I have been pleased with the wide readership my blog on the India microfinance crisis has gained, second only to my post on the Fonkoze/Partners in Health alliance. The India post, the reaction to it, and some writing I have been doing this week have prompted me to think about what distinguishes the Bangladeshi microfinance leaders (Grameen Bank and BRAC), and what they share in common with Fonkoze. (I have long been associated with Grameen, and I have recently read the definitive book on BRAC, “Freedom From Want” by Ian Smillie, which while annoying in some of its references to microfinance and Grameen, is an impressive tour de force of BRAC’s history that is refreshingly honest about some of its failures. (Another organization that could be put in this group is SEWA Bank, but that is beyond the scope of this post.)
Grameen Bank and BRAC realize that microcredit can be a powerful tool, but it is best thought of as the foundation of a holistic development strategy – one that should no more be relied upon entirely to get people out of poverty than a builder would finish with the foundation of a house and neglect adding walls and a roof. This insight led to decades of experimentation with financial products beyond credit, as well as non-financial products. Many of the latter were implemented through co-branded companies, especially in the case of Grameen. (Grameen Foundation commissioned a paper on the “Grameen Family of Companies” and their track record through 2009.)
Not all financial products succeeded, nor did all the non-financial products/initiatives/companies. A few failed miserably. But many evolved into world-class offerings to help the poor do more than they could with credit alone. CARD in the Philippines, through its “Mutually Reinforcing Institutions” or “MRI”, followed a similar course, as did Fonkoze through the establishment of the original non-profit, Fondayson Kole Zepol (Fonkoze), followed by Fonkoze USA, Sevis Finansye Fonkoze (and a related holding company, Fonkoze SA), and finally MiCRO, a microinsurance joint venture involving Mercy Corps and SwissRe. (For a thoughtful analysis of the concept of microfinance as delivery channel for other empowering products to the poor, see the Grameen Foundation white paper “Microfinance: A Platform for Social Change” by former Citibank executive Marge Magner, which is also available in Spanish.)
Another common element among these organizations’ DNA is their commitment to measuring how effective they have been so that they can ensure continuous improvement in their poverty alleviation efforts. Grameen’s Ten Indicators of Poverty was the prototype for the Progress out of Poverty Index® now available in 45 countries and that is used by both CARD (the leading MFI in the Philippines) and Fonkoze (and hundreds of other MFIs in addition to many other poverty-fighting initiatives not involving finance). Chris Dunford, who until last year was the CEO of Freedom From Hunger, made the case for the PPI as effectively as I have ever heard in a recent speech where he explained the power of combining it with other tools (such as FFH’s Food Security Index), as Fonkoze has done. For its part, BRAC has long emphasized monitoring and evaluation, as Smillie’s book describes in detail.
Finally, all of these organizations understand the importance of shared leadership. As a result, they spawn multiple companies each with CEOs empowered to make decisions and even negotiate hard with each another. I recall an instance about five years ago when I was trying to entice a Grameen Foundation donor to invest in the bank being spun off by a successful microfinance NGO. She read the business plan and declined to invest, citing the fact that the founder of the NGO was going to retain a large degree of control of the bank (and any other institutions that would be established later). She compared this model unfavorably to CARD’s, which she knew well, and how CARD has five organizations each with a strong leader.
I am writing this book on Fonkoze as someone who is involved in a governance role in one of the family of organizations. (I have served as Chairman of Fonkoze USA since November 2009, weeks before the fateful earthquake as it turned out.) This has made the job of writing a book easier, and harder, as one might expect. In my role as Chairman, and as Vice-Chair before that, I occasionally argued for establishing some kind of coordinating body to oversee the entire family of Fonkoze organizations – perhaps made up of the Chairs and CEOs each institution.
This past February, Fonkoze’s leaders in Haiti called together about two dozen senior staff, board members and investors for a retreat in Haiti. One of the key outcomes of that meeting was to set up something called the “Fonkoze Family Coordinating Committee” or FFCC. (Some wanted to call it the “Super Committee,” but I resisted that and anything that suggested that this was supplanting the other boards.) I was asked to Co-Chair the committee along with a humble, savvy and deeply religious businessman named Julian Schroeder. It has been a challenge, and an honor. One of the interesting things about the group is that it has been delegated no formal decision-making authority, but its recommendations are often adopted by the member organizations.
