MICROFINANCE’S EVOLVING IDEALS: HOW THEY WERE FORMED,
AND WHY THEY’RE CHANGING
BY STUART RUTHERFORD, SAFESAVE
The views expressed in this paper are the views of the authors and do not necessarily reflect the
views or policies of the Asian Development Bank Institute (ADBI), the Asian Development Bank
(ADB), or its Board of Directors, or the governments they represent. ADBI does not guarantee the
accuracy of the data included in this paper and accepts no responsibility for any consequences of
their use. Terminology used may not necessarily be consistent with ADB official terms.
MICROFINANCE’S EVOLVING IDEALS: HOW THEY WERE FORMED,
AND WHY THEY’RE CHANGING
Money is important
The economist John K. Galbraith remarked that money is just as important to people who
don’t have much of it as it is to people who have lots1, so it should follow that poor people
are just as keen on looking after their money as the rich. And indeed research shows that poor
people are just as likely as rich people to look for smart ways of managing their money. All
around the world poor people are busy borrowing and lending and saving and swapping, at
home and at work, with neighbours and family and employers, or in devices like savings and
loan clubs, trying to leverage the greatest possible value out of their small irregular and
unreliable incomes. That’s why the text of my first slide is set against a background called
“informal money management” – to remind us that whenever we talk about microfinance it is
just a small part of a much larger world of money management by and for poor people.
Historically, governments and banks and other formal institutions have usually been happy to
leave poor people to get on with their own money management. But as my slide suggests,
from time to time the outside world decides to take an interest in the financial affairs of the
poor. These interventions by outsiders have increased recently, and they are subject of my
talk today.
What sets off these episodes of interest in the poor and their money, and drives outsiders to
intervene? Well, these episodes often come at times when there are changes taking place in
the way that poor people, and their place in the world, are perceived, and changes in what
governments and other responsible bodies believe should be done about the poor.
For example, in the colonial period government officers posted in out-of-the-way places
regularly became concerned with what they saw as exploitation of poor people by
moneylenders. So one of the first interventions was driven by moral concerns2, and took the
form of ‘usury’ laws introduced by colonial governments – laws that tried to govern the
interest rates and other conditions of informal lending. Another kind of intervention that also
dates back to the 19th century was inspired by a mix of pro-poor social, political and
educational3 aspirations: this was the cooperative movement, which believed in self-help
money-management through devices like the credit union as a route for poor people to learn
about finance and to harness it to empower themselves. Akhtar Hamid Khan, a pioneer of cooperatives for the poor of South Asia, used to tell poor people that
you are being crushed by the power of capital: the same power will release you if
you learn to possess and control it
Three interventions
So much for history. To illustrate how modern interventions in the financial affairs of the
poor come about I have chosen – as you see on the first slide – three broad episodes, each
characterised by a different vision of the poor and a different way of working with them. In
1
Paraphrased from Galbraith, John K (1975) ‘Money: Whence it Came, Where it Went’, New York, Houghton
Mifflin
2
See J Allister McGregor, Credit, Debt and Morals: An Aspect of the Colonial Inheritance in South Asia, Bath
University, undated ms
3
A colonial Indian government report of 1905 advocated credit for the poor, but stipulated that “it must be
credit which shall be so obtainable that the act and effort of obtaining it shall educate, discipline and guide the
borrower”. Quoted in McGregor, op cit.
2
the early postcolonial period official interest focused on moderately poor farmers as villagelevel actors in the great drama of national development. The task assigned to the villagers
was to modernise and increase farm output and thereby lay the foundations for GDP growth.
New official bodies, known as development finance institutions (DFIs), provided loans to
farmers, often on a subsidised or loss-making basis. Let’s agree to call this style of
intervention the ‘Development Finance’ approach.
By the later years of the 20th century, however, things had taken a quite different turn.
Microcredit for women-owned microenterprises was attracting grants and soft loans from
governments, donors and international NGOs. Women were recognised as the forgotten half
of the poor, and informal business was recognised as the forgotten half of the economy: their
simultaneous rediscovery seemed to offer huge potential for gains in women’s status and for
the growth of the non-farm rural economy. To qualify for a loan it was suddenly better to be
female and landless than to be a land-owning male. Let’s call this the ‘Microcredit’ approach.
