I'm seen as an expert on microfinance. I'm writing a book about microfinance. I blog about microfinance. I go to microfinance conferences. So you'd think I know what microfinance is. But I'm not sure I do.
How would you define "microfinance"? Google, helpful as always, lists definitions like these:
- Microfinance is the provision of financial services to low-income clients, including consumers and the self-employed, who traditionally lack access to banking and related services.
- Refers to institutions that specialize in making very small loans to very poor persons in developing countries. Instead of using collateral to assure repayment, these lenders harness social pressure within the borrower's community. ...
- The provision of small loans (microcredit) to poor people to help them engage in productive activities or grow very small businesses. The term may also include a broader range of services, including credit, savings, and insurance.
The main idea seems straightforward: micro = really small, so microfinance is financial service in small amounts for poor people.
The last definition, from PBS, adds a twist: a reference to the lender's purpose---to support microenterprise. That's a vestige of the term's evolution. In 1971, Intel released the first microprocessor, the 4004. (There followed the 8008, the 8080, the 8086 and 8088, the 80286, 80386, the 80486...then the branded Pentium series.) By 1973, "microprocessor" had appeared in the American newspaper of record, and around then, I think, "micro-" gained currency. Jeff Ashe told me that it was a volunteer for Accion's program in Recife, Brazil, named Bruce Tippett who in 1974 coined the term "microenterprise" or "microbusiness" to describe informal businesses run by poor people. Accion lent money to the microenterprises in Recife, leading to the phrase "microenterprise credit." Much later (does anyone know the history?) came the term "microcredit." Hans Dieter Seibel says that he coined "microfinance" in 1990 to signify the conceptual expansion beyond credit to savings and insurance. But through much of the 1970s and 1980s, what we call "microcredit" was termed "microenterprise credit."
I think most knowledgeable people in the world microfinance (however defined) have moved beyond the equation of microcredit with enterprise. (Alas Kiva's web site hasn't: ever borrower there is an "Entrepreneur.") It is widely recognized that poor people use credit for many things besides investment, that this is often a good thing, and that money is so fungible that you can't really tell people what to do with it anyway. I, at any rate, am not confused on this point: microfinance should not be defined by the lender's purpose.
But here's a bigger source of confusion, a circa-2000 tally of accounts at "Alternative Financial Institutions," which generally aim to serve people too poor to interest commercial banks:
The "MFIs" heading on the first data column stands for "microfinance institutions." This study by Robert Christen and Rich Rosenberg opened a lot of eyes to a wider terrain of financial services for the poor. There are postal banks and state agricultural banks and credit cooperatives and credit unions and more. In assembling the data set behind these totals, Bob and Rich confronted questions of taxonomy. They had to group institutions and label the groups.
The results of their labors force two questions: Is "microfinance" narrower than "financial service in small amounts" after all? If so, what distinguishes microfinance?
Some possible answers to the second question:
- Microfinance is non-governmental and non-profit. Except not. The biggest institution generally considered to be doing microfinance, BRI, was government-owned at the time of its ascent and is now privatized and for-profit.
- Microfinance works with groups of people, not individuals...except there is such a thing as individual microfinance. That's what BRI does, and lots of Latin American MFIs do it too.
- Microfinance clients are poorer. Could be. But do know that clients of all the other kinds of institutions are better off? In fact, by and large, microfinance clients are themselves not the poorest of the poor.
- Microfinance institutions operate in a business-like way. Even non-profit MFIs strive to cover their costs. But lots of MFIs are losing money. And in many cases this is by design. Charities often subsidize their microcredit operations to hold interest rates down or compensate for the inefficiencies of small programs.
Let me head off some criticisms before I continue. First, people can define words however they want. I'm not interested in arguing over the true meaning of "microfinance" or criticizing how anyone uses it. Second, what dictionaries or reflecting humans mean by a word can differ from what it means in practice, when people allocate funds, perform analysis, write regulations, convene conferences. I'm interested in what the term tends to mean in practice. My book is about whether microfinance works; I'd like to pin down what I'm talking about and what readers think I'm talking about. Third, defining words is not judging approaches. I can exclude some method of providing financial services from my definition without denigrating that method.
Here's how Bob and Rich defined microfinance in their study, in 2004:
This paper uses "microfinance institution" and "MFI" narrowly, referring to NGOs [non-governmental organizations], non-bank financial institutions (NBFIs), and commercial banks that specialize in microfinance, as well as separate microfinance programs in full-service banks. "Microfinance" as used in this definition refers to financial services designed for lower-income clients using the new delivery methodologies developed during the last twenty-five years.
Pragmatic---but unsatisfying, because it begs the question of what distinguishes those methodologies.
Here's the clearest typology I've found, from the CGAP Financial Access report:
- Commercial banks Banks with a full banking license. In some countries, the term “universal banks” or other terms may be used. Majority government- and stateowned banks should be included in this category to the extent that they perform a broad set of retail banking functions and are regulated and supervised in the same manner as privately owned banks.
- Cooperatives, credit unions, and mutuals Financial institutions that are owned and controlled by their members (customers), regardless of whether they do business exclusively with their members or with members and nonmembers.
- Specialized state financial institutions Specialized state-owned institutions are extensions of the government whose main purpose is to lend support to economic development and/or to provide savings, payment, and deposit services to the public. They include postal banks, government savings banks, SME lending facilities, agriculture banks, and development banks.
- Microfinance institutions Institutions whose primary business model is to lend to (and possibly take deposits from) the poor, often using specialized methodologies such as group lending.
This seems reasonable. But its interesting that BRI, which Marguerite Robinson says led the "microfinance revolution," is not a microfinance institution in in the CGAP classification but a commercial bank. Evidently a lot of microfinance is done by non--microfinance institutions.
My best shot at defining microfinance? I'll take two:
- The business-like provision of financial services to the poor.
- Provision of financial services to the poor in ways that depend on outsiders, especially socially motivated ones, for finance and advice.
The first definition resonates with the "business model" phrase in the CGAP typology. I think it works pretty well because even though there are probably thousands of tiny microfinance programs that won't even try for financial self-sufficiency, the broad thrust of the movement has been to cover most costs through interest charges in order to scale up. This is what makes the large MFIs so unusual in the spheres of foreign aid and international philanthropy.
Last Thursday in Uruguay, at the opening plenary of the FOROMIC conference, I offered a version of my second definition. I'm not sure it went over very well. But I think there's something to it. It seems that a money-losing NGO making small loans to groups of poor people is doing microfinance, while a money-losing Chinese government program making small loans to groups of poor people is not? As far as I can tell, when most people say "microfinance" they are thinking of something like the first, not the second.
What is the key difference? I wonder whether it is that the NGO must raise money from outsiders, probably foreigners. BRI didn't raise money from the west, but it took a lot of advice, paid for by the U.S. government and provided by the Harvard Institute for International Development. Roughly speaking, under this definition, microfinance is what microfinance investment vehicles invest in. It is what Kiva users lend for. It tends to include Village Savings and Loan Associations, because these are organized by Oxfam or Care or CRS, but not the quite-similar informal groups that form without outside help.
And "microfinance," so defined, is the class of interventions for which the impact debate matters, the class for which it is most important to ask: does it work? Outsiders do not generally ask whether informal savings groups or commercial banks "work" in the sense of increasing development. Basically, it's none of their business. But microfinance is their business.
Again, I'm just trying to find the pattern in how people use this word, not defend it. What do you think?