Muhammad Yunus and Michael Chu debate commercialization

by Richard Rosenberg : Tuesday, October 14, 2008

The World Microfinance Forum in Geneva just put on a conference, and I might say, a quite successful one: over 300 investors and others paid their money to attend, and the presentations were well received. I was asked to moderate a debate between Prof. Yunus and Michael Chu. Michael, for those who don’t know him, was a big-wig investment banker who then spent a few years on microfinance as President of ACCION. He’s now teaching at Harvard Business School, and has stayed close to our field since he stepped down from running ACCION. The debaters argued about whether commercialization (let’s define it as the entry of investors whose primary motive is financial rather than social) is good for microfinance. Yunus thinks that it’s immoral to make money off the poor, and that the only kinds of investors needed in microfinance are ones who are willing to accept very limited profits for the sake of keeping as much money as possible in the pockets of the borrowers. Michael thinks that we can’t meet the worldwide demand for poor people’s financial services unless we can draw in private, profit-oriented capital, and that eventual competition can be counted on to bring interest rates and profits down to consumer-friendly levels in most markets.

It will surprise no one to hear that they didn’t work their way to an agreement after an hour and a half. But the audience response was amazingly enthusiastic. I suspect part of what the audience liked (certainly the biggest thing that I liked) was listening to two industry heavyweights talking over these contested issues face to face, and respectfully. I confess that I’ve been disappointed for years that we conduct so many discussions of these hot issues by lobbing rhetorical grenades over the wall at each other. Even when consensus isn’t reached, it’s so much more satisfying, not to mention productive, when people are in a room talking to each other, and laying out issues instead of attacking each other’s motives.

I had one more reflection after the event. As I listened to and thought over the issues, it became clear to me that a core question in this argument is a factual one: is there enough government and socially-oriented capital to meet eventual worldwide demand for microfinance, or is there not? Neither debater had much to offer by way of evidence to support their opposing assertions about this. Michael did present a back-of-the-envelope dollar demand guesstimate. But Malika Anand and I wrote a paper a few months ago looking at demand estimates, and I’d think that the assumptions behind Michael’s, like the assumptions behind all the others I’ve seen, are probably way too optimistic, at least when compared with the empirical data points that we have so far. Anyway, even if we knew what the demand would be, that gets us toward an answer only if we also have some kind of fix on how much subsidized and soft money is floating around out there. Neither debater had anything to offer on that one. I don’t either. As I write this, it occurs to me that some of my CGAP colleagues in our Paris office have invested tons of work in gathering data on donor and investor flows. Maybe I’ll give them a call next week to see what light they can shed.

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  1. December 3rd, 2008 at 2:15 am, Sachin ()

    Great to read about such two heavyweights deliberating on pros and cons of commercialisation of microfinance. My person view is- nothing wrong in earning profits/returns from the microfinance offerings. I think what matters most for the client is the cost and quality of services offered to them by the MFIs. on the cost and quality front, ultimately competition would fix them up. Whether investor should extract maximum return from the MF investment- would utterly depend on them, how can this be controlled on this? I agree with you also- do we have sufficient soft money to meet the financial needs of the poor- if not we will have to attract typical investor/venture firms
    what is the way out? I donot see anything going wrong if MF will/has commercialised…..

  • February 4th, 2009 at 3:29 pm, Eniola Taiwo ()

    my take on the concept of microfinance is that it should be a social enterprise with social change as the major objective. I believe that the failure of numerous intervention in this area is because attempts were not focused on properly guiding the poor to use funds for entrepreneurial ventures. What we see is the poor engaging in business that are not innovative, less competitive and not sustainable. many poor doing the same business, the same way and serving the crowd. in the face of social change, commercialisation of microfinance will be effective if the poor can truly be entrepreneurial.

