Research in Microfinance – Vijay Mahajan’s perspective

Vijay Mahajan has some great insights on the recent role of research in the evolution of the microfinance sector; Shamika Ravi rebuts. I have to say that the ‘acts of omission and commission’ by practitioners have hurt the sector far more than anything researchers could ever have done. At the same time, it draws attention to the recent debates on the politics of evidence-seeking – it matters what kind of evidence we are seeking and how our results are used. In this case, when a practitioner as eminent as Vijay Mahajan points out key research areas that are under-researched, the researcher community must pay attention. This is not a criticism of micro-level impact assessments – it is in fact a criticism of the fact that there haven’t been sufficient number of reliable research on microfinance at the ‘meso’ and ‘macro’ levels, as Vijay Mahajan defines it

Vijay Mahajan has some great insights on the recent role of research in the evolution of the microfinance sector; Shamika Ravi rebuts. I have to say that the ‘acts of omission and commission’ by practitioners have hurt the sector far more than anything researchers could ever have done. At the same time, it draws attention […]

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Another heartwarming microcredit story

This time, from Nick KristofThis is a good opportunity for me to rehash some old arguments! In this article, Kristof places his faith with village savings and loans associations (VSLAs), around multiple countries in Africa. 

If you want to understand some of the best new ideas to chip away at global poverty, an excellent place to start is the Nasoni family hut…

The author is already convinced this is one of ‘best new ideas’ for poverty alleviation.  In doing so, he ignores  the currently available evidence from rigorous impact evaluations of microcredit that are yet to find significant impact on poverty. I understand that the MFI model of microcredit is quite different from the VSLA model, now popular in many African countries (some of which are currently being evaluated). Experience does suggest though that VSLAs are more of a social safety net (rather than economic, and yes, the two are linked) than a pathway out of poverty through profitable economic activity. VSLAs are of course immensely important for the savings habit they cultivate among participants. Encouraging savings is important and quite difficult

…Alfred, 45, told me that even as his children were starving, he spent an average of $2 a week on local moonshine and 50 cents on cigarettes. He added that he also spent $2 or more a week buying sex from local girls…The suffering associated with poverty is sometimes caused not only by low incomes but also by self-destructive pathologies…

This is a well documented phenomenon and numerous studies have focused on temptation goods and commitment devices. It is also true that we all suffer from this in varying levels. Research has also shown that the critical difference in this regard this that the price that the poor have to pay for their temptations is far higher than the rich. Add to this the fact that they receive little benefit from the government and are almost completely (and unfairly) on their own, facing the consequences of their decisions.

…With a loan of $2, Biti Rose started making and selling a local version of doughnuts, which she initially sold for 2 cents each. “People really liked my doughnuts,” she noted, and soon she was making several dollars a day in profit… 

I am deeply sceptical of this claim. A leading Indian microfinance practitioner has often made the point that a whole bunch of women selling bananas is not going to push them out of poverty, thereby explaining the limitation of small loans – neither will doughnuts. Sure, a few are bound to succeed, but we need more than chance anecdotes to see systemic impact. Another major limitation is that microcredit is built on the failure of the formal financial infrastructure and in many ways, keeps it from being fixed. And so yes, just heartwarming stories are not going to help people in poverty, but will only serve to perpetuate the myth of the miracle of microcredit. 

More trouble for SKS

“We have found massive problems in insurance operations of SKS Microfinance,” Mr J. Hari Narayan, Chairman, Insurance Regulatory and Development Authority (IRDA), told Business Line here on Tuesday.

The irregularities included receiving the cheques of death claims from its insurers on its name, which is illegal.

The only listed MFI in the country, based out of Hyderabad, had also “collected” higher commissions than permitted by the insurance regulator while selling the insurance policies.

