The End of Microfinance’s Honeymoon

ARDY's Fu Xing branch office

I’m a couple of weeks late, I know, in commenting on article in the New York Times about the recent image issues that the microfinance industry has suffered. The article describes how major microfinance lenders, in particular in South Asia and in Latin America, have begun to come under greater public scrutiny, and even resistance, from the media and from political leaders. In the most extreme example of resistance, the government of the Indian state of Andhra Pradesh has banned microloans altogether.

…as with other trumpeted development initiatives that have promised to lift hundreds of millions from poverty, microcredit has struggled to turn rhetoric into tangible success.

Done right, these loans have shown promise in allowing some borrowers to build sustainable livelihoods. But it has also become clear that the rapid growth of microcredit — in India some lending firms were growing at 60 percent to 100 percent a year — has made the loans much less effective.

Most borrowers do not appear to be climbing out of poverty, and a sizable minority is getting trapped in a spiral of debt, according to studies and analysts.

…even as the results for borrowers have been mixed, some lenders have minted profits that might make Wall Street bankers envious. For instance, investors in India’s largest microcredit firm, SKS Microfinance, sold shares last year for as much as 95 times what they paid for them a few years earlier.

The article confirms something that we probably should have known all along–that an organization isn’t necessarily doing good for a community just because it labels itself as “microfinance”–rather, effectiveness is inevitably going to vary by organization and each microfinance firm must be evaluated individually in order to determine its effectiveness. In my experience, the Association for the Rural Development of Yilong County is one of the better-run organizations, and its successes carry lessons for both implementing microfinance successfully, and for evaluating the reliability of other organizations.

In the last month of my time in Sichuan ARDY hired an outside software distributor from Nepal to help them install a new data management system–something I’ve blogged about previously here. The two men who came in from Kathmandu to oversee the installation process had been to China several times before to work with other microfinance firms in various parts of the country. When I asked them how ARDY compared to the other Chinese firms they had worked with though, they respondingly responded that ARDY was quite different. Many of the other organizations, it seemed, fell into the same pattern that the article describes as inspiring suspicion. They ran their operations strictly as a business, beholden primarily to the profit motive, and with little concern as to whether their borrowers were really being lifted out of poverty. ARDY, they said, was the only Chinese microfinance distributor they had seen which was really motivated by social goals, and which really worked to change peoples’ economic situations.

As I have discussed previously in this blog, one of ARDY’s really unique characteristics is its organic relationship with the local community. Gao Xiangjun and the other directors all grew up in this community, and have a strong sense of personal dedication to improve it. They know what local inhabitants need and are personally dedicated to providing them with the instructive and material support that they need. However, I was equally impressed by the shrewd business acuity which Gao and her colleagues display in their work. ARDY maintains an incredibly high repayment rate, and reinvests much of its profits from interest back into the organization, such that its lending pool increases each year. How can an organization combine both profit motive and social good?

I think one important element is the need to distinguish profit motive from profit as a performance indicator. ARDY seeks to help local farmers by creating sustainable local enterprises which borrowers will be able to manage and develop themselves. Traditional indicators of business performance, in particular profit, are the best way to determine if borrowers are in fact moving toward financial independence rather than simply accepting handouts. They should also inform the way in which potential microfinance entrepreneurs manage their new enterprises, and ensure that they can eventually turn a profit on their own.

However, in order for these more conventional business practices to be successfully integrated into a community which previously lacked them, they must be combined with an intimate understanding of the community and a willingness to work with borrowers to overcome the greater obstacles that inevitably arise from starting a business in a more extreme environment. When a borrower from ARDY fails to make a payment, a loan officer visits them at their home, and works with them to figure out a strategy for repaying the loan and, hopefully, salvaging their failed business endeavor. Without this sensitivity to local conditions, any organization that treats profit as its bottom line is inevitably going to leave some people behind. Instead, profit motive should inform socially motivated projects, allowing an organziation to meet its social goals within a competitive capitalist environment and with a more efficient use of resources.

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