  • February 23rd, 2009 at 7:25 am, suresh gurumani ()

    Let look at the reasons for emergence of the MFI industry and you will see that the traditional bankers never invested their money or efforts due to the basic premise that poor are not bankable – high risk low return etc.,

    No wonder the charities have to step in to demonstrate that this is indeed profitable.Even now MFI have restricted themseleves to micro lending while there is clearly need for other products eg housing for one and micro savings.

    generating profits commensurate to attract commercial capital is vital to deliver the needs of poor.

  • February 25th, 2009 at 12:16 am, Aditya Mohan ()

    Well, when two of the biggest names cannot come to an agreement on the issue of commercial Micro Finance, shouldnt we just let the market and time teach us?

    My take is that both the models should be encouraged for now. With the MF industry being at such a nascent stage, only time can tell as to which approach is better. This will (for the immediate future at least) encourage a competetive atmosphere with the end user enjoying the benefits of competition. If the commericial MFIs are able to attract a large number of clients (thus widening the net of MF and extending credit to a larger section of the populace), and yet maintain profitablity and asset quality, there is no harm in it.

    If so, socially oriented MFIs will be kept on their toes and will be forced to efficiently utilise the available funds and provide high quality services.

    Even though Capitalism (more specifically the financial sector) is at the cross-roads, I belive that only free-markets and competition can provide a conclusive answer.

  • February 28th, 2009 at 7:05 pm, Patti R ()

    As a graduate student in Cultural Anthropology and a participant in the microfinance community for the last four years, I support the proposition from Dr. Yunus. My thesis does not look at the financial aspect first as a great deal of the quantifiable research does. It looks at how developed societies take on microfinance projects in primitive, rural and undeveloped communities. Immediately the evaluation of success shifts to criteria established and preferred by the developed society. Instantly decisions based on future generations, valuing the time with the family, health of the family, and passing on traditions; all become irrelevant. An overriding belief that money can take care of all of this, transcends any cultural preferences. Money does not have to be a cultural value, especially with indigenous people.

    Look at the Grameen model. How many loans are offered today from the payback and savings of the women over time? Microfinance is not on developed societal terms, nor should it be. Let the communities move at their own pace and create their own success.

  • April 11th, 2009 at 11:14 pm, ajit jhangiani ()

    we seem to want to demand a bit too much from MFI..it is a limited tool in that it is merely a financial tool that does ultimately have to answer to financial market requirements, especially to risk and reward criteria

    however there are other advantages that provide additional value propositions..one such value prop is distribution..when there are indeed twenty illiterate women that have organised into a group, they could be offerred adult literacy, health education and delivery, and vocational programs..

    now who is this of value to? that is where some further funding can come from

  • April 22nd, 2009 at 2:42 am, TOMAS JANUARIO R. SOSA ()

    I had been in the Microfinance business for more than twelve ( 12 ) years. I started with a cooperative as a Director and then Chairman of the Board then I established and found a private commercialized Microfinance company. My vast experience in this field had an outreach of more than one million people. My advocacy is not focused in money but rather Individual and Social Transformation. It is necessary to have sufficient profits for Microfinance company to be self-sustainable and self-sufficient for reaching more poor people. If the Microfinance company is not profitable and it will only ask donation from the rich, I have learned from the borrowers that they will not help themselves because they say that NGO’s will always help them and give them money. The borrowers said that they know that many organizations are using them just to collect donation money. This is also their reason why they dont want to pay diligently. I highly agree with the opinion of Mr. Michael Chu, and I am willing to discuss with Mr. Yunus about Microfinance in the Philippines compared to Bangladesh. I had a 99.5% collection efficiency in my Microfinance company year-on-year index. The only 0.5% repayment slide are those people who had been used to borrowing from NGO and foundations and they say they always dont pay them.

