Malcolm Harper is a long-time practitioner with extensive microfinance experience in India. From 1996 to 2006 he was Chairman of Basix , and currently serves as Chairman of M-CRIL. He is also the founding Editor-in-chief of the Small Enterprise Development Journal, and is a director and trustee of a number of other institutions, including Homeless International, EDA (UK) Limited, APT Enterprise Development and Intermediate Technology Publications in the United Kingdom.
Q: BASIX has moved away from calling itself an MFI. What differentiates BASIX from other institutions?
Harper: BASIX sometimes calls itself an MFI when it’s convenient to do so. BASIX is a rural finance institution, although our head office is in Hyderabad. We deal with people who are not traditionally MF clients, because we believe they create jobs for poorer people and that most people actually want to have jobs and don’t want to be self-employed. Only approximately 30% of BASIX clients are women, who are the classic microfinance client.
The main thing that differentiates BASIX from other MFIs…is the emphasis on livelihoods. We call ourselves a livelihood promotion institution and even at the level of the agents who work in the field—our customer contact people—we call them livelihoods promotion people. So it’s about livelihoods, which is enormously difficult, but I think well worth doing. Anybody can do microfinance but livelihoods are more difficult.
Q: Anybody?
Harper: …if you’ve got a few million people—or hundreds of million people as you’ve got in India— whose only source of finance has been the moneylender at 10% a month, and you come in with money at 2% a month, it’s hardly surprising that they buy it. And if you’re allowed to offer savings, and pay an interest that’s secure and not run away with your savers’ money to the next town or Dubai, and if you offer insurance as well, it’s even easier. It is surprising that people make so much of microfinance.
Q: With livelihoods work more complex—this raises this question of the relative merits of microfinance and microfinance plus, and implications for sustainability and scaling up that may come along when MFIs try to provide more than narrow financial services.
Harper: I’m not to do with BASIX anymore and perhaps this sounds arrogant, but I don’t think BASIX is a model for other institutions. As well as being the only local area bank—LAB—which is doing microfinance or development finance, it’s also a “lab” in the other sense of being a laboratory. It’s doing all kinds of interesting, experimental things, some of which fail, some of which work. It manages…to make a bit of money in the process, but it is not a model. It is a place where all kinds of innovative things are being done, from which we hope others will be able to learn…. I think anybody who tries to replicate the complete package of BASIX activities somewhere else would be making a mistake.
Q: If BASIX is non-replicable, will it become non-scaleable?
Harper: Not non-scaleable. It’s growing very fast, though not as fast as some of the single-purpose MFIs…. It’s growing pretty fast by normal standards, but at the same time it has been constraining its own growth by its insistence on providing livelihoods services to those clients who need them, as well as financial services.
Q: Do you think there are things BASIX should have done differently?
Harper: My regrets about BASIX—if that’s the right word—apply to all microfinance in India and indeed the world over. It’s pretty pathetic that we are still—not wholly, but quite importantly—dependent on foreign sources of money, although Indian debt is becoming available so here the foreign money is mainly for equity now. I find it very sad that in a country as rich as India, something as small and modest and essentially local as microfinance should have to depend on the United States, or England, or Holland for its risk capital.
The second regret… is that BASIX had not focused our activities in fewer locations so that we could say “look at this place”—not even a district, but even one block or two—which had been somewhat revolutionized by our impact. There are good reasons for being all over the place, from Rajasthan to Jharkhand to Tamil Nadu, never mind our center in Andhra Pradesh. But it’s expensive, time consuming, and impact-diluting to be scattered… although I supported that strategy in the beginning because it’s good to take microfinance to underserved places.
| Microfinance in the north is difficult for the reasons that any development work is difficult: the nature of the work of this kind is that those who most need it are the most difficult to get it to. |
Q: There is a huge inequality in access to financial services between the north and south. In Tamil Nadu, where the CMF is located, we’re in the middle of diverse microfinance activity. But from our projects in the north and east we’re constantly reminded of the differences in access and quality. Why is it so difficult for microfinance to get a toehold in the north?
Harper: Interestingly, three or four years ago Tamil Nadu went through something not as dramatic or extreme as Andhra Pradesh, but went through a usury act problem where they wanted to cap interest rates. They’ve managed to come out of that, but at the time Tamil Nadu might have been portrayed as the least attractive place in India for microfinance. But you speak rightly of Tamil Nadu as a good place to do business.
One of the reasons for BASIX spreading itself is its desire to get out of the (until recently) easy environment of Andhra Pradesh and the south in general. We’ve been driven by livelihoods in the north, rather than financial services.
Microfinance in the north is difficult for the reasons that any development work is difficult: the nature of the work of this kind is that those who most need it are the most difficult to get it to. Whether you’re talking of communications, or physical safety, or levels of corruption, or force of illegitimate interests that don’t want you to do business there, or the apathy of people, all kinds of reasons that make it difficult to deliver health services, primary education, anything else…. I don’t think there are any reasons peculiar to microfinance. It’s just that the reasons places are poor also make it difficult to make them less poor.
Q: What then is your take on the insistence by MFIs to lend only for productive purposes?
Harper: Luckily it doesn’t work!
Q: Even in the South when client incomes may be relatively higher, many of us have seen “productive” loans being used for consumption. Is there value in MFIs holding clients to the discipline of borrowing only for productive purposes?
Harper: I think its nonsense. And it does matter because it induces falsehood at an early stage of the relationship, which can easily lead to falsehood in more important things. If the client is forced to lie and say she’s going to use it for a productive purpose and she’s not, then that’s the beginning of a slippery track to saying she’s going to repay and she won’t. It’s nonsense. Luckily it’s not nonsense that makes much of a difference as clients ignore it.