Now, we are seeing another shift. One by one, the key elements that defined the microcredit
revolution have been challenged. ‘Why only women?’, some practitioners and academics
have asked, ‘don’t men need credit too?’. Why only microenterprises? Aren’t there other
legitimate uses for credit? Why only credit? Aren’t savings and insurance also important?
And why groups? Why can’t poor people enjoy individual financial services? This most
recent style of intervention I call the ‘Financial Services’ approach.
Indonesia in the 1970s
To help us to understand how these shifts occur, let us look at conditions in a handful of
places where the new ideas and practices developed rapidly, starting with Indonesia in the
1970s. (Slide 2).
The Bank Rakyat Indonesia, or BRI, is at old State bank that came to be used as a national
development tool in the 1970s4. With international intellectual support, and tapping into the
surpluses generated in the state-owned petroleum industry, it set up thousands of small
branches (known as ‘Unit Desa’) to feed capital to farmers who were being encouraged by
agricultural extension officers to adopt new and more capital-intensive techniques. The
interest BRI charged for the loans produced less income than was required to run the
operation, and at one time BRI even paid more interest on savings that it charged on its loans.
Clearly, it was behaving less and less like a bank and more and more as a distribution channel
for public subsidies. This was a ‘supply side’ intervention in the villages: national and
international authorities were getting involved in village level lending and saving not because
of a new demand for such services, but as part of a state led attempt to reform the agricultural
economy.
Sure enough, this was a period of rapid transformation of Indonesian agriculture, of high per
capita growth rates in the economy, and of dramatic falls in the incidence of poverty. By
1980 Indonesia was self-sufficient in rice, and its farmers were enjoying some of the best
yields per hectare in Asia. BRI in the 1970s illustrates a ‘development finance’ style of
intervention, top-down, supply-driven, and subsidised – that has subsequently gone out of
fashion. But not only did it appear to be succeeding at the time, it also introduced features
that microfinanciers have come to appreciate more and more – above all by making contact
with the bank convenient to villagers by developing huge numbers of small outlets close to
where they live and work, but also by popularising savings services alongside the loans.
4
There are many books and articles on BRI. For a comprehensive treatment see Marguerite Robinson, The
Microfinance Revolution, World Bank, Washington DC and The Open Society, New York, 2001 and later
3
Bangladesh
We’ll be coming back to BRI, because the 1980s brought a dramatic turnaround in Indonesia.
But for the time being let’s move on to Bangladesh, the birthplace of modern microcredit.
What was it about conditions there that led to a new style of intervention, featuring poor
women, groups, and lending for microenterprises rather than for farming? (Slide 3).
Bangladesh suffered a devastating war of independence in 1971, and took years to recover
from it. The very name ‘Bangladesh’ became shorthand for desperate poverty, seemingly
made worse by very high growth rates of an already dense population. Though the economy
was still overwhelmingly rural, landlessness was widespread and growing. What could be
done? Government was weak and corrupt, its services in disarray or even totally absent. But
the country was full of idealistic youngsters who had helped fight the war. They had no jobs
but they were eager to try out new ways of dealing with the poverty they found in their home
villages. The end of the war had seen the new country open up to a flood of ideas from
abroad, brought in by volunteers working for NGOs and backed up by a steady flow of
financial support from charities, development NGOs, churches and governments. There was a
strong ideological preference for non-bureaucratic ‘grass roots’ collective approaches, and
Bangladesh was full of newly-formed groups experimenting with co-operatives and other
self-help approaches. The quotation from Akhtar Hamid Khan about the poor ‘seizing the
power of capital’ rang in peoples’ ears.
Most of the great institutions of modern Bangladeshi microfinance were born in that era.
ASA5, for example, was founded in 1978, but didn’t turn to microfinance for a decade. For
the first years of its life it was busy forming village men into revolutionary cells, preparing
them to spearhead a nation-wide uprising that would give birth to a Maoist government.
ASA’s leaders, who now sit in the ASA HQ in Dhaka deciding interest rates, are the same
men who debated, in the early 1980s, at what stage they should provide machine guns to their
village groups6.