  • May 12th, 2009 at 1:41 am, V.Rengarajan ()

    Any debate on MF, be its central focus on commercialization or socialization, should begin with certain widely agreed premise that enhancement of wellness of the poor or reduction in their vulnerability in their given settings through power of (micro) financial access should be the ultimate goal. Further, in the context of unique cultural. Social and economic environment of the poor, it may be also noted that the whole process of expected change towards the said goal in the poor community through MF, is more intricately intertwined with social sensitivities and cultural realities. (In the traditional patriarchal society an example – denial for women to financial access)So, the influence of economic and financial factors .for effecting such change at household level may be inadequate. That is to say, to my opinion, towards the set goal referred to above, it is important that MF functioning need to design primarily (For e.g. Islamic banking).on cultural considerations of the demand side besides the commercial principles of the supplier of MF. It therefore calls for a multi disciplinary perspectives for analyzing the subject holistically covering the facts both from supply and demand sides and making value judgment.
    In the context of aiming such a phenomenon of change in the given setting, expected out of MF, the economist and financial investors could understand the various casual relationship between the cause and effect with limited assumption and try to justify the level of commercialization and the profit for the given level of economic impact (part of the goal) in the MF arena but development ethicist has the responsibility to appeal to applied phenomenological insights to perceive the ‘ lived experience’ in the process of such change (goal) holistically in the target group as a consequence of gaining new access to capital and technology. at the bottom level and clear the ambiguity. In this regard, a social anthropologist could perceive the facts and can shed crucial light on how and the extent of the change (well being or ill being) in post micro credit period, and the benefit distributed among the members in the culturally contingent and social values laden target group. .
    Coming to the posted views by many on the relevance of commercialization or socialization in MF arena. with the focus on poor, it appears that most of them are emerging more from the economic and financial management rationale while one comment has been distinctively identified under anthropological perspectives (Patti.R). Consequently whatever the reasons, put forth for defending their wisdom on the subject, remain adequately for indicating justification for their respective point from their perspectives: but it deals with the fact partially and not holistically To put it simply when the micro credit reaches their home (hut) what is exactly happening (eventualities) in the process of transformation from its quantitative monetary physical form in terms of currency & coins to qualitative subjective form in terms of. ‘wellness’ (goal) is not portrayed holistically making difficulty for value judgment. on the subject.
    Keeping the above academic philosophy in the background for approaching the development issue, let me analyze various points posted on the subject.
    In the first, both industry heavy weights, Michael Chu, the financial investor & Mohamed Yunus the economist, have argued their stand point on the subject from economic and financial point of view and both stand right in their own rationale. In fact Yunus has also accepted for ‘ very limited profit’ although he claimed immoral to make money off the poor. Their arguments seemed to be based more on modern economic rationale reflecting happenings at surface level only without percolating down to the ground realities at poor community level for whose concern the MF concept emerged.. Further, albeit necessary, these rationale pertain are more concerned with only institutional development for providing financial access to the poor with the limited assumption that access to micro credit leads to income generation, repayment and welfare at household level. Therefore both are partial. and lacking ethical features in their development approach for the poverty reduction. In this development context, it is pertinent to quote Amartya Sen “ Another surprising feature is the contrast between the self consciously ‘non ethical’ character of modern economics and the historical evolution of modern economics largely off shoot of ethics”(Amartya sen ‘ On ethics and Economics- Oxford University Press) Despite partial coverage with the modern economic approach, admittedly Yunus has demonstrated the world that poor are credit worthy the fact which encouraged many financial institutions foraying into poverty sector more intensively.
    The other opinions (posted) on the subject, falling under economic/financial perspectives include ‘supporting commercialization ’ (Sachin)‘ leaving to the free market, competition, profit, development of entrepreneurial ventures (Aditya Mohan, Eniola Taiwo, Tomas ) diversification of lending purposes besides micro lending (Suresh Gurumani) which are all partial analysis in the process of reaching set goal without perceiving the realities at poor household level. Ajit Jhangianai with his social perspectives outlook, has gone one step ahead with some ethical feature that the poor group members are to be assisted more advantageously with pro poor development inputs like literacy, health, education, vocational programme like that of access to credit depending on their priorities and needs It is agreed that these additional (non credit) also may facilitate attain the said goal (increase the wellness) Towards this goal, BRAC in Bangladesh is experimenting micro financing integrated with other inputs health and education.
    Among the seven comments so far posted, it is more interesting and very important (to me) to note the posting of R.Patti. emphasizing the need to look at subject in anthropological perspectives, for perceiving the ground realties in the process of change in the post credit access period. at the poor client’s household. Although economic factors such as ‘commercialization’, ‘free market’. ‘competition’, ‘profit’, ‘interest rate’, ‘subsidy’ are functionally related in the process of attaining the said goal, they do not reflect the actual happening at the poor household level unlike anthropology does holistically at bottom level. In this regard, some of the findings of Aminur Rahman (1999), who probed micro financing to women from anthropological perspectives, are presented below . (Critical appraisal on Grameen Bank (GB)Evan Selinger– Micro finance gate way.com )
    - Micro credit borrowers can find themselves in a state of micro credit dependency. MC is used more for consumption than for production. It acts more as ‘consumption stabilizer’
