Monday, December 08, 2008

Rethinking Yunus

I used to think that M. Yunus' work on Grameen Bank tells that, contrary to common belief, lending to the poor outside regular banking system can be profitable, because they are equally good, if not better, in repaying their debts than the non-poor.

But I don't understand why, when his idea has been seriously taken by people that really want to make profit by lending to small and poor investors, the microfinance, he was fumed and pointed them as moneylenders, the bad guys he wants to get rid of.

I read this in Tim Harford's article (HT: Marginal Revolution) that summarizes the debate on whether it is appropriate to actually make money and adopts profit maximizing value in microfinance, or should it be left as non profit motive. This, I think, an important topics and we'd be in a better situation should this be read and discussed by anyone seriously involved in microfinance frenzy in the country.

Tim wrote:
There is nothing intrinsically sinful about pawnbroking or intrinsically virtuous about microloans: what matters is the effect on the clients. And to our discredit, we don't really know what that effect is. There have been only two serious cost-benefit analyses - and they've produced a split decision as to whether, given the subsidies involved, microfinance delivered value for donor dollars.

Dean Karlan, a microfinance economist at Yale, is frustrated by this lack of serious research into what works. He also thinks Yunus's talk of "the moneylender's thinking" is unhelpful. "If you're trying to make the world a better place but you're not, that's bad. If you're trying to make profits and don't care about people, but make them better off anyway, that's good," he says.
Thus we don't really know, empirically, whether microfinance initiatives helps the poor. Which brings me into a question to friends advocating microfinance that might read this posting: do we have empirical evidence on the impact of microfinance to, say, poverty in Indonesia?

Also it is interesting to discuss two buzzwords that oftentimes brought in to argue the superiority of Grameen-like microfinance: the peer control, or group liability, and the role of women as debtor, because:
Already, solidly held beliefs about microfinance have been shaken. The "group liability" system, in which a group of borrowers guarantee one another's loans, is still supposed by many to be the secret behind Grameen Bank's low default rates. But a randomised trial in the Philippines conducted by Karlan and a World Bank economist, Xavier Gine, found that group liability was discouraging new customers without improving repayment rates. Grameen itself quietly dropped group liability some time ago.

Another sacred cow of microfinance is that women make best use of the money - the Grameen Bank says 97 per cent of its borrowers are women. But another randomised trial, conducted in Sri Lanka by a team of researchers including David McKenzie of the World Bank, found that male borrowers seemed to make a far higher return on their capital. As with the ZaFinCo study, it's just one experiment in one country.
Anyone in the business or aware of the issue, please feel free to jump in and join the fray.

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