On August 15, 2014, an official of the Bank of Papua New Guinea spoke at the opening of the Women’s Micro Bank Limited.
The address, by Ellison Pidik, whose title at the Bank of PNG is “Assistant Governor for Financial System Stability,” gives us a chance to check back in on the world of micro-finance. This is the widely lauded practice of lending to small-scale producers, “microenterprises.” Institutions engaged in such lending, MFIs, operate now in many emerging-market nations.
Such lending’s benefits for a portfolio include capital preservation (the default rates are very low) and non-correlation. But it is a low-return play.
The microfinance industry has long focused its attention on women as borrowers, for a number of reasons, not the least of which that women in many contexts simply default less often than men. There is also the social-responsibility argument that since “countries in which women are oppressed or treated as second class citizens are always the ones who suffer the highest rate of poverty,” they are the sex with which to start in order to ameliorate that poverty.
Pidik spoke at the official opening ceremony of an institution created for this market, the Women’s Micro Bank Ltd., in Port Moresby.
The Bank for International Settlements has just posted the text of this speech.
Pidik lists the achievements of the micro-finance industry in PNG of late, thus:
- It has already reached about half a million clients;
- It “continues to develop a range of client centered products and services”;
- It uses technology to extend those services even to remote parts of the country;
- Its services have come to include micro insurance; and
- It has established “industry standards in line with the international best practices.”
He also offered some words of caution, though. He said that some micro-finance institutions have “succumbed to the pitfalls of reliance on subsidies and other market distortions” and that this “should be avoided.”
Though he no doubt believes he is expressing himself gently, this is a criticism of microfinance that is becoming more familiar. MFIs must operate on a very large scale in order to be profitable at all. An MFI may make a loan of just $50 to a particular enterprise, so naturally a lot of such loans, to a lot of entrepreneurs, are necessary even if the default rate is very low, simply in order to cover operating costs. MFIs, then, cannot afford to be very “micro” themselves. And in order to attain the necessary scale of operations, they have in fact relied upon subsidies.
A paper presented at the Second European Research Conference on Microfinance, three years ago, took up the issue of sustainability, and thus the issue of whether MFIs can wean themselves from subsidies once they attain the proper scale. Although here too the authors [Gopal Kuman Sarma and Prof. Saundarjya Borbora, both of the Indian Institute of Technology Guwahati] express themselves gently, their conclusion from data in India seems ominous: even with a repayment rate of 95% and with a large number of clients, “analysis indicates that MFI is still financially not self-sufficient.”
There is also the fact that some MFIs charge rates of interest that put one in mind of what Tony Soprano might charge a New Jerseyan with a gambling problem. Indeed, Muhammad Yunus, the central figure in the early development of the industry in the 1970s and 1980s – an achievement for which he won the Nobel Peace Prize in 2006 – has lamented some of the interest rates charged.
“I never imagined that one day microcredit would give rise to its own breed of loan sharks,” he has written, “But it has.”
The Third Hand
So much for “the one hand” and “the other hand.” Now the third hand. There is too much at stake to be churlish. One hopeful trend arising out of MFI is the “Village Bank” model, one where the key institutions aim at neither subsidy nor profit (and thus don’t have to aim at scaling-up either). The village banks are run by the clientele in the manner of a co-operative, and they can rely largely on peer pressure within the village to secure repayments.
Through some such means philanthropists can leverage their own generosity and achieve greater bang for their donated buck. It isn’t a means of seeking alpha, though it is a sensible way to “pay forward” some of the alpha you may have earned elsewhere.