Philanthropic success...with a twist

The Economist has a bold claim in its March 17 issue - microfinance has shown it can succeed, philanthropists deserve the credit, they should take it, and move on to the next frontier. This is the kind of claim one would think foundations would love to hear - a major independent media outlet gives them credit for their work. As the magazine puts it, "The pioneering work of donors means there are now some 10,000 microfinance institutions lending an average of $300 to 40m poor borrowers worldwide."

Furthermore, the magazine cites the entry of commercial players into the microfinance market as evidence of the philanthropists success, claiming at least one victory for this route to sustainability.

So, why won't philanthropists love this story? Because the magazine goes on to say:

" is a pity that all these lenders are competing to support the same, small group of microfinance institutions that cater to the most creditworthy borrowers. It would be better for the poort if the IFIs (international finance institutions) and donors left the best credit risks to profit-seeking lenders and concentrated instead on those still stuck outside the system." (The Economist, March 17, 2007, p 16)

This is a tough call. Grameen Bank's founder, Muhammed Yunus, has said himself that Grameen's path to sustainability was lengthened because of philanthropic support - it didn't need to find its sustaining strengths as soon as it could have if the donors hadn't been so generous. And some donors are "cutting the apron strings" to those MFIs that can clearly make it on their own. The article puts it this way:

"This trophy lending is harmful....Aid money is better spent where commercial cash fears to tread - such as on the next generation of microfinance institutions."

The article goes on to encourage donors to get involved in mobile banking, or helping MFIs expand to insurance or other financial products. It also calls on these organizations to then pressure their national governments to remove restrictive regulations that further isolate the poor from financial tools.

I agree with the above and I think its problematic. We know from experience that markets will go where there is profit to be made. So hats off to the donors who helped the commercial lenders find these markets. But the very poor - can we really leave their needs to donors? What then is the public sector's responsibility?

Philanthropy, aid agencies, and social investors are few in number, not subject to widespread oversight or election, and usually suffer relatively short attention spans. Its one thing to encourage donors to take on the needs of the poorest. Its quite another to rely on them to do so. The public sector has a role to play here, and it is more than one of restrictive regulator. We must find ways to work with donors and independent agencies to better the conditions of the poor, and we cannot abrogate its responsibility to do so because of a few market and philanthropic successes. All too often we see governments - who must convince taxpayers to fund services - either abandon the poorest because they can't raise the necessary revenue or rewrite rules so that services are targeted to everyone - thereby winning the support of taxpayers but diluting the available revenue.

Yes, markets and donors make key contributions - and microfinance is a success. But public policy, public revenue, and public services are also key - to either ending poverty or further entrenching it.


Tim Ogden said...

I'm troubled here by something else: the use of the word "success" by not only the Economist but so many others when talking about microfinance. The fact is that microfinance began as a way to help people out of poverty. Quite simply, there's no evidence that borrowers routinely stop being poor. Does this mean there is no benefit? Of course not. But we've shifted the goalposts of microcredit to be "repayment rates" and "profitability" and declared "success." And I think a big sucker punch is coming toward this industry as people begin asking harder questions about the actual outcomes for the poor.

Tim Ogden, Chief Knowledge Officer, Geneva Global

Holden said...

Amen to Tim. I've pushed microfinance organizations hard for information on what ultimately happens to the people they help. So far, I've gotten nowhere with this - the most I've seen is repayment rates. Nobody seems to have any idea of how many people they've helped in a meaningful way, which is what I care about re microfinance.

I wanted to make a comment about nonprofit sector vs. govt responsibilities. I haven't thought much about this, but generally, when I see a nonprofit doing something along the lines of providing food, or foster care, in the US, I think "Why the !@#$ isn't our govt doing that?" However, when I see something a little more elaborate/innovative - like providing after school activites - or something focused on indigent foreign nations, as microfinance generally is - I rarely have this thought. Basically, govt should provide the aid that everyone agrees should obviously be provided. Beyond that, I don't see a big problem with letting taxpayers decide where and how to give. They'll have more freedom and do it better - only problem is if they just flat-out don't give *enough*. Even this concern seems better addressed by public advocacy than political advocacy.

Paul Botts said...

I just read the Economist article and can't find anyplace where they suggest that _only_ philanthropy should be used to help the poorest poor. Maybe I missed something in all the jargon.

Regarding the comment just above:
"Basically, govt should provide the aid that everyone agrees should obviously be provided." Ah, but there's the rub -- fewer and fewer people around the world still believe that government is very effective at aiding the poor. As Stewart Brand (founder of the Whole Earth Catalog, author of "The Clock of the Long Now") puts it, government's ability to directly raise societies out of mass poverty has been largely disproven. Or as Alan Khazei, founder of City Year, puts it, "Everywhere around the world, people are concluding that the limit has been reached in the ability of big government to directly solve problems." This is the core of Yunus' approach.

Government's role in creating the conditions for families to rise out of poverty remains undisputed (ranging from basic rule of law to property rights to basic infrastructure to decent educational systems open to all), but the idea that public-sector redistribution can sustainably change poverty rates is really something for history's dustbin.

Lucy Bernholz said...

Ah, to follow the comments thread here is to see the real need - for creative thinking about the role and reach of the public sector. Redistribution is by no means what the public sector is limited to - in fact, in a democracy, the public sector should be concerned with the reach, shape, role, and creativity of the other two sides of the private sector - commercial and public good. We can not rely on government to solve poverty - nor should we expect that markets can. This is my point - these social ills are a result of dynamics - between and among the decisions made within and across sectors. Only new dynamics will create real change - it is not enough (see Holden and Tim Ogden's comments) to expect change in one arena to provide solutions.