Jonathan Morduch: Come What May
Image: William K. Sacco
One of the most crucial insights about microfinance is so blindingly obvious that for years I failed to see it. The lesson is that if there is any one thing that makes microfinance different from previous attempts to provide credit to the under-served, it is ‘reliability’. Life in poor communities is filled with unreliability. Employers fail to guarantee steady work, officials seek bribes capriciously, health emergencies arise, rains fail, electricity cuts off. The list goes on. Having reliable institutions can help keep nuisances and temporary setbacks from becoming calamities.
I learned the importance of reliability from Stuart Rutherford, the founder of SafeSave, a microfinance organisation that works in the slums of Dhaka, Bangladesh. In 2003, the World Bank asked us to write an article on the future of microfinance in India. This was long before the aggressive expansion of SKS and the massive growth of microfinance in India. As we imagined the future, we reflected on untold lessons from Bangladesh, home to a thriving sector in the 1990s.
While Grameen Bank founder Muhammad Yunus focussed on how lending affected borrowers’ income, Rutherford saw a different story. In many ways, Grameen’s greatest innovation was simply to bring convenient and reliably continuous services to villages.
“Rain or shine, the well-behaved bank workers turned up on time every week,” we wrote in our World Bank report. “They kept immaculate records. Unbelievably, they gave the advances in the sums promised on the day promised. Astonishingly, as soon as one advance was paid down, a new, often bigger one was immediately available.”
Reliable financial services are not the same as regulated financial services. And in Bangladesh, the NGOs proved more reliable than formal banks. With these kinds of reliable services — which most of us take for granted — it became possible for customers to relax a little, and to focus on parts of their lives more important than finance.
That remains a helpful perspective for viewing the debate on microfinance in India today. Allegations of harassment by loan collection officers are particularly damaging because they signal a departure from reliability and rule-bound, professional relationships. The rush to regulate is understandable, but the real answers lie with management. As Bindu Ananth of IFMR Trust argues, interest rates can surely fall (and are falling already). But the current discussion of interest rate caps needs to be kept in perspective. Customers would rather pay more for reliable banking services than pay less for ones that are inferior and unreliable.
Jonathan Morduch is managing director of the Financial Access Initiative (www.financialaccess.org) and professor of public policy and economics at New York University’s Wagner Graduate School of Public Service. He is a co-author of Portfolios of the Poor: How the World’s Poor Live on $2 a Day, published in India by Permanent Black.