By David Whitehouse/The Africa Report
Collective savings and credit mechanisms have been overlooked due to Western ideological preference for individualistic models.
Digital channels are aggravating rather than reducing the dangers of excessive borrowing among Africa’s poorest, long-time microfinance critic Milford Bateman tells The Africa Report.
Microfinance was pioneered in Bangladesh by Muhammad Yunus through Grameen Bank in the 1980s. Yunus, who won a Nobel Prize, was convinced that small loans could end mass poverty while empowering poor women.
Bateman debunked such claims in his 2010 book ‘Why doesn’t microfinance work? The destructive rise of local neoliberalism’. He argued that Grameen’s early success, rather than proving the viability of low-interest rates for loans to the poor as Grameen claimed, relied on external subsidies from the government and international organisations.
Five touches on the phone and you can jump into debt.
Once the subsidies were phased out, interest rates soared as the fledgling microfinance industry sought to achieve profitability at scale.
Academics have yet to find statistical evidence that microfinance benefits the poor, though there is clear evidence of harm in some cases, shown for example by the raft of suicides among over-indebted borrowers in India in 2010. The microfinance industry today tends to make the softer argument that it extends “financial inclusion” rather than directly reducing poverty.
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“Microfinance,” though often used interchangeably with “microcredit”, is more accurately an umbrella term that includes microsavings and microinsurance, as well as loans. An invisible impact of microcredit, Bateman argues, is that it diverts money away from formal lending to small and medium-sized enterprises. The result, he says, is a “primitivisation” of African economies.
Bateman is now an adjunct professor of development studies at St Mary’s University in Halifax, Canada. Much of his recent research concerns South Africa, whose poor population, he argues, is among the main victims of the microfinance industry.
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He calculates that South Africa became the most overindebted microcredit market in the world in 2016, with 86% of the population having loans. Digital banks, he says, are now increasing the dangers for the poor and unbanked.
“Five touches on the phone and you can jump into debt,” Bateman says, pointing to Tyme Bank as an example. “It’s a jump into darkness”.
Microinsurance
Some argue that the microfinance industry needs to put less emphasis on microcredit, and more on the other two components. Among them is David Kirk, managing director for Africa at the Milliman insurance solutions provider.
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Microinsurance, he says, has been “the poor cousin of the microfinance world”. Lack of insurance means many small businesses are just one bad break away from going under. That’s a “huge disincentive” to potential entrepreneurs, Kirk says.
Kirk, based in South Africa, counts 19 microfinance licences in the country currently, focused heavily on funeral insurance. While recognising the cultural importance of funerals and the need to be able to pay for them, a wider range of microinsurance products is needed, he says.
A key obstacle, Kirk says, is the inability of South African insurers to offer parametric insurance. Such policies pay out automatically when a given parameter, such as cyclones or flooding, is breached. The policies present a problem for the South African statutes which require proof of an “insurable interest” and that “a loss has been incurred” for payments to be made.
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At present, there is no clear way for parametric policies to circumvent those requirements. Kirk says South African regulators are aware of the problem, and he hopes a solution can be found. “My sense is they want to get it fixed.”
However, Lawrence Nazare, CEO of Africa’s largest privately owned reinsurer Continental Re, has argued that parametric products are better suited to market segments than protecting the continent’s poor masses against risks such as climate change.
Collective models
Bateman argues that microinsurance to date is an example of window dressing tacked on to make microcredit look more respectable. Better solutions that ensure money remains in the community are available, he argues. He points to the potential of rotating savings and credit associations (ROSCAs) and savings and credit cooperatives (SACCOs).
ROSCAs date back to, at least, the thirteenth century and are known globally by various local names in poor countries. Savers contribute to a collective pot, with the total shared out equally between the members in random order.
The advantage comes from an early pay-out, which creates an amount of working capital that would have taken the individual saver much longer to accumulate. The basic formula is open to endless variations, and Ethiopia’s eQub is among companies that use digital methods to try to deploy them at scale.
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SACCOs are collectively owned savings vehicles originating from the mid-nineteenth century Britain and Germany, from where they spread to the Americas and Africa. There are currently an estimated 37.8 million Africans who are SACCO members, concentrated in Kenya, Uganda, Tanzania, Ghana and Rwanda, according to the World Council of Credit Unions.
ROSCAs and SACCOs, Bateman says, would have achieved much more by now had they received the same kind of technological support as the microfinance industry. The World Bank, he says, has done nothing to encourage them because of their community-based, rather than individualistic, approach to savings – a prejudice Bateman also finds in British development policy. “They don’t like the ideology of collective self-provision”.
Fintech, Bateman says, can help ROSCAs and SACCOs to advance, provided they remain rooted in the community. He sees danger in the fact that some groups want to expand to cover a whole country. It’s essential, he says, for there to be a sense of localness and for people to know who they are giving their money to.
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Digitally based ROSCAs have claimed that technology reduces the risk of the people managing the savings pools absconding, a claim Bateman contests. National scale based on digital channels, he says, increases the risk of money disappearing. “You don’t know them and they don’t know you.” The ideal solution, he argues, is for technology to be used for savings pools that remain local.
That looks unrealistic given the natural propensity of technology owners to want to deploy their innovations at scale – a difficulty Bateman acknowledges.
Hope for the future, he says, exists in the form of the success of the SACCO model in Brazil, with Banco Cooperativo Sicredi and Banco Cooperativo do Brasil among organisations that remained effective at scale. Bateman says there is a need for further research to explain the resilience of the Brazilian SACCO model.
