What’s the Big Fuss about Small Bucks?

• Posted by Bright Simons
• On August 27, 2008


• Interests: Development

 Wish I knew.

A number of my friends work  in microfinance or related fields.  This does not make me an expert, but I like to think that it makes my interest in the topic deeper than would have otherwise been the case.

I have been brushing up against some rather fascinating connections between microfinance and corruption in my recent readings and conversations.

While catching up on Kiva’s recent troubles with partner Microfinance Institutions in East Africa, some thoughts intruded...

We all know Kiva is divine genius in mortal form. I like slick but sturdy, and Kiva is all that plus 20% sublime. But we all also knew that its out-of-the-worldly low default rate couldn’t last. Folks are expected to pay back money they are loaned.   Philanthropic though the intentions behind the loans may be (lenders on Kiva don’t earn interest), the context is still enterprise, and we all know ‘enterprise’ does not suffer the weak-hearted. Folks are supposed to make a RETURN on the loans they receive, if the goal of the investment is both to improve their lives as well as equip them to pay the loans back.

Some may want to grumble about Kiva’s use of unconventional definitions of loan defaulting.  Failure to service loans for six consecutive months, rather than the more typical three months, is the p2p – peer to peer - microcredit site’s preference.  They may also accuse Kiva of exaggerating its portfolio quality and risk management performance. This is missing the point.    Defaults should increase as the pool of eligible borrowers increase, due to scale of borrowing.

What is out of the ordinary is that in Africa a significant portion of Kiva-facilitated loan borrowers are defaulting as a consequence of moral turpitude.

Kiva is not, notwithstanding its reach, a global operation with boots on the ground. It relies on partner microfinance institutions (MFIs) to a.) evaluate microcredit borrowers b.) profile eligible ones to persuade lenders across the world to part with $25 stakes in loan packages, and c.) upon completion of each investment monitor loan use and repayments.

Unfortunately, not all MFIs are upstanding institutions with the well-being of poor entrepreneurs on their minds. One such MFI, SEED, appears to have created a unique business model, to say the least.  Not only did it frequently lie about how much it was disbursing but often actually disbursed nothing and posted fictitious repayments from fictitious entrepreneurs!

Kiva Executives in their comments on this matter appear to mix moral outrage with a certain level of frustration. The latter sentiment seems to be fueled by their inability to bring SEED principals to justice despite relationships with the highest echelons of the Kenyan political establishment.

Beyond SEED, this conundrum is generating some occupational angst  in the MFI world.  After all, Kiva-type social entrepreneurs are out to cure poverty, and where is the ailment more chronic than in Africa?

What do you do about a unhealthy society that seems to breed its own resistance to corrective medication?

The parallels with the growing ill-sentiment about aid ineffectiveness should be striking. Incidentally, a global conference on Development Aid Effectiveness is scheduled to take place in Accra, Ghana, in the coming week. Donors will enter into an uneasy alliance with ‘civil society representatives’ to stress government accountability in conjunction with the disbursements of increasingly unproductive ‘development’ aid. In times gone by, ‘corruption’ would have been the catch-all refrain. Nowadays ‘good governance’ is the preferred umbrella phrase.

There is, in a subversive fashion, a certain resemblance between donor handouts (also referred to as ‘development assistance’) and microcredit.  Practitioners in both fields talk incessantly about issues of ‘governance’ and accountability, in the effort obviously to ration super-scarce resources amongst the super-needy.

Sinapi Aba Trust, another remarkable institution, pioneered ‘group microcredit’ in Ghana some years ago. The idea was that individual borrowers could only access financing through the group and the burden of default was shared by all members.

Now, stories abound that Sinapi Aba’s concept is failing the test of time. The general rise in default rates across the microfinance world has not spared this organization either. Its bigger competitor (shall I say ‘compatriot’?), Opportunity International – Ghana, also appears to be bleeding highly trained, top-level, management. Rumours abound that some ‘governance’ issues have reared their heads there as well.

600 billion dollars in aid is said to have gone to Africa since the post-war giving ‘frenzy’ begun, but all the continent has got to show for it is zero or negative growth over the course of the same period. Whatever else the aid may be doing, it definitely is not boosting productivity. This is leading to a new  consensus that something must be done about the rampant defaulting of African governments on their expected national returns in poverty reduction.   Thus leading to resulting proliferation of futile aid monitoring schemes.

The temptation to tie donor aid and micro-credit with the same saddle can only be taken so far.  Every microfinance practitioner I know promises to impact the world one struggling entrepreneur at a time, not transform it overnight in a torrent of prosperity.

Aid workers, on the other hand,  make too much  fuss about their anemic giveaways. After all, is aid nothing more than an ability to recycle defaults into an endless cycle of revolving credit?

Is it not time for an entire new development scheme?

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