By then, a disillusioned economics professor, Muhammad Yunus, had put together what
proved to be the dominating model for using groups and credit to fight poverty: the Grameen
Bank. Groups of villagers, deliberately selected on account of their landless poverty, met
weekly. They took loans as individuals, but they undertook to help each other if anyone got
into repayment difficulties. Repayment was made as easy as possible by being divided into a
year’s worth of tiny weekly instalments, small enough that they could be saved out of normal
weekly cash flow. The loans were supposed to be used for ‘income generating activities’, for
fear that any other use would lead to repayment difficulties and would fail to build assets and
income. The capital for the loans came from outside the village: from Yunus’s pocket at first,
then from local banks, but then as the banks proved problematic, from private foreign and
finally public domestic and foreign sources.
At first, the movement was not exclusively nor even mainly female. The early groups of the
main Bangladesh MFIs – Grameen, BRAC, and ASA – were single sex, but there were as
many, if not more, men’s groups as women’s. But then two things happened: the NGOs
found that women were more reliable borrowers than men, and the international development
community suddenly discovered and promoted gender issues, a co-incidence which allowed
NGOs to be praised for their gender work as they quietly disbanded their poorly-performing
male groups.
Bangladesh, then, tells part of the story of microcredit – the part that stresses credit as a tool
to fight poverty, and focuses on ways of reaching rural poor people en masse and designing
5
6
The Association for Social Advancement, see www.asabd.org
For the story of ASA, see Stuart Rutherford ASA, the biography of an NGO Dhaka, ASA, 1995
4
loans that are easy to take, use and repay. But there are other aspects of the story, and for
them we need to turn to Bolivia.
Bolivia
The Bolivian intervention displays a similar mix of origins as Bangladesh: brilliant dedicated
individuals, country-specific economic, social and intellectual conditions, and the constant
pressure of international thought and fashion7. But the details in Bolivia are quite different. In
the mid 1980s Bolivian economics and politics were changing quickly. A failing socialist
regime was giving up its ownership of industry and liberalising the economy. This brought,
on the one hand, a welcome end to hyperinflation and on the other massive unemployment as
loss-making state enterprises were closed down. A wave of unemployed people flooded into
the towns looking for employment, but, not finding it, settled for self-employment, causing a
ballooning of the informal sector. The streets of La Paz and other towns were packed with
street vendors and small-scale producers, all hungry for capital. (Slide 48).
The microcredit idea had already reached Bolivia in various ways, including the influence of
expatriate Bolivians living in the United States and, crucially, through American ODA
(USAID), which had already carried out several microcredit experiments in Bolivia. But it
was the consequences of the structural reforms that gave Bolivian microcredit its defining
character. By comparison with Bangladesh, the Bolivian intervention was typically urban
rather than rural, less concerned with poverty and more focused on micro-enterprise. It
targeted the ‘economically active poor’ – people with established businesses that needed
capital to grow. The Bolivian experience shaped USAID’s view of microfinance, which it has
always interpreted the word to mean ‘finance for micro-enterprises’ rather than ‘loans for the
poor’, as it was understood in Bangladesh and elsewhere.
But there is another important difference between Bolivia and Bangladesh. Bangladeshi
microcredit sprang from humanitarian impulses: it was a way of confronting intolerable
poverty. But from the start, Bolivian microcredit certainly saw itself as ‘pro-poor’ but also
saw itself as a business, potentially as a branch of commercial banking. As in Bangladesh,
borrowers were arranged in groups, but in Bolivia group members were formal guarantors of
each other’s loan, legally bound to pay up if any of them defaulted. This contrast with
Bangladesh’s much less formal use of group solidarity, in which borrowers merely
committed to ‘try to help each other’. Differences in the level of education – most of
Grameen’s members were illiterate, while most Bolivian clients could read and write – may
be associated with this difference.
Happily for the Bolivians, the state-level reforms also affected the Central Bank, which,
working with the microcredit NGOs themselves had, by 1992, developed a legal identity
suitable for microcredit. Bolivia’s leading microcredit NGO, Prodem, became Bolivia’s first
microcredit bank, BancoSol. There followed a string of Bolivian ‘firsts’ in the world of
microcredit: the first microcredit bank to become more profitable than the commercial banks,
and the first to take in capital via international money markets, and so on: you’ll hear more
about where all this led to from Nimal in a moment. Until the late 1990s, Bolivian
microcredit thrived and grew. Many thought its model would last: that this would be an
intervention that grew into a permanent industry.