    -In some instances peer pressure has forced women borrowers to take on expensive loans from money lenders to repay the bank loan”
    -There have been cases of women from the most destitute or socially depressed group being excluded from the membership of groups containing better off members because of fears that their inability to repay will damage the prospects of other members)
    -The husbands who were excluded by GB Policy , force their wife to sign up for loans and forcibly appropriate the funds for them. In such case the author raises question how women are empowered.? The anthropologist claims that GB generates an ideology that obscures the connection between micro loan practice and the larger structure of patriarchy
    -The goal is not to tell the truth but to placate authorities and ensure that they can continue to qualify funds
    -Patti a cultural anthropology student, in his posting in this blog, asserted “Look at the Grameen model. How many loans are offered today from the payback and savings of the women over time?”
    -( This kind of peer pressure forcing the group members to repay ‘somehow’ even borrowing from money lenders to get rating and qualify funds and drop out of the poorest who could not keep regular repayments etc have been observed during my multidisciplinary study in Indian Micro financing through Self Help Group system.)
    -What is inferred here from the anthropological findings ? Many unknown about known came out. In the case of ‘Repayment’ it is a key factor for financial viability and sustainability for the lender in the competitive and profit oriented free market economy . Here the economist’s assumption is that when micro credit is accessed for running micro enterprise or any purpose for that matter , the repayment is automatic. thanks to the peer pressure or collective responsibility of the group. The micro credit statistics on repayment also gives evidence of high performance. Here the anthropolists study perceived the whole process of repayment taking place at the bottom and brought to light that repayment is not made from the profit of the ,micro enterprise assisted with micro credit the fact contradicts the above known assumption from economic perspectives So what is unknown about the known (repayment) as perceived by an anthropologist is the repayment is made by the clients from the actual sources like money lenders with high cost )other than profits from the activity financed (whatever the sample reported) This is only tip of the ice berg,
    In the last, three concluding remarks
    In the first,. the above citation different disciplinary perspectives on the subject and over view on various postings on the subject suggest that an interdisciplinary study alone could bring out the fact on the subject holistically and help value judgment on the moot point. Otherwise it is only partial.
    Secondly, accordingly neither the ‘commercialization’ nor ‘very limited profit banking’, camouflaged under the social banking, may not be able to bring any tangible and sustainable social change in poor community as per the set goal for MF industry
    Third one pertains to way forward for MF journey in the given environment. That is ‘painful commercial pressure’ on the one hand, and need for consideration of ‘values and ethics first and foremost to serve the poor’ on the other hand , the journey of this MF industry should continue as highlighted by Elizabeth Little Field in her introductory posting while launching this blog. I quite agree with her erudite forethought and following are therefore some of the suggested strategies based on the interdisciplinary research studies as discussed earlier in the posting . .
    1. Experimenting with culturally or ethnic oriented micro financing – Example – Islamic Banking with honoring Islamic values and ethical codes and social acceptance for gender development – no interest with profit/loss sharing system
    2. Experimenting with Self Help Group Federation – functioning as mini MFI managing their own self financial resources (contributions from member SHGs) under the principle of self reliance and self help with their indigenous value system (be it commercial or non commercial) As anthropologist Patti in his posting asserted that “let the community move their own pace and create their own success”. Here initial external financial assistance as well capacity building including financial literacy and inculcation of ethical values & equity principles in sharing the benefit under buffering mechanism are required and after a period of time this SHG federation should be de linked from their NGO/BANKS/MFI who nurtured and become and independent functional unit (more detail on SHG federation as mini MFI discussed in my earlier posting under ‘Growing, Changing and Gone”)
    3. Group enterprise involving the most deprived along with other poor in the group approach for equitable sharing the benefit. and eschewing exclusion.
    4. Encouraging “Integrated” or “credit also” approach like that of BRAC ( credit +health +education). Micro Insurance as compulsory input for social security ( for life, hut &other Income generating assets ) The direction of subsidy should be in the form of micro insurance for all the poor at the bottom level.
    5. Experimenting the model like The WORTH program in Nepal for women ending poverty. Here the concept of empowerment through a combination of self managed Savings led, micro finance literacy and business training (detail Micro finance gateway library) Six year after pact assistance ended, 25,000 women in 1000 groups were still going strong without external assistance (real sustainability as I have been arguing in my earlier post under MF sustainability) The same group helped form more than 400 new group with impressive income generation and to women. – a role model for without ‘dependency’
    In the context of Michael Chu’s thinking that unmet world wide demand for poor people financial services can not be served without profit oriented capital and competition, an action for promoting and encouraging self financed institutions like SHG federation/Worth Programme with indigenous systems and procedures may go long way in the long run while challenging the forces of commercialism in MF arena. and
    6. Encouraging for designing religious or regional culture based micro financial products and services for low cost resource mobilization by the MFIs- To quote ‘”Further innovation may be directed to have a diversified religion based products to suit devotees taking advantages of this cultural affinity of rural people even to local /village God/Goddess ( Hinduism and Hindu deities/God are popular in many south and south eastern Asian countries and baptizing these products (savings/credit./insurance) with the deities names – For innovative micro financial products and services in selected Asian Countries-Dr..V.Rengarajan “Extending a helping Hand: Matching the financial needs of the rural poor”. IFAD-APARCA publication Bangkok 1999)
    Welcome comments for further learning