As one might expect, looking across all the Fonkoze organizations, some things look better than from a single organization perspective, and some look worse. The analysis the FFCC has done – based on requests made that the staff have been very responsive to – has revealed new opportunities to be seized, and new problems to be tackled. Now the challenge is to use this holistic analysis to strengthen Fonkoze as it contemplates the daunting work ahead.
I was prompted to start researching a book about Fonkoze when this microfinance/development institution – Haiti’s largest in terms of number of clients – willed itself back into existence and relevance within days of the devastating earthquake in January 2010. In time, donors with pockets deep and otherwise helped bankroll the revival strategy, but in its early days it was the sheer force of a few leaders’ wills imposing itself on a future that was uncertain to say the least.
Well, this project has taken a detour to visit the scenes of two other disasters that hit leading microfinance institutions (MFIs) in 2010 – though these were far from natural, but rather socio-political in nature. The governments of Bangladesh and the Indian state of Andhra Pradesh (AP) took aim at a leading MFI (in the case of Bangladesh) and the entire sector (in AP). Unraveling these two temblors seems important to understanding Fonkoze’s past, present and future. So I travelled to Bangladesh and India to start part two of my sabbatical in order to learn more.
I have already written about my impressions of Bangladesh, so let me turn now to India. Much has been written about the microfinance crisis there. For my part, I have made public statements about it, transcribed and released of my debate with SKS founder Vikram Akula at the Asia Society (which took place at the outset of the crisis), and addressed the issue in the opening section of my chapter in New Pathways out of Poverty (the Spanish and French versions of which are freely available, as they are not protected by copyright). David Roodman gave an impressive account of the crisis in his book Due Diligence, which I have reviewed (a review to which Roodman thoughtfully responded).
However, when I went to India I tried to free myself from preconceptions, and attempted to listen and observe with an open mind. I met with leaders of MFIs large and small, as well as other members of the ecosystem including consulting firms, industry associations, and the staff of Grameen Foundation’s wholly owned subsidiary Grameen Foundation India and our joint venture Grameen Capital India (both of which are organized as social businesses as per Professor Muhammad Yunus’ definition). Below is a list of eight things I learned that I did not know, or believe, before I arrived:
- Despite recent progress in terms of returning the sector to normalcy outside AP, and in advancing legislation that is flawed but still a net positive, I heard from multiple sources that that state government of Tamil Nadu is considering an AP-type of ordinance that would throw the Indian microfinance sector into a new and probably much deeper crisis. Stay tuned!
- At the height of the frenzied growth during the period 2007-10, many MFI field officers came to rely on so-called “agents” (also known as “ringleaders”) at the village level who took on many of the functions of staff. In effect, field staff were outsourcing their client recruitment and loan underwriting responsibilities. This was a ticking time bomb, as the MFIs effectively lost control of their own activities, most importantly in terms of their relationships with loan clients. The reasons for this probably include the lack of training given to the new recruits of fast-growing MFIs, and the impossibility of managing as many clients as staff were expected to serve (based on unrealistic targets that were the basis for awarding generous bonuses) using the traditional approach. It is not clear that MFI leaders were aware that this was going on, or whether they just turned a blind eye.
- I was aware that most of the smaller AP MFIs who do not have operations outside the state have effectively gone bankrupt. What I learned from sitting down with four leaders of these now defunct institutions – who predictably though plausibly claim to have been largely innocent of the abuses committed by the larger MFIs based in the state – is that two AP MFI promoters (i.e., founders) who were distraught by their life’s work being ruined have recently committed suicide, and more are feared.
- Another thing I learned while speaking to the smaller MFIs is that they are now being sued by Ananya, a non-bank finance company set up by the respected wholesale lender Friends of Women’s World Banking. (The CEOs came from across the state to meet with me on the day when they were consulting with their legal advisors.) They claimed that they needed to dig into their dwindling personal assets to hire lawyers. I was told by others that Ananya is being required to file these suits as part of its own difficult negotiations with its lenders.
- At least one large AP MFI is optimistic about the future, feeling that it can recover 50-70% of its portfolio once the AP Ordinance is repealed (which would likely happen as a consequence of federal legislation being enacted later this year, though perhaps only after India’s Supreme Court gets involved) and it can issue fresh loans to those who pay off arrears. Based on a two-hour session with about 20 clients (pictured below) handpicked by this MFI for me to talk to, it is difficult to dismiss this claim despite conventional wisdom that holds that AP portfolios are unrecoverable. (One client, Devamma, was particularly articulate in praising her MFI and blaming the local political leaders, bureaucrats and moneylenders who conspired to shut it down.)