7
The story of Bolivian microfinance is brilliantly told in Elisabeth Rhyne Mainstreaming Microfinance
Kumarian Press, Bloomfield Connecticut, 2001
8
The picture used in this slide is taken from the web-site of BancoSol, www.bancosol.com.bo : there was no
time to obtain formal permission and the author thanks BancoSol in anticipation of their forbearance
5
Reversals
Our third and final kind of intervention, the one I have called the ‘financial services’
approach, had its own roots but also grew out of the ‘development finance’ and the
‘microcredit’ approaches, both of which, though at different times, went through corrective
reversals. Let’s take a quick look at these reversals. (Slide 5).
By the mid 1980s BRI’s Unit Desas were in deep trouble, on both the demand and on the
supply side9. Demand from farmers fell off sharply, as it became clear that there’s a limit to
the amount of money that you can pump into agriculture. More and more farmers, above all
the smaller ones, were facing declining or even negative returns on their loans, partly because
they had completed the transition into high-yielding methods, partly because rice prices were
falling as harvests grew. More and more of them defaulted on their loans – by some estimates
about half were in arrears by 1984. Many more just stopped borrowing – the number of loans
outstanding halved. A few bigger farmers were still borrowing, but many of them were
diverting their loans into off-farm enterprises. On the supply side, government subsidies
declined as oil revenues fell.
Meanwhile, on the other side of the world, in the United States, development academics,
sponsored by USAID, were busy mounting an assault on the whole idea of subsidised
Development Finance. Their influence reached Indonesia via technical assistance officers at
about the time of BRI’s crisis. Working together, American advisers, Indonesian government
officials, and BRI staff, turned just about everything upside down. The Central Bank removed
interest rate restrictions and encouraged BRI to become profitable. Subsidies disappeared.
BRI brought in new savings and loans products, and interest rates on both rose, with
borrowing rates, at 36% a year, four times the rate paid on savings. Loans could be taken for
any use, were wholly in cash (rather than in cash and kind), were sanctioned by trained bank
staff rather than decreed by agricultural extension officers, and were designed with incentives
to encourage swift repayment: if you repaid quickly, you got a bigger loan next time and you
got back some of the interest you had paid. Savings were designed to attract millions of small
savers: minimum balances were virtually abolished, attractive incentives like lottery prizes
were introduced, withdrawals were allowed as often as you liked and in any amount, and staff
were retrained to see that savings lay at the heart of their business. In short, BRI went back to
being a bank. The value of outstanding loans went from about $250 million in 1987 to $1.7
billion a decade later. The transformation on the savings side was even more dramatic: there
were about 4 million savings accounts in 1987, but 16 million ten years later, in which time
the value of deposits rose from about $150 million to over $3 billion.
The financial services approach: a real microfinance revolution?
The reversals in Bangladesh and Bolivia were different in detail – and we’ll a look at the
Bangladesh case more carefully in a minute – but the three rebirths all had a key feature in
common: much greater responsive to the market for financial services among the poor. This
is the heart of the third approach, the one I have called the ‘Financial Services’ approach.
The broader developmental aims which had inspired the interventions in Indonesia,
Bangladesh and Bolivia – increased farm production, women’s empowerment, poverty
eradication, micro-enterprise development – didn’t disappear, but practitioners began to
believe that they must reach these aims more indirectly, and shift the direct focus on to
responding to what poor people want instead of what we want for them.
9
Paul Mosley gives a good brief history of BRI’s fortunes, in Hulme and Mosley Finance Against Poverty
volume 2, Routledge, London 1996
6
The New York Times10, within the last month, neatly summarised the spread of the new
thinking in an article entitled ‘Banking for the World’s Poor’ which calls for what the
newspaper calls ‘a real microfinance revolution’. The article observes that ‘microcredit –
tiny business loans extended to poor people in developing countries – is a proven
development strategy…. But the world’s poor desperately need access to a broader range of
financial services – microfinance is the more apt term – to improve their living standards.’
