IrresponsAbility

In the latest entry in CGAP's great series on overindebtedness, Rochus Mommartz of the Swiss social investment group responsAbility (which I think mostly invests in microfinance) is enjoyably blunt:

What has repeatedly astonished me about the discussion of over-indebtedness during the last couple of months is that people tend to treat the topic as if we only discovered it most recently....The basic recipe to counterbalance the risk of over indebtedness is known. It is made with the following ingredients: formalisation of MFIs, strong supervision, high financial incentives not to overshoot through strict provisioning requirements, full compulsory information sharing, broad product range with more and more individual lenders who can much more easily fine tune their reaction in case of problems and who carry out a more detailed cash flow analysis compared to group lenders, and strong supervision of internal control mechanism–to name the most essential ones.Unfortunately, if we compare our basic recipe with the current regulation frameworks in many countries, we find that too small a number of countries use the basic ingredients described above.

The message: if there is overindebtedness, it is entirely the fault of domestic actors, namely microfinance institutions and their regulators, if any. The role of outside investors such as responsAbility does not bear examination.But, I must ask, if the facilitating factors of overindebtedness are so clear to responsAbility and so widespread, why did responsAbility invest presumably a fair chunk of its $900 million in countries blighted by these factors? The more visible the seeds of overindebtedness were to responsAbility, the more responsibility it should take for the overindebtedness it financed. Last year, in Who Inflated the Microcredit Bubbles? I listed the top five creditors to microfinance institutions in countries where microcredit had recently crashed. The data are far from perfect, and don't include equity investments, but the patterns are interesting. responsAbility was #5 in Nicaragua, where things have gone quite bad, and #12 in Bosnia (which you can see in the spreadsheet).This reminds me of what I wrote last month about assigning blame for financial crises:

The second thing muddling the search for a single cause is that sometimes causal factors interact. Some people pointed out that the financial crisis hit many countries, with quite different regulatory systems, so you couldn't just blame a national factor such as Alan Greenspan. The real cause was the huge swell of capital, much from certain developing countries, which inflated a bubble. But others said, not so fast: thanks to firm banking regulations, Canada came through just fine even though it was tied to the same global capital markets. So actually domestic policy failures were the cause, you see. How to square this circle? Both sides were right. At the risk of oversimplifying, the crises in the U.S., U.K., and other countries arose from the combination of easy money and bad policies. If either had been eliminated (leaving aside the question of what agent would have done that), the crises would have been prevented. Thus we could blame---and adopt policies to redress---either factor alone and be sort of right.

Earlier, I illustrated the interaction between growth drive and weak policy environment, mathematically.Looks to me like there is responsibility all around, and that there ought to be self-reflection all around.