- Many have noted that MFIs should have been more actively engaged in building bridges with local politicians and bureaucrats. What I heard for the first time was that MFIs also have learned how important it is to pay attention to members of the media. Among the many criticisms of SKS and its public offering – which most agree was a catalytic event that transformed animosity into confrontation – is that it failed to spend much if any of its pre-IPO advertising budget in its home state (preferring instead to spend it where it believed the investors were, namely in Mumbai and in the state of Gujarat).
- Many have noted that the perception and/or reality of good ‘ole greed on the part of MFI investors and management played a role in precipitating the crisis. What I heard for the first time is that greed on the part of clients themselves may have played a role (though some dispute this). The argument is that many borrowers – unfortunately and tellingly, none were savers – knew they were getting into too much debt but reasoned that since everyone else was, the loans were ultimately going to be forgiven somehow (as has often happened in India, especially in the case of government loan programs). So, they took as much as they could and pressured people who wanted to repay not to do so.
- Many have also noted that MFI clients did not rally and protest against the anti-MFI Ordinance. The reasons typically cited are that borrowers did not feel a strong bond to their MFI(s) and perhaps resented their poor service. Based on my point immediately above, one could also argue that they simply liked the idea of not having to repay their loans. However, there is a much easier explanation: that they saw a fight brewing between the private MFIs and the state government, were effectively forced to pick sides, and picked the stronger party (the government) since it was likely to prevail. They reasonably concluded that being aligned with the losing side might carry risks of reprisal well into the future.
There is another reason I am trying to get to the bottom of this crisis. I have been asked to address the closing session of the Indian microfinance association Sa-Dhan’s annual conference in August, which is a major honor especially for a foreigner. (Increasingly self-confident Indians are more likely than ever to resist solutions, ideas and models implanted from outside the country.) The topic for the closing session is the future of microfinance in India, and I welcome input from loyal blog readers for my remarks.
What does all this mean for Fonkoze? With one possible exception that is years old and was brief, Fonkoze never got caught up in growth for growth’s sake, especially growth that led to cutting corners on staff training, outsourcing key functions to local “agents,” and stripping down product offerings. In terms of building bridges with local media, government officials and politicians, Fonkoze has recently stepped up its outreach. But will it be enough to prevent some future backlash along the lines of what we have seen in Bangladesh and India (and other mature markets such as Bolivia)? Only time will tell.
South Asian microfinance has had a major influence on Fonkoze and its work in Haiti. BRAC’s models and people have had especially large impacts, but Grameen Bank has also been studied and its people brought to Haiti for input. Today, as South Asian microfinance faces crises that some say are existential, it is worth asking what the lessons are for Fonkoze. I have just wrapped up a trip here and below is part one of my reflections. As I sit down to compose this I am reminded of these words of a Middle Eastern diplomat: “You can always count on government to do the right thing. But only after it has exhausted all other possibilities.”
One of the things that spurred me to write a book on Fonkoze was that while the organization was little known outside Haiti and a small community of social investors, microfinance professionals, and Haiti solidarity activists, it represented a shining example of what was right about microfinance at a time when the industry was coming under some intense criticism (some of which was justified, even though much of it was exaggerated) and attack.
I have taken some time off again this summer from my “day job” at Grameen Foundation to work on this project. Instead of going straight to Haiti (which I will do in a few weeks), I travelled first to Bangladesh and India. These two South Asian countries have been “ground zero” for microfinance controversy and crisis over the past 24 months (and for achievement over the last two decades). I wanted to probe deeper into what was going on even as I contemplated the example of Fonkoze.
For those of you who have not been following these stories, here are the basics. Since late November 2011, the current elected government of Bangladesh and its allies in the media have been consistently hostile to the Grameen Bank, the Grameen family of companies, and Professor Muhammad Yunus. (Grameen Bank and Prof. Yunus shared the Nobel Peace Prize in 2006.) While the government’s attempts to convince people that Dr. Yunus and the organizations he created are in some way corrupt have failed, they did succeed in having Dr. Yunus removed from his post as Managing Director in May 2011 on a technicality of dubious legality. Furthermore, they have been laying the groundwork for taking over control of Grameen Bank and the most successful of the other Grameen companies, despite the recent plea made by Professor Yunus to forsake this path. The government has been far from supportive of the other microfinance institutions in the country, but Grameen has been singled out. Friends of Grameen, an international solidarity group working to preserve Grameen Bank’s independence, has written a short summary of these issues.
