Is microfinance like alcohol?

Part of the comments by Nachiket Mor in response to a post rooting for social performance rating as a way to measure the social impact of the business of microfinance.

It is true that in the world of commerce there are often businesses (such as cigarettes and alcohol) that one may wonder if they are indeed adding value or destroying it even though they seem to pass my test of being viable businesses and are far from becoming non-performing assets.

The same question is being asked of microlenders who lend at very high interest rates. In my view that is where competition and activisim come in — they ensure that super-normal profits are competed away and that businesses (apparently social or not) are forced to stay within accepted norms. Thankfully the level of activism against smoking is growing by the day.

For alcohol the evidence seems to be that it is excessive drinking that is the problem and not small amounts so really the challenge is not at the production end but perhaps partly also at the consumer end. 

So microloans are like alcohol and are okay if taken in moderation; but can ruin if consumed in excess?

That aside, the implicit debate about focusing on the ‘social’ is a question of impact. This, below, is problematic as far as I am concerned –

For example, the most social value that microlenders can add, in my view, would be to grow as fast as they can to serve as many customers as possible and do so at the lowest possible interest rates and still remain profitable and viable

Surprisingly, the arguments suggest the usual practitioner defence: if it is popular/profitable, it must be good. Surprising, because these comments come from the group that funded one of the first RCTs on micro-credit and continues to fund studies till date…

Perhaps the frustration is about the clamour for ‘social’ ratings with apparently fuzzy methodologies. As Mor puts it

The worry that I have (and share with Bindu) with Social Reporting is that it at its best it can seriously distract the attention of the business from its core task of adding value by doing what it does best and at its worst it can be used to hide inefficiency and to even conceal direct violations of the law.

Agreed, we shouldn’t be forced into social rating merely to satisfy donors. An MFI also doesn’t need to be defensive about their core strengths, which might be in attaining the widest coverage in delivering credit at the lowest price. Every donor/financier has the right to choose what they want to focus on – outreach and profits, or social impact. But none of this implies that these businesses are inherently contributing to good change – and while social ratings may not answer all our questions just yet, it seems to be a step in the right direction.

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