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Dr James Copestake, Department of Economics and International Development, University of Bath, on 21 February 2003
The speaker had recently attended a ‘microcredit organisations summit’ that produced a video record of projects, from which he showed extracts illustrating activities in Bolivia and America. These showed how poor people collectively help themselves through mutual loans when other sources of credit are not available, either because they lack sufficient credit-worthiness or because banks deem such schemes uneconomic. He said that although this has a ‘strong affinity with capitalism’ it helps the poverty-stricken without aid or handouts. This encourages organisations such as Microsoft, for example, to become involved with such schemes in the belief that providing access to capital can help solve global poverty and thus maximise economic growth. Dr Copestake thus wanted to consider whether such projects shadow missionary activities by exporting cultural values through the sale of credit, often at high rates of interest, or whether, more laudably, it should be seen as developing a philosophy of self-help.
Various charts provided relevant statistics. Microfinance schemes are now being marketed globally as a solution to global poverty – for example, the Commonwealth Society is providing a lecture entitled ‘Halving global poverty by 2015 – we can make it happen’. The World Bank target for the period 1990 to 2015 aims to halve the percentage of people receiving less than one dollar per day and that has been accepted by the British government and others. The 1990 figure of 916 millions fell when East Asia and Pacific nations such as China made progress, but with growing population problems elsewhere (as in Sub-Saharan Africa) the number is now increasing, although in Latin America numbers remain stable at around 20% of its population. Economic growth is dependent upon inequalities within countries and while a substantial middle class historically reduces poverty over time, that is rare in low-income countries. Given historical growth rates, projections indicate no change in Sub-Saharan Africa, one-third reduction of poverty in South Asia and slightly less reduction in Latin America, but if growth rates improved much more significant reductions could be achieved.
A Harvard Business Review report claims that 100 million people have incomes of over 20,000 dollars per annum, that 2 billions have between 2,000 and 20,000 per annum and that 4 billions have under 2,000 per annum. If, as predicted, multinational companies will use technology to mass-produce for the biggest market, growth is likely to worsen rather than reduce inequalities. Small businessmen may believe they can compete in time or abandon hope. Dr Copestake commented – ‘ What capacity have we got to manage the sense of frustration? What happens to growth when a negative feedback loop occurs, when inequality spawns instability and investors thus stop coming?’ There is now much international discussion of ‘inclusive growth’, evident in trade reform bodies (e.g. WTO), in capital market reform and in migration, security and aid policies.
Turning to possible measures within countries to achieve inclusive growth, there are both pros and cons with respect to policies relating to health, education, asset redistribution (such as land reforms), income transfers, social security systems, capital and labour market reforms. Labour market reforms (applying to migrants and asylum-seekers in Britain as well as elsewhere) are perhaps the most desirable basic need, but they are long-term, dependent as they are upon changing practices, beliefs and prejudices. The speaker confined his consideration therefore to the pros and cons of microfinance. With respect to demand, poverty brings vulnerability through lack of liquidity. Financial services which enable people to ‘smooth out consumption’ (via saving, credit, insurance, banking) help provide ‘flexible liquidity’. Microfinance is not, however, about transfers, i.e. giving money away. Payment maintenance and ‘debt capacity’ are also factors to consider.
Considering supply, the relatively low sums involved provide low unit value and those who need financial services are those least likely to get them. Their capacity both to borrow and pay interest is low and their risk factor is high, as are transaction costs. There is a ‘chicken and egg’ situation with regard to savings and credit, and saving is difficult for the poor. Subsidised credit is prone to political patronage and boom/bust cycles, which discourage attempts at innovations. Over the last two decades, however, organisations have become more realistic and tougher, developing vigorous cost control, realistic pricing and improved corporate governance. Systems are based upon group incentives and disciplines, peer screening and monitoring, and repayment enforcement (through household asset collaterals, group pride, etc.) Relatively high interest rates help to assure the security of the organisation and keep it free of political control. In conditions of high inflation or government control of interest rates, etc. such schemes are not viable. Staff need both financial and social skills. Government policies must be market-friendly. As well as aid and technical assistance, international bodies must recognise that success also depends upon changing values and norms, and the building of trust within and between groups. There must be gender awareness – many work primarily with women, because they are considered more reliable (although in Kenya young men are forming credit groups)- but it is common policy to employ male loan officers to check on female credit groups.
