Do Social Motives Make Microfinanciers a Better Option for the Poor?

Consider the diverse social motives of microfinanciers.  These drive them to go literally the extra mile and make the extra effort to serve people who are unserved.  The moneylenders and the bankers serve people from whom they can make a profit with their tried and true techniques and products.  They may often be sympathetic to their clients, and certainly as good business people, they ought to be attentive to their clients’ needs and wants and to innovate to attract them and keep them happy.  But they go where the market is now.  What is different about microfinanciers?

Having social motives means microfinanciers make a conscious decision to reach out to people in need of financial services – usually where the market is weak.  Acutely conscious that no money means no mission, they still give priority to need, not profit opportunity.  Profit is mandatory to be a “going concern” in service of the chosen clients.  But the clients are the primary concern and profit is a means rather than the end.  This is a generalization; there are lots of exceptions and outliers.  But my experience with a large number of microfinance providers is that social motives are what drove the vast majority of them to start operations (what happened as they grew their operations may be another story).  They were motivated by concern for others to set up shop in rural backwaters or urban slums or to focus on marginalized ethnic groups or on women, often in combination.

Do the clients feel this difference between the microfinancier and the moneylender or banker?

Maybe not in competitive financial marketplaces like the Santa Rosa market in the Philippines (see earlier posts).  I chose this example to compare the options of the poor when they have choices among a multitude of financial service offers.  In sharp contrast, the poor feel the difference keenly in much less vibrant markets, as in Sahelian Africa or the Andes of South America or any number of other woefully underserved areas or communities.  Because they had no choices to speak of until the microfinancier arrived.  They depended almost solely on extended family and community members.

Here’s an example from Freedom from Hunger’s work.  Santa Clara University economist Michael Kevane produced a fascinating report (later published with Barbara MkNelly in World Development) based on in-depth interviewing of microfinance program participants, non-participants, community leaders and others in three villages in Burkina Faso in the mid-90s.  He made only this mention of alternative sources of credit (in the course of exploring why women took much larger loans than needed for their business activities):

Emergencies and market opportunities are ever-present possibilities, and credit on a short-term basis is unavailable.  Households may view the 20 percent interest charge [paid to our partner credit unions for village banking loans] as a low price to pay for having a stock of cash on hand” (Kevane report, p. 16).

The indication is that credit from informal providers, whether moneylenders or extended family or neighbors, is hardly to be found in these villages.  The borrowers from the credit union microfinanciers probably feel they are getting a very good deal compared to alternative formal sources in faraway towns!  Not as good a deal as they would get if the credit were available for shorter terms.  Still, the half-loaf available from the microfinancier is far better than none at all.

Why is the microfinancier (in this case, the village bank – caisse villageois – supported by the credit union) the only, therefore the best, alternative to family and friends?  Answer: social motives drove the credit union to enter a market that is unattractive to other financial providers.  Yet these credit unions in Burkina Faso and elsewhere still manage to make enough profit to sustain their operations in such villages to this day.

David Roodman’s Due Diligence (chapter three) provides a thorough and enlightening history of socially motivated financial service, showing that people have been moved by charitable impulse to provide financial services very similar to modern microfinance since at least the late 18th century.  However, the continuity of this history was broken in the post-World War II decades such that public and even academic memory of prior movements and institutional structures designed for the poor had been lost by the 1970s when modern microfinance first “started.”  Focus on the poor by the movements in the now “developed” countries was gradually lost as their clients became less and less poor.  I suppose that private-sector microfinance was legitimately novel in the context of post-war assumptions that social services to the poor are solely the work of governments.  For the poor who see little welcome evidence of government in poor countries, and who had seen little if any of the earlier private movements, modern private-sector microfinance must have arrived as a welcome novelty indeed!

I close with a hypothesis about program placement: the poorer and less profitable the potential clients, the more likely they will be offered their first access to microfinance by a provider motivated to give priority to a social objective over profit maximization.

No doubt this hypothesis needs to be tightened up to make it genuinely testable.  If you would like to refine it, or you know of any studies that might support or refute this hypothesis, please post a comment.