Will the Real Bad Guy Please Stand Up?

Milford Bateman has contributed to the CGAP blog's series on overindebtedness. He focuses not on how to define and measure over-indebtedness but on who to blame for it:

It is vital that we recognise right away---however painful this will be for some---that over-indebtedness is the almost inevitable outgrowth of the international development community’s preferred model of microfinance; the commercialised model. Even before the sub-prime-driven global financial crisis, financial history showed the potential for huge damage if opportunistic individuals are allowed (thanks to extensive deregulation) and encouraged (thanks to free market ideology) to effectively take control of the financial institution that employs them. Senior managers begin to act like private entrepreneurs and impose upon their institution a new operative goal---their own private enrichment. The long-term benefits that might accrue to the shareholders/owners and/or to other important stakeholders (clients, employees, suppliers, and the community) are effectively abandoned as the primary strategic goals.

I think that as regards India, Milford has a valid point: the profit motive, as experienced by top executives and by venture capitalists who gained seats on boards, drove the industry toward short-term profit maximization. That was a major reason the industry grew too fast---along with a genuine desire to serve many people quickly, and a naive/arrogant assumption that microcredit would always help. Many people borrowed too much and got in debt trouble.But here's the missing muddle: Exactly what is commercial microfinance? And is only commercial microfinance susceptible to such dynamics?In his book, Milford asserts that donors drove the Grameen Bank to the dark side, meaning commercialization. But Grameen is majority-owned by its borrowers, making it a cooperative. Granted, I doubt they've exercised much power over the Bank, but neither have outside, profit-driven investors---an approach that Yunus has highlighted, and which events have partly vindicated. And in a dialog with Barbara Magnoni in the comments on his post, Milford regrets how neoliberalism destroyed similarly cooperative, for-profit financial institutions in the U.K.:

Yes, the buidling societies were for-profit institutions, but it was also the case that most of any surplus (less a healthy portion for reinvestment) was recycled back to saver-members, not channelled up to the managers themselves in the form of higher pay and bonuses. Sadly, the building societies in the UK were virtually all destroyed by the commercialisation drive that got going under the Thatcher government in the 1980s.

Alongside Grameen, other big players in Bangladeshi microcredit, such as BRAC and ASA, are non-profits. If there were a microcredit industry crisis in Bangladesh, which is conceivable, would Milford also blame it on neoliberal commercialization? If not, then who or what exactly is to blame for the general problem of unsustainable credit growth?Consider too some events on the other side of the subcontinent. In Pakistan, the Kashf Foundation experienced troubles remarkably similar to those in Andhra Pradesh, with fast growth, poor controls, ghost borrowers, etc. Things fell apart in 2008 and 2009. As far as I know, Kashf is non-profit. Perhaps top managers were somehow pocketing large sums, validating Milford's theory---I don't know. But I do know who the macrofinancers of micofinance have been in Pakistan: the Asian Development Bank and the World Bank. Why did they lend so much? Some combination of good intentions, institutional inertia, pressure from American non-profits to lend more for microfinance, and pressure from the U.S. government to give lots of aid to Pakistan as part of the "war on terror." Not profit maximization.This is why I have emphasized high growth as a source of danger, while recognizing the many forces that can cause it. It makes it harder to condemn any particular institutional form.