History of profiting from the poor
In November 2011, Chuck Waterfield wrote a guest blog for GAP, entitled “A Quick Journey Through the History of Usury: Commercialization and profiting from the poor“, as part of their series on microfinance commercialization.
To read this blog on the CGAP website please click here
Should we as a field transition into more commercial approaches to lending? If so, how do we avoid becoming indistinguishable from modern day usurers?
St. Francis, Dante, and Machiavelli
What we call microfinance—the modern microcredit movement–is about 40 years old. But lending to the poor is thousands of years old. I am on five-week bicycle trip, a trip that is heavily symbolic for me. I started at the Roman Forum, and I will end my trip in Valladolid, Spain, at the Microcredit Summit. My route is designed to look at some of the microfinance practices of the last 1,000 years.
My first stop was Assisi, where St. Francis, born in 1182, established that we should practice the values of humility, poverty, and simplicity, and we should serve the poor. These were radical ideas even at the time, yet he inspired many to practice these same vows. He refused the common paths of money and power, and yet it resulted in a life that made great moral influence. In his life, the means he chose were aligned with the ends he hoped for. Can we in microfinance define some core principles of compassion and respect for others that are able to withstand the greater influences of wealth and power that surround us in the world?
The next day, I went to Perugia, where two hundred years after Francis’ death, in 1463, his society started the first “Monte de Pieta,” created to give the poor an alternative to the moneylenders. The term “monte” meant that the capital came as a “pile of money” donated by the wealthier in society to enable the organization to then lend that money out to the poor. The loans were initially at zero-interest, and then later at modest interest charges determined necessary to sustain the institution. The poor would bring collateral to be held during the term of their loan. In other words, these were “compassionate” pawn shops. These organizations still operate, 500 years later, but the more “commercial” variety of pawn shops that maximize profit, are much more common.
And today I am in Florence, where Dante, writing just shortly after St. Francis’ time, put the moneylenders in the seventh circle of hell, and where Machiavelli, two hundred years later, wrote “The Prince” arguing for manipulation and cunning because “the ends justifies the means.” (Machiavelli is still widely read in college, St. Francis is not.)
Commercialization? Or Responsible Commercialization?
The “Occupy Wall Street” movement is spreading fast, not only in the U.S. People all around the world are challenging current profit-maximizing approaches to financial services.
Meanwhile the field of microfinance is finding it difficult to answer the questions of how we can claim to be compassionate when some of us loan money to the poor at very high margins and make profits so large that the conventional finance world looks twice. How have we distinguished what we are doing from what the moneylender offers?
We sought commercialization without taking the necessary and challenging step of articulating a definition of responsible commercialization. We need clear definitions, we need clear practices for which we can be held accountable, we need lines that distinguish microfinance from moneylending, we need better transparency and we need better awareness of the implications of following such practices. Opacity is convenient for profit-maximizing businesses. Transparency burns off the fog and puts an MFI in a glass house. Let the world see what you are doing, and why, and your behaviors and decisions will change accordingly.
Two examples of the dangers of commercialization
I believe that Mexico and South Africa offer two examples of what happens when profit-maximizing practices are promoted or tolerated.
Mexico is an example of uncontrolled commercialization and the damage that comes. The microfinance industry spent a decade working to attract the attention of the conventional commercial finance world. But when you open yourself up to any investor, you can no longer be selective. In Mexico, most of the Compartamos IPO stock was bought up by hedge fund managers who don’t ask about empowerment and gender issues. They only ask about quick returns.
Compartamos argues that they pursued a high-growth, high-profit strategy to attract the attention of the business world and draw in investors, so that more poor would have access to credit. Since the IPO, while hundreds of new micro-lenders have started up, relatively few are connected to our microfinance industry. Most are profit-maximizing start-ups. The supply of credit has grown extremely fast, and over-indebtedness is a serious risk. Surely this is not aligned with our original vision of microfinance?
South Africa has also followed a very commercial path. While South Africa has less than ten conventional microfinance organizations, there is a large supply of credit targeted to the poor, through several thousand “payday lenders,” consumer lenders focused mainly on people with paychecks, not the self-employed. Clients get fast loans, but at very high prices, averaging around 200% a year. The payday lenders call themselves “microfinance.” Are they? What distinguishes us from them? When we look at South Africa and Mexico, are we looking at our future?
We must take action
If we don’t force dialogue and set standards, profit-maximizing at the “Bottom of the Pyramid” will take the wrong path. If we don’t continue our current efforts to establish systems to protect the poor, to define responsible microfinance, and draw lines between those who adhere to those standards and those who don’t, microfinance in 20 years will be nothing but an obscure article in Wikipedia.