the one by the World Bank cannot detect them. For example, Rasheda was always able to borrow from her family when she needed to buy medicine for her children because they could rely on her repaying them when the next ASA loan came along. In Manikganj, Zigir and the family never used microcredit to run a business, but as the foundation for a complex structure of transactions that led to vastly increased income from his two employed sons and propelled them into the ranks of the rural well-to-do. In their case, microcredit did not achieve this miracle on its own---it had to be matched to hard work and shrewdness and to informal sources of credit---but at the same time the achievement itself would have been impossible without the continuity that microcredit gave their financial life. In Comilla...Lutfar saved her father's life with the help of microcredit loans, something of immense value to her that would show up in no survey of income or microenterprise growth.

On bubbles and overborrowing (pp. 191--93):

The possibility of a microfinancial train crash in Bangladesh cannot be entirely ruled out. The core microfinance product is now widely available throughout the country....Away from extremely remote areas, most households have at least two or three providers serving their village or slum, and many households have opened accounts in more than one NGO. Imran Matin of BRAC says that the "first-generation gains" of microfinance have been realized, in that most poor Bangladeshis now have routine access to a basic banking service that is often more reliable than the educational and health services that they commonly encounter. Nowhere else in the world has this yet happened.It isn't hard to find examples in Bangladesh of microcredit users in arrears on payments to multiple providers....Aware of the business risks if too many [such] cases occur, but unequipped with any industry-wide mechanism to curb growth, the microcredit NGOs have been indulging in what some see as a race to the cliff edge, with each organization determined to secure the largest possible share of the market before it starts to shrink. PKSF, with its massive funds [of wholesale capital for microcreditors], fuels the process. Rather than shun areas already heavily populated by competitors, organizations have been rushing to establish branches wherever a rival has one.When, in late 2007, ASA decided to impose a six-month pause on...expansion...there was a feeling...that this wasn't such a bad thing, given the possibility of a "train crash." Shafiq was then more worreid about the consequences of all-out competition than at any other time in our conversations." A survey that branch staff members had recently completed had made Shafiq feel that "the scenario is very horrifying," with too many borrowers multiply indebted, and missed payments on the rise.

On the double-edged relationship between access to finance and access to health care (pp. 196--97):

ASA...returns some of its surpluses to samity members in the form of grants for hospital treatment for a limited range of serious illnesses....The program grew from the branch staff's observations of one of the dilemmas of general purpose credit services: that credit may be used in expensive ways that, before the coming of the microcredit providers, were seen as not within the expectation of poor villagers. Often the expenditure is for medical services, and this is one of the main causes of multiple indebtedness....

I don't recall seeing this point before. It is intriguing in its parallel to the problem of financing healthcare in the United States. Likewise in the analogy it sets up between credit and cigarettes. When credit is available, there is a certain inevitability in people borrowing more than they can really handle---getting hooked on it---since health emergencies are common. Yet, as Stuart pointed out to me, if a woman bankrupts herself saving her husband's life, is that such a bad deal?His bottom line on microfinance's "social bottom line" (p. 214): "a useful service that may not always transform poor people's lives but rarely fails to help them."