Where to microfinance?

• Author: Woller, Gary M.

Abstract

The microfinance industry is characterized by a "schism," or debate, between two camps that represent broadly different approaches to microfinance: the institutionists and the welfarists. How this debate is resolved has crucial implications for the future of microfinance--its guiding principles, its objectives, its clients, and its impact on the poor and poverty in general. The institutionist approach, with its emphasis on financial self-sufficiency and institutional scale, appears to have gained ascendancy over the welfarist approach, with its emphasis on direct poverty alleviation among the very poor. The institutionists, however, base their arguments on a number of debatable assertions and questionable empirical methodologies. This article critically examines some of these with the intent of placing institutionist claims in their proper perspective and tempering the hegemonic aspirations of some institutionist writers. It concludes by proposing a middle ground between the two approaches in the hope that it will lead to more productive dialogue between the two camps in the future.

Introduction

Like many popular grassroots movements, the microfinance movement is characterized both by widespread agreement on broad objectives and by multiple rifts on key issues. The movement itself is driven by the shared commitment to provide credit for small enterprise formation and growth. It is also bound together by a common rhetoric of concern for the poor. This unity of commitment and rhetoric, however, masks a bewildering variety of philosophical approaches, types of institutions and borrowers, and delivery systems that shelter uneasily together under the big tent called "microfinance."

The movement has come to be divided by two broad approaches, or opposing camps, regarding the best way to help the poor through access to financial services: the institutionist approach and the welfarist approach.(1) Jonathan Morduch (1998d) refers to this division as the microfinance schism. The irony is that while the worldviews of each camp are not inherently incompatible, and in fact there are numerous microfinance institutions (MFIs) that appear to embrace them both, there nonetheless exists a large rift between the two camps that makes communication between them difficult.

The institutionist approach focuses on creating financial institutions to serve clients who either are not served or are underserved by the formal financial system. Emphasis lies on achieving financial self-sufficiency; breadth of outreach (meaning numbers of clients) takes precedence over depth of outreach (meaning the levels of poverty reached); and positive client impacts are assumed. The center of attention is the institution, and institutional success is generally gauged by the institution's progress toward achieving financial self-sufficiency. The best-known examples of the institutionist approach are Bank Rakyat Indonesia (BRI) and Banco Solidario (BancoSol) in Bolivia.

Institutionists argue that a primary objective of microfinance is financial deepening, the creation of a separate system of "sustainable" financial intermediation for the poor. Theirs is a "financial systems" approach to microfinance, in which the future of microfinance is dominated by numerous large-scale, profit-seeking financial institution that provide high quality financial services to large numbers of poor clients. Because of their insistence on financial self-sufficiency, institutionists eschew subsidies of any kind. The institutionist position is articulated in virtually all the literature coming out of the Ohio State University Rural Finance Program, the World Bank and the Consultative Group to Assist the Poorest (CGAP) in the World Bank, and USAID. It is also found in the many writings of Maria Otero (ACCION International) and Elisabeth Rhyne (formerly of USAID). Most published literature in the field of microfinance espouses the institutionist view.

Welfarists, on the other hand, emphasize depth of outreach. Welfarists are quite explicit in their focus on immediately improving the well-being of participants. They are less interested in banking per se than in using financial services as a means to alleviate directly the worst effects of deep poverty among participants and communities, even if some of these services require subsidies. Their objective tends to be self-employment of the poorer of the economically active poor, especially women, whose control of modest increases of income and savings is assumed to empower them to improve the conditions of life for themselves and their children. The center of attention is the "family." Like the institutionists, welfarists have assumed more impact than they actually have been able to document. The most prominent examples of welfarist institutions are the Grameen Bank in Bangladesh and its replicates elsewhere, and FINCA-style village banking programs in Latin America and, more recently, in Africa and Asia.

Obviously, there are fundamental differences between the two camps. These differences, moreover, are much more than merely philosophical debates. How they are resolved has crucial implications for the future of microfinance--its guiding principles, its objectives, its clients, and its impact on the poor and on poverty in general. Our purpose in this paper is first, to trace through these implications; second, to evaluate critically the arguments, assumptions, and methodologies of the institutionist camp; and third, to offer our views on how the two approaches might be reconciled.

Before proceeding, however, we should make our position clear. We are welfarists. Moreover, we have grave concerns about the direction that the institutionists are attempting to push the industry. The institutionists clearly have won the debate to date. They have defined "best practices," and the most prominent donors and even the most prominent welfarist practitioners have embraced that definition. The institutionists have been more articulate and persuasive and certainly more prolific in their writing, and their message has been more in tune with the times, the currently dominant culture of laissezfaire business.

We should also add that we have tremendous sympathy for the institutionist position, and we share the institutionists' vision of financial deepening. But this is not the limit of our vision. We foresee an industry in which the two approaches work in tandem to reach different, but equally deserving, populations of poor clients. We do not eschew profits, but neither do we eschew "subsidies." Nor, finally, do we dispute the institutionists' principled commitment to poverty alleviation.

Our specific concern is that in advocating their position, some prominent institutionists have gone too far--to insist that all MFIs adopt institutionist values and "best practices," to attempt active suppression of the welfarist point of view, and to cause the expansion of "best practices" to become antithetical to the welfarist objective of direct poverty alleviation among the very poor. Thus we believe it is important that the many pronouncements emanating from the institutionist camp be rationally challenged in terms of logic and fact, which we attempt to do in this paper. Our purpose is not to invalidate the institutionist view, but rather to put it into perspective, temper its hegemonic aspirations, and argue for the vision in which both approaches can work simultaneously toward shared or disparate goals. Both approaches are needed--in whatever combination possible.

Two Nations Divided By A Common Language

In thinking about the rift between the institutionist and welfarist camps, we are reminded of the quote by George Bernard Shaw that Great Britain and the United States are "two nations divided by a common language." Although the two camps share a common commitment to microfinance services and a common rhetoric of concern for the poor, many in the industry mistake this unity for a unity of purpose.

The stated ultimate goal of both camps is poverty reduction. Yet the practical objectives each camp has set for itself diverge. Each has defined "poor" differently, and each has articulated different visions of how the poor can be helped by increased access to microfinance services. The practical implications of these differences between the two camps are at least threefold: (1) differences in the population segments served (the not-so-poor true entrepreneurs vs. those who struggle on the margins of survival); (2) differences in the designs (and the reasons for the designs) for service delivery to these populations (lending to individuals vs. small solidarity groups vs. large village banks);(2) and (3) differences in the institutional structures and financing to support these services (social service NGOs vs. community-based credit unions and community banks vs. commercial banks and finance companies).

These differences are legitimate, if and only if the objectives from which they derive are considered equally legitimate. But they are not considered equally legitimate by many persons in each camp. Heightening the potential for conflict is the apparent unity of purpose in the microfinance community, which has fostered a mentality of "one way" for microfinance. Donors have become confused by the veil of unity and the argument that a common set of standards is needed to advance the apparently common agenda. There has developed in the 1990s a struggle to define that "one way" for both microfinance practitioners and donors.

The Institutionist Attack. The conflict between the two camps is driven by the belief that the alternative approach threatens the fulfillment of the movement's broadly shared goal--poverty reduction. Institutionists believe that successful poverty reduction requires massive scale, given both the worldwide prevalence of poverty and the estimated demand for microfinance services. Rough estimates put the total demand for microcredit...