Chapter 7! Microfinance through "Development as Freedom" Lens

It's been almost four months since I posted a chapter draft (chapter 4). Now I'm posting chapter 7 (in Word format pdf). [Update: added quotes from CARE studies in Bangladesh.] So I have some explaining to do.I actually have drafts of 5 and 6, but I need to do more on them. I want to add some discussion of VSLAs to chapter 5 and move some of the material on insurance from 4 to 5. As for 6, all the new impact evaluations I have blogged have made the draft obsolete. I hope to have 5 and 6 for you by the end of the month. If you can't stand the wait, you can read Microfinance as Business, on which chapter 5 is based, and peruse my posts on evaluations, which reveal the conclusions of chapter 6.Chapter 7 is one of the hardest things I've ever written. Maybe my struggle is obvious in the text, which is quite long. There are a lot of contradictory ideas---credit frees by giving people more control over their finances, credit entraps---and the evidence is fragmentary. The major last section goes through studies one by one, rather than themes one by one, which is much more my wont. I gave up on a comprehensive conceptual organization.Regular readers of this blog (if there are any) will recognize past posts in the draft.Please tell me what you think.By way of introduction, here is the Conclusion:

A simple question---does microfinance expand or contract freedom?---led us onto a vast and variegated terrain. The root of much of this complexity, noted at the outset, is debt’s double aspect as a source of both possibility and obligation. The theory and evidence we have probed lead to several conclusions, some more certain than others:

• By decoupling when something is bought from when it is paid for, financial services inherently give people more control over their financial lives—more "agency" or "freedom" in Amartya Sen’s terms.
• Savings and insurance services do so without imposing future obligations the way credit does, so they seem more benign in the development-as-freedom perspective if they are provided free of fraud, price-gouging, and recalcitrant disbursement.
• Thus loans threaten the freedom of the poor most, a truth embedded in the ancient proscriptions on usury. Yet the traditional referent for the definition of usury, the interest rate, is not the only characteristic of credit that determines its effects on borrowers' agency. Transparency, reliability, flexibility, group dynamics, and systematic forbearance from overlending appear to matter at least as much in practice.
• Reliable evidence on how microcredit affects people's freedom is fragmentary and emanates mostly from Bangladesh. It tends to support a few generalizations: First, doing financial business with poor women empowers them mainly through any economic success they achieve rather than in parallel to it. Women gain more autonomy from successful investment or spending management than they do from entering into solidarity with jointly liable borrowers. Yet programs such as Indian self-help groups that go well beyond pure financing, running activities dedicated to organizing women to fight oppression, can leave a stronger imprint. [Update spurred by commentary from Sara Duke:] The same may hold for the “credit plus” programs of BRAC and Freedom from Hunger, which train and teach as they lend (see chapter 4). Second, the more a microcreditor pursues financial self-sustainability the more it imposes on the freedom of its clients. The financially loose SHGs and the subsidized SEDP program that Kabeer studied seem to score best on empowerment. Finally, collateralizing one's reputation through group credit may be more oppressive than a more conventionally collateralized individual loan---for those who can afford the latter.

We arrive at a surprising conclusion: the most famous form of microcredit, the solidarity group loan, appears least intrinsically empowering. Now, that is a relative statement. If all who enter into group credit borrow no more than they can handle, then by helping them manage mismatches between earnings and spending needs, credit still empowers them all. Yet as we have seen, some poor people do get in trouble with microcredit. The needs of the poor are indeed endless, or they would not still be poor. And the evidence does not suggest that empowerment "side benefits," those not transmitted through finance itself, compensate. They do not salve the wounds of the debt trap.This reality confronts the charitably minded investor with a conundrum: should she support an activity that might help 90 percent of the people it touches while making 10 percent worse off---perhaps much worse off? The Hippocratic dictum to "first, do no harm" comes to mind at this juncture. Taken literally, it is impractical in fighting poverty: every effort to better a society trods on someone’s toes. But the old doctor’s oath is food for thought. Done right, savings and insurance approach the ideal of minimal harm more surely than credit. Since, as chapter 2 explained, savings especially can substitute for credit for many purposes, the pursuit of development as freedom seems best served by supporting savings more than credit. People rarely get caught in savings traps.While I would personally hesitate to support microcredit---group credit especially---I would never say never to lending. Absolutism is rarely credible in matters of social policy. I am convinced that millions of poor people live better because of microcredit. And it is much easier to set up an institution to disburse funds on credit than to collect them as deposits. Granting microcreditors a place in the portfolios of the poor, we should ask that they maximize their flexibility and transparency with respect to clients and take all reasonable steps to prevent overlending. And we should do everything we can to give the poor stronger alternatives to borrowing.The need to deemphasize microcredit leads and the institutional challenges to doing so---institutions that would take savings and sell insurance properly face high legal hurdles---leads us to a quite different perspective on the contribution of microfinance to development. The next chapter looks at microfinance operations in terms of how they enrich the institutional fabric of societies by growing, competing, and innovating to serve the customer. That perspective tends to valorize businesslike operation, financial independence, and freedom from subsidy.Yet our scrutiny of microfinance through the lens of freedom hints at an important tension between the two perspectives. It appears that what is arguably easiest from an institutional point of view---making loans rather than taking savings or insurance premiums, passing the full costs of credit on to customers, assertively enforcing repayment requirements---is hardest on poor clients. There is a margin at which convenience for the institution and the needs of the client conflict. That tension may be appropriate---it is inherent in the dynamics of any healthy market system---but it should be recognized. The moral onus remains on the microfinance industry to do not what is easiest but what maximizes poor people’s freedom.