The true joy of microfinance
That Muhammad Yunis has been having problems in Bangladesh has been true for a long time. Sad perhaps but true. But it’s still worth pointing out what we really found out when we tried microfinance:
Yunus is credited with pioneering microfinance, a financial service for people locked out of formal banking systems. It allows them to take out small loans to invest in building their own businesses. Piloted in 1976 among a group of women in a Bangladeshi village who were given small loans without needing collateral, by the mid-2000s it was seen as a key tool for ending poverty. Yunus and the Grameen Bank won the Nobel peace prize for the work in 2006.
The first point is that those loans were not without collateral. Rather - and this is a very Elinor Ostrom point - the collateral was the social reputation of the borrower. Potential borrowers are placed into groups - who should know each other well. Only one of the group can have a loan at any one time. There’s therefore considerable social pressure to repay so that one other of the group can borrow. The very poor do still have an asset - their social reputation.
The second, and perhaps much more important, thing we’ve found out - more from Mpesa than Grameen - is that what the poor really want is a form of secure savings. Microsavings if you wish. The ability to put by - out of reach of the mice that will eat paper cash, thieves who might take it - a few days or a couple of weeks of necessary funds.
The point to be made here is not that therefore everyone must provide opportunities for microsaving even if that would be a good idea. It was that until those poor actually did get banked no one had a clue that that’s what the poor really wanted. Even Yunus thought it was access to capital that was the grand wish. But it’s been the ability to save, even at that microscale yet securely, that has had the biggest take up.
We don’t, in fact, know what people are going to do with a new thing until they’ve the opportunity to do so. Planning at some rarefied level of abstraction simply does not work. It has to be actually tried then, of those things that work, we do more of them. Markets that is and markets with free entry. Let all try stuff out then do less of what isn’t wanted, more of what is.
There’s, well, umm, you know, a plan, eh?
Tim Worstall