In India, the southern state of Andhra Pradesh (AP) has been the hotbed of microfinance controversy. The local government basically outlawed microfinance provided by private organizations in late 2010, which led to the collapse of both nongovernmental and (in time) public sector microfinance – leading clients inevitably back to moneylenders. It also caused funds to dry up for microfinance across the country, as investors and lenders feared contagion. What prompted this draconian law? As best I could tell before I arrived here a few days ago, there were several factors:
- The state government was looking for a scapegoat for the failings of its public sector microfinance initiatives and also the alarming number of farmer suicides (though some politicians were probably well-intentioned, thinking that by reigning in private sector microfinance they were in fact protecting the poor from unacceptably high interest rates).
- The public offering of the giant MFI SKS, which initially created a lot of wealth for the senior staff and investors in that MFI (but none for its clients), inflamed opposition to microfinance in general.
- There were some legitimate cases of abuse by MFIs in terms of their collection practices, mainly committed by undertrained staff who were under pressure to recover loans in an increasingly competitive landscape. (The fact that these abuses were exaggerated and sensationalized does not excuse them.)
As a result, microfinance in AP ground to a halt – one could say it basically vanished overnight – and in the rest of the country, it survived but had to contract significantly. As one might expect, the poor were the primary victims of this political confrontation.
Well, what did I see and learn on my trip to South Asia? In Bangladesh, these were my main take-aways:
- The government’s troubles extend far beyond its confrontation with Grameen. While I was there, the World Bank cancelled at $1.2 billion loan to help finance the Padma Bridge project. They cited credible evidence of high level corruption which they had given the government many months to address before finally cancelling the financing. The government called the Bank’s review process flawed and asked incoming World Bank president Jim Kim to rescind the decision, which he immediately said he would not do.
- The elected representatives of the borrowers of Grameen, who make up 9 of the 12 voting members of the bank’s board of directors, are passionate and articulate defenders of the organization. They, and the immediate past directors whose terms ended in February, spoke up at Social Business Day that I attended. Many voiced their commitment to Grameen’s independence through tears as they spoke, one by one, in front of about 700 attendees. They warned the government that elections were coming and that the 8.3 million women of Grameen were not a force to be ignored.
- International solidarity does help. While I was there, a letter from all 17 female members of the U.S. Senate was delivered to the Prime Minister and covered extensively in the local media including the Daily Star. It put the issue of Grameen’s independence in the context of women’s rights, noting that Grameen was the largest organization in the world owned by poor women and that its take-over by the government would represent a major blow to women’s rights worldwide.
- Despite all the difficulties, Grameen Bank is hanging on. I visited a branch that had historically been relatively weak but was located in a stronger performing zone – the branch that was the focus of my book Small Loans, Big Dreams. (I had been told that weak zones were deteriorating quickly and stronger zones much more slowly during this uncertain period – so this branch seemed a good litmus test.) While I could see how the crisis had negatively impacted the branch in many ways, there was surprising resilience. The branch was due to show a modest profit of about Tk. 610,000 (US$ 7,500) for the first half of the year. Loan disbursements and collections were taking place more or less normally. When asked, Shandha Rani Halder, a borrower featured in my book whom I have known for almost 20 years, said, “It will take more than any government can do to ruin Grameen Bank. We are much stronger than that.” The local branch manager bravely (if not entirely convincingly) said, “These controversies impact our head office. But they do not affect what happens in the zones and the branches at all. We keep on with our mission.”
Some key questions are:
- Will the Haitian government, which is finalizing a bill to regulate microfinance that it hopes to introduce in Parliament, ever assume a confrontational posture with respect to Fonkoze? (The legislation itself, if passed, could have positive or negative impacts on Fonkoze – most likely a combination.)
- If a confrontation ever comes to pass, how will the women clients of Fonkoze stand up for their institution? Will they be as bold as the women of Grameen? Or even bolder?
- What could Fonkoze’s international friends do in such a situation? Would U.S. Senators take the same kind of initiative as they did in defense of Grameen? Would it matter?
These are the kinds of things that keep microfinance leaders up at night in these turbulent times, and the top executives at Fonkoze are probably no exception. Being able to plan and act for maximizing client benefit while worrying about these issues is no mean feat. But it is what Fonkoze’s leaders do every day.
To be continued…