SKS has been summoned by IRDA for an explanation, Business Line reports. More regulatory trouble is not what SKS needs, with its already plummeting stock prices. Having said that, micro-insurance is tricky business and agencies sometimes expose themselves to regulatory risks in trying out innovative solutions to improve access for the poor. On the other hand, some agencies try to be clever and try to intentionally control their clients’ insurance pay-outs so that these could be held as a sort of proxy-collateral for their outstanding loans. I am not insinuating anything in this particular case, of course…

More dirt on SKS: the pitfalls of chasing growth

This time, on The Hindu. Exceprts:

One loan officer signed up 273 groups in a month. Under training protocols, the ideal number of groups formed per month is 12, the maximum is 36, according to field agents and reports written by Mr. Akula.

“The focus is only on targets,” said Ramulu Sirgapur, who spent a decade at SKS before he left in December. “Even if we’ve given feedback, there might be recovery or repayment issues. That’s OK. Just concentrate on growth.”

But basic principles of lending were overlooked, according to interviews with current and former employees, as well as correspondence and internal PowerPoint presentations by Mr. Akula.

Six current and former SKS staffers with experience in the field told the AP they no longer had time to check a borrower’s assets or follow up and make sure a loan was put to productive use. They said they were pressured to push more debt onto people than they could handle, and that the number of days devoted to borrower training was cut in half.

On posturing by MFIs

MS Sriram has an article on MFIs, where he insists on the importance on ‘modesty’ as an important personal and organisational attribute in general, doing business, but especially when working with the poor.

When Mexico’s Compartamos, one of the largest MFIs in Latin America, was a not-for-profit, it was not really questioned much on its “sustainability” issue. The moment it became a bank, and particularly after it issued shares in the secondary market, several eyebrows went up. Fundamentally nothing had changed with regard to Compartamos vis-a-vis the clients. In case of Bolivia’s BancoSol, the differences between the profit orientation and the social orientation became very sharp, with those with a social orientation moving back to a not-for-profit model leaving the people with commercial orientation to continue the mainstream banking operations.

Does hit home, with microfinance in India. However, we need to see ‘modesty’ not just in terms of lifestyle, but also in terms what we think we have achieved, especially in development

I am not a MFI, just a moneylender

Both my savings and loan repayment schemes with my neighbourhood fruit-seller hit a snag after two rounds of repayment, a few months back. She had repaid 20 out of my 50 cedis over a couple of months. Then one day, she offered to give me mangoes for free, saying that she would never be able to repay the entire loan in cash. There had been a couple of unexpected deaths in the family and with funeral expenses etc, she was in a tight spot. 

Instinctively, I denied, thinking it might be exploitative of me to be doing so. Perhaps I was wrong – it could have been a painless way for her to pay off her debt – a mango a day. But I rationalised with myself that if I took up her offer, I was forcing her into a daily transaction which she may start grudging soon after. That in turn could affect my personal relationship with her. What if I was her only customer on a given day (not entirely implausible)? Moreover, I really wanted to give her the choice of saving up again and deciding how she would pay me back. Not to mention that in such an arrangement, the burden of keeping records would be on me and that was a cost I was not prepared to take on. I also did not want to be locked into a system where I would feel obliged to pick something from her shop even if I didn’t want to. I of course wanted her to pay me back, but was comfortable allowing her a reasonable time period to do so – and of course, I was aware that by doing this, I was running the risk of never being fully repaid.

At that point, I could be either a MFI or a moneylender. If I chose to be a MFI, I probably would not have the flexibility of offering her a moratorium on her loan to help her tide over. I probably would also not have the luxury of placing my personal relationship with her on par with my stake in getting my money back – what with equity investors and term loans on my back! As a money lender instead, I could do as I wished – it was my capital. I could give her a moratorium on her loan – and that is exactly what I did. I told her that it was okay for her to resume paying me back later, when things were better – effectively, I gave her a grace period of no repayment until her cash flows stabilised. My reward then was the look on her face and her smile when she realised I was not going to come claiming my free mango every evening. 

Today – a few months hence – I raised the matter of the remaining 30 cedis. She has been doing good business over the last few weeks and I thought it was an appropriate time to remind her. And she promised she would try to return at least 20 cedis. I leave Ghana in about three weeks – in the end, it may not be enough time for me to collect all my money back. Whatever…


Writing this down makes me wonder – how would she have narrated this? I don’t want to guess. The story could sound entirely different…or not!