Sociological and cultural factors complement the traditional extensive family relationships. Where aid programmes are insufficient or dry up radical groups (particularly in Latin America) work with city banks to create microfinance programmes. Such programmes have been very successful in Bolivia (and in Bangladesh), when hyperinflation brought many unemployed workers with requisite skills while the West market for cocaine brought national income which could not be serviced by a collapsed banking system. Such success brought over-extension and politicisation, however, so now the system is again being ‘rationalised’.
The speaker confessed that in 1997 he thought Washington was trying to assert leadership of another global industry when it could be seen as attempting to impose uniformity upon a plural, decentralised and ‘wonderfully chaotic’ enterprise. By 2001 it had become clear that microfinance schemes are only one still quite small means to developmental ends. By the end of 2001 there were 2186 microfinance organisations reporting, serving 55 million clients, of whom 27 millions are classified as ‘poor’. Most organisations (1583) serve fewer than 2500 clients and represent only 3% of the total, whereas 5 large organisations serve at least a million clients and account for 32% of the total. These figures should be compared with the global estimates of need given earlier. The many small organisations have to be aware of the dangers from charging high rates (to get capital for recycling), from over-extensions and from the social repercussions of failed repayments. There is now a strong move to strengthen self-regulation, but the figures for 2002 show that of the 147 organisations from 53 countries who collectively served 9 million borrowers and 29 million savers only 62 were judged to be financially self-sustainable.
Dr Copestake was contracted to study microfinance programmes in India, Malawi, Zambia, Kenya and Latin America, which were being aided by Britain. Finding difficulties with evaluation, he concluded that progress must be assessed in relation to historical contexts. He discussed 3 examples – India, Zambia and Peru. In India he observed a ‘huge social experiment’ which was greatly politicised but very diverse, generally tending to be both subsidised and unviable, but nevertheless arguably worthwhile overall. In Zambia, the decline of its copper industry had stimulated hopes for foreign investment, through which microfinance schemes, although minor would benefit, for example by the unemployed gaining employment as security guards, cleaners, etc. In Peru the impact of such schemes would be on social inclusion, since as middle class survival instruments, they help to break down stereotypes and social barriers.
There is now an action research project sponsored by the Ford Foundation to cover the years 2001 to 2004, involving 31 microfinance organisations in Latin America, Africa, Asia and Eastern Europe. A team of researchers from Bath, Sheffield and Sussex Universities are helping those organisations to monitor the impact of their schemes themselves, using local academics, market researchers, networking with others and clients, etc. The U.K. help is conditional upon their full co-operation in monitoring their own efficiency, errors included, but Dr Copestake conceded that many organisations were not solely concerned with making money and their social performance was as important as their financial performance. If, at best, ‘doing no harm’ was a verdict, so be it. Serving local needs in local contexts was desirable – for example, where HIV /Aids was a big problem, insurance needs were obvious – and copying other organisations was not required.
The speaker concluded by asserting that although these schemes were designed to improve businesses, they were also about the vulnerability of the poor. Now they are tending to move from credit to savings and insurance and they are beginning to link with education and health schemes without distortion of purpose. There are problems – organisations differ widely and can be competitive, which can encourage ruthlessness and depress outcomes. Trade-offs are often needed, when decisions are needed on how much subsidy is needed to reduce charges while maintaining the incentives of organisers. Dr Copestake believes that credit is not a right, but safe savings and payment facilities for social needs are arguably rights. Subsidy for infrastructures to enable ‘self-help social security’ through savings would allow microcredit services then to be built. People in Britain without access to post office or internet services could thus benefit.
Questioned on the lack of comment on ‘productivity’ and the possibility of linking religions to these activities, the speaker claimed that an emphasis on efficiency enabled services to be supplied more productively and links with religion could be inhibiting or creative (by providing a ‘common language bigger than money’). Any cultural frameworks bringing suppliers and users together are helpful. Questioned further on the motives of originators of the schemes, he saw them as diverse. American business ideology favours private business and Christian evangelism supports intervention, but radical movements also favour ‘empowerment’ of the poor. Where governments fail, grassroots activity occurs. Sometimes ancient informal systems become associated with such schemes. The newest features are recognition of the need to find best practice, to regulate and to learn from others. In general these schemes are not top-down, centralised initiatives and he hopes that a balance will be preserved. There is much ‘learning by bootstraps’, which originates from very diverse sources. He agreed, however, that such schemes could be distractions from much bigger and more urgent international activities and recognised that there are risks that if they are too successful donors are tempted to put in more money, which can undermine the self-help basis.