By Peter van Dijk, Microfinance Consultant BSD City, Indonesia

Microfinance Focus, February 5, 2011: Over the last two-three years we have witnessed the force of banking throughout the world. Or rather, we have seen how bad policies, regulations and supervision have caused havoc in the financial sector throughout the western world that, in turn, caused one of history’s gravest and global economic crisis.

The “Sub-prime Mortgage” lending hype was the single biggest cause of the crisis. Western government bodies, banks and institutional investors put loads of money in the social housing finance programs in the United States of America. They could not care less of the common sense that credit risks and the market value of the collateral could not be assessed. “Piggy-banking” on the people’s focus being fixed on regular high returns, a bank (Ice-Save) in one of the world’s smallest economies, Iceland, attracted billions in deposits from private savers in Great Britain and the Netherlands just by promising a high fixed interest rate on its website. And the New York “darling of charities” Bernie Madoff attracted some 57 billion US$ from all kinds of people on the basis of no other information than again a promised fixed rate of return. So-called experts bet huge loads of money on myths that any citizen in the street could have serious doubts about.

And so we now witness what some call is the worst crisis in Micro-Finance, one that could damage its reputation so badly that it will finally disappear as the development aid’s “flavor of the month”. We can all read this in CSFI’s recently published “Microfinance Banana-skins”. Could we have seen this crisis coming? I would say yes, and since the start of the debate in the late 1990-ies on the title of the United Nations’ YearofMicrocredit that took place in 2005, I did.

Then Professor Yunus, Sam Daley of the MicroCredit Summit and Jeffrey Sachs of the Harvard University (now the UN’s Secretary General’s closest advisor on the Millennium Development Goals), started developing and spreading the Microdebt Myths: that the poor can borrow their way out of poverty, that the poor can easily pay back interest rates that are astronomically high compared with those banks ask and that Micro-lending is a profitable business opportunity for institutional lenders and investors throughout the world.

Over the last three years, the above CSFI showed in its “banana-skins” that credit risk shot up to the top of the risks identified by Microlenders from all regions on the globe. From all the popular Micro-debt countries, Bolivia, Peru, Bangladesh, recently in Nicaragua and in India, strong protests have come since the first popular micro-borrower revolt in Bolivia already over a decade ago, that poor people, including fast-moving traders, do face problems in paying high interest rates and that they have other priorities than to remain faithful to micro-lenders.

And since the Comportamos (Mexico) debate that started in 2009 on the internet debate “DevFinance” organized by the Ohio State University (OSU), repeated by the debate on Indian SKS, we see that making a profitable business on the backs of poor borrowers has its moral boundaries.

As some have argued since the 19th century, what poor people need more than the rich is to manage their money safely, quickly, flexibly, prudently in a structural and affordable manner. Only ten years ago Microfinance researchers dared to report centuries’ old common sense that the little money, on which the survival of poor people often depends, is at grave risk of theft, loss or unnecessary expense. No wonder that in all countries throughout the world, visionary leaders in those times created postal banks, (state and municipality – owned) savings banks, and they developed principles on how poor people could themselves create such deposit-led autonomous financial institutions, as cooperative societies for instance. As a matter of fact, only the world’s most stable and truly social democracies (with the lowest murder as well as prisoner rates and the rarest of food aid programs for its own citizens) have succeeded to, with these models, build nearly fully inclusive financial sectors, where nearly every citizen, from cradle to grave, has a savings or a basic transaction account with a commercial bank and where they all have public health and house insurance. The state-owned banks and cooperative financial services societies have all transformed into financially sustainable, profitable banks that compete with other banks whose owners, managers and clients only desire rapid maximum income gain.

Current “bravados”, surfing high on political, economic, financial and mineral waves, but who are still confronted with massive poverty challenges, including Brazil, Russia, India and China, should be aware of at the same time calling themselves “developing” countries requiring trade law exemptions and massive financial aid from the “wealthy donors” in North America and Western Europe. CSFI and the Microlenders it interviewed now consistently put credit risk, political risk and reputational risk on the highest level. It seems naïve to just entitle the 2011 Banana Skins “Losing its fairy dust” and to not see a risk regarding the flow of “socially responsible” lending and investing of the likes of World Bank (including IFC and CGAP), United Nations Organisations, regional development banks whose trustfunds also depend on the generous donors, next to the national “development finance institutions” (DFIs) such as KfW (Germany), FMO (Netherlands), AFD (France), DFID (UK). They are also convinced of the continuing growth of below market rate funds of socially motivated private lenders and investors such as Accion, Alterfin, Blue Orchard, Calvert, Citibank, Deutsche Bank, Dexia, HSBC, Morgan-Stanley, Oikocredit Triodosbank/Doen Foundation. It seems to me quite logical to say that high credit risk, reputational risk and political risk is a deadly combination for banks, but especially for microfinance institutions that strongly depend on local political support and foreign financial support. Last year two US-based organizations suddenly stopped their once large microfinance activities in silence: Unitus and Southshore Bank. If Microfinance will continue to witness widely publicized criticism, especially regarding its social impact, then other socially motivated donors will follow.

With this message I want to provoke the world’s largest magazine that focuses on Microfinance and is established in a country and managed by citizens of a country with massive and unrelenting absolute poverty. Please stop for a moment in reporting what others say. You have also been a tool in creating and strengthening the myths of Microfinance, in particular of the benefits of micro-loans, microfinance institutions and their supporters. Become the Message, develop a common sense message. Building inclusive financial sectors is what poor people desire from Microfinance as its particular and potential, meaning still to be realized, strength. Microfinance is not lending only, in fact it might come last, but what is more important, it needs to be separated from enterprise development, job creation, agricultural development and from developing social safety nets. Furthermore, Microfinance needs to be recognized as a LOCAL process in which foreign organizations and consultants might have a role, but only when they integrate into such process. And it needs to be recognized that as any local process that aims at building and protecting its people, it needs to be based on a national strategy, a national policy, transformed into a coherent and consistent legal framework whose compliance by all parties is ensured.

Indeed areas such as SUSTAINED job creation, enterprise development and food production are equally if not more urgent priorities in national development, but if anything, the popular uproar in Tunisia and in Egypt also demonstrates the total failure of their political micro-credit programs1 to support the development of the above areas. Financial sector development, integrating so far unbanked people and areas in legally protected activities of professional money management, is a specific technical skill in a context of strong commitment towards sustained nation-building.

It has been said before over the last months, a crisis represents an ideal opportunity for change but in the case of Microfinance, it may benefit a lot from a confident and loud message from your magazine and its readership to once and for all “bust microfinance myths” and to define what this sector is all about.

About the Author:

Peter van Dijk is a lawyer by training with 16 years of experience in Microfinance and Financial Sector Development. As an independent consultant he advises governments, central banks and development agencies on policy, regulation, supervision and capacity building. He worked in Central Europe, Africa and Asia and lives in Indonesia.  If you want to get in touch with the Author, His email id : petrusvandijk@yahoo.com

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