  • May 26th, 2009 at 3:21 pm, Jacob Kurien ()

    Any activity, besides voluntary work and altruism, should necessarily be built on a business model. A financialy viable business model must factor in economic profit. Microfinance need also to be built on the sound economic principle of cost efficiency and thereby be socially and economically viable. The debate on commercialization of microfinance must address the long and short term goals.In the short-run, initiating a program for uplifting the vulnerable and socially deprived people, must strive towards creating tangible capital assets. This will require providing subsidised seed capital in the short term period to the poor. Once the poor are able to generate sufficient income from economic activites they must be weaned away from concessional/subsidised lending and encouraged to participate as borrowers in the competitie financial market. Productivity and effciency are the corner stone of economic growth and this will only be achieved through participation in competitive markets.

  • July 13th, 2009 at 12:12 pm, Rebeca Alfonso ()

    I have read the debate between Professor Yunus and Mr. Michael Chu, It is a very important paper. I would like to share it with my collegues in México. DO YOU KNOW IF EXISTS A TRANSLATION IN SPANISH?

    About the debate.

    Bad practices: Costs reduction based in bad labor conditions and hipermaximizing the interest rate. This two conditions may provoque attitudes in credit officials that will travel into the field, subsequently it will provoque that people in the communities will feel attacked and they can become cheats. That would place the model in serious problems. (Bacause the base of the model: confidence in poors, could be broken.)

    Thanks CGAP.

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