New research also pushed practitioners in this direction. Work done in India and Bangladesh
two or three years ago11, for example, documented the astonishing extent to which poor urban
and rural households engage in money management. Researchers worked with household
members to record ‘diaries’ of exactly what they did with their money between its arrival as
income and its disappearance as expenditure. Poor households don’t live ‘hand to mouth’,
spending every cent as soon as it comes in: on the contrary they typically process a huge
amount of money – equal on average to two thirds of their annual income – through some
form of saving or borrowing or lending. In the Bangladesh study the researchers identified
twenty-nine different kinds of service and device that were used to do this, ranging from
formal banks to clay ‘piggy banks’ kept at home. No household, not even the poorest, used
less than four devices during the year of the study, and some used as many as sixteen. On
average, households started some new arrangement – took a loan, entrusted an employer with
savings, joined a savings club or an NGO – once every two weeks. ‘Unless we manage our
money in this way, we just can’t survive’ was a typical comment from the study households.
A moment’s thought shows why this is so. (Slide 6). Poor people, pretty much by definition,
don’t have much money. Their incomes are often not only small, but irregular and unreliable
as well. Much of it is spent on basic necessities – above all, food. At any given time they are
unlikely to have to have more than a few cents in their pocket or purse. So whenever they
need anything other than basic food – whenever they need to buy clothes, or take the children
to the doctor, or arrange the marriage of their daughter, or bury grandfather, or mend the
leaking roof, or buy an asset like land, or start or run a business – they usually find that they
just don’t have the money to do it. So then what happens? Well, in the worst case, which
happens only too often, they just go without. Better, they sell off assets, but that’s hardly a
sustainable strategy, since they have few assets to start with, and once they’re gone they’re
hard to replace. Best of all – and the only reliable way to manage when you don’t have
enough current income to buy what you need – is to dip into past income or future income.
Dipping into past income means having savings, and dipping into future income means taking
loans, and savings and loans are the prime tasks of financial services. Arguably, the poor
have an even greater need of financial services than the rich12.
Let me show you a practical example of this rather theoretical argument. Let’s look at what
Grameen Bank has started doing in the last two years13. (Slide 7). The ‘one size fits all’
microcredit approach has been replaced by what they call ‘Grameen II’. Grameen II features
a much wider range of products with a much wider range of terms. Loans can now be taken
for three months, or for three years, rather than for one year as in Grameen I. Repayment
schedules can be tailored to the individual borrower’s circumstances. General loans no longer
have to be invested in businesses – Grameen recognises, now, that there are many other
10
19th November 2003: www.nytimes.com
by the Institute for Development Policy and Management, University of Manchester, UK. See Stuart
Rutherford Money Talks: Conversations with Poor Households in Bangladesh about Managing Money on the
IDPM website at www.man.ac.uk/idpm
12
For an extended version of this argument see Stuart Rutherford The Poor and Their Money Oxford University
Press, New Delhi, 2000
13
See Mohammad Yunus Grameen Bank II: Designed to Open New Possibilities Grameen Bank, Dhaka,
October 2002 ands on the Grameen web site www.grameen-info.org
11
7
useful ways of spending loans. For its poor members, savings are now given as much
prominence as loans. Personal savings have been opened up, so that members can now
deposit or withdraw any amount at any time. Perhaps most exciting of all, long-term savings
plans have come in, called the Grameen ‘Deposit Pension Savings’. Now, if you’re a
Grameen members, you have more than one choice of what to do with the few dollars you
can save each month: you can use it to pay down a loan, or you can use it to build up capital
in the long-term savings account. Many many members, especially older ones like Rahima
featured in the slide, are choosing the second option.
A practitioner, really
Ladies and gentlemen, I’ve been talking to you this morning as if I were an academic. But
mainly I’m a practitioner, and as a practitioner, I can’t take a lofty view of the approaches
I’ve described today. I have to make a choice. It’s time for me to reveal my true colours: I’m
all for the financial services approach. So let me leave you with one last quotation and one
last slide (slide 8). SafeSave, an MFI that I founded which works in the slums of Dhaka, says
of its work:
‘…we try to provide financial products that poor and very poor individuals value.
We don’t explicitly try to lift the poor from poverty nor push them into running
businesses. Rather, we try to offer a high-quality market-based flexible and
convenient service to all who live in low income areas. Many poor and very poor
people find this a useful tool, one that they are prepared to pay for. This leads us to
believe that it is a service suited to the general goal of poverty alleviation’.
Stuart Rutherford
November 2003
8