Moreover, it’s overambitious in the sense that it assumes that it gives the impression that if someone is a client of an MFI she’s automatically got a livelihood, which of course she hasn’t. It also exaggerates the importance of loans as opposed to other services, because if you need to start a little business you need something to invest and therefore you need a loan before you need anything else which is rubbish. So it both exaggerates what microfinance can do and distorts the emphasis of the products that are offered. And at the same time it understates what it can do in that microfinance can provide a full range of services—insurance, all these things— that goes far beyond running your own business. So it’s very damaging in every respect.
And it’s part of a broader illusion and rhetoric that I still see coming out of some high-level meetings where they’re still talking about micro- entrepreneurs—about microfinance being about creating this world of millions of selfemployed women, which is totally unrealistic in terms of any long term goal. I’ve never seen what we would call a rich, developed economy which consists of millions of women sitting around selling bananas.
There is another aspect of this consumption and production division which continues to infuriate me, in which education and health are regarded as ‘consumption’, somehow as a bad thing to spend money on. So it’s sad to see the same silly rhetoric still being pumped around.
Q: One of the primary justifications for lending for productive purposes is to keep repayment rates high. Some have started to suggest that recovery rates this high are either unsustainable or not optimal. The CMF’s research unit is interested in the question of why recovery rates are so high—that is, why people repay.
Harper: Well, just now I’m looking on my ‘screensaver’ at a picture of a women’s group. The women are clutching their books and looking nervously at me, the photographer, and it’s pretty obvious they’ve got no place else to go. If you only have one place to get financial services from, you keep it clean. You repay. So one reason is the weakness of the client groups and the relative monopoly position of the service provider. Of course that monopoly position is being eroded now, so things are changing.
Another reason is the group mechanism, which is enormously strong—destructively so sometimes— people repay because their neighbors will do horrible things to them if they don’t.
Another reason of course is that the interest rates are very high and if you owe money to several different people, whether the local moneylenders or banks or whatever, the one that charges the most is the one that gets repaid the fastest. And MFIs often are nowadays the ones that charge the most, so get repaid fastest.
And as we found with the recent EDA study of the light and dark sides of self-help groups, although this also applies to all clients with some form of group guarantee, a lot of defaults can be concealed and never appear in the books because the lenders help each other out informally. If the bank lends money for a SHG for three years, and members are lending that money within the group at shorter intervals, there’s a lot of room for adjustments going up to a three year period which will keep the bank’s repayments at 100% even though repayments within the group are of a much lower quality. The EDA study found extraordinarily high rates of portfolio at risk if you take a one-year repayment as being the average.
Q: For a lot of things we’ve been discussing there’s been little to no reliable data or systematic research. What are some of the gaps in microfinance research and research questions you think should be addressed?
Harper: The actual rates of on-time recovery within groups, self-help groups in particular. But one needs to go further than finding the rate of default and pose the question, “does it matter?”… If people are repaying because they’re being helped by their neighbors, and then they’re helping their neighbors the next time around, one needs to examine whether the notion of on-time repayments and so on really is relevant when what people really need is an overdraft facility.…Is the term loan an effective form of finance? It isn’t to me, and I don’t think it is for them. It is for me when I need to buy a car, but I don’t think it is for me or them in their day-today financial environment.
Another research question is how do the high interest rates charged by some MFIs compare with the returns earned by some borrowers on their investments, particularly investments in farming and manufacturing? And, is this high cost of money tending to create trading and service economies, petty shops and vendors, rather than growing and making things, and does it matter? Related to what I just mentioned, are MFI interest rates justified by the costs of doing what they do, doorstep delivery and all the things microfinance enthusiasts go on about, or are they caused by inefficiency, excessive wages and other costs, lack of competition, or just plain gouging? The recent problems which arose in Krishna District of AP, and some MFIs’ responses, suggest that their previous interest rates may have been higher than necessary, but this needs to be studied.
Another question is to what extent microfinance clients borrow from more than one microfinance source at a time, such as from their bank-financed SHGs and from SHARE, and is this actually good or bad for them—in terms of sensible diversification, filling gaps in time or amounts, vs. a spiral of increasing over-indebtedness, and too much time in meetings—and good or bad for the banks/MFIs?
A related question is to what extent banks or MFIs engage in market sharing, cartel-making behavior, “you take this village and I’ll take that,” and what effect does this have on their customers? In other words, the extent to which competition between MFIs is such a bad thing that they should be allowed to form cartels and engage in monopolistic behavior.
I think one area that still has not been covered sufficiently is some assessment of the value added by clusters and federations. I haven’t seen anything systematic on that. Do SHG federations and clusters and all that add value more than cost, should they stick to social vs. financial intermediation, are they just creatures of NGOs who need to create new (and permanently dependent) entities in order to justify their own existence, and of politicians who need vote banks?
Q: What about the competition between the SHG bank linkage model and the Grameen model?
Harper: Well the methodological competition I think is the wrong way to look at it. I see them as complementary. When you’ve grown out of the 6 extremely transaction cost intensive (if you’re the borrower), somewhat demeaning, and very rigid, inflexible method of Grameen, then you’re ready for self-help groups—to run your own bank, it could be argued. And when you’ve grown out of that you’re ready for joint liability groups, if you want to go that far. If you want to go even further you go to an individual account. So I don’t see SHGs with bank-linkage and MFIs as competitive in that sense. I see them as different rungs on a ladder.
| The challenges to microfinance are to make the less poor much less poor, and to reach the hundreds of millions of people who aren’t being reached at all. |
Q: What do you think are the big innovations of the last decade? At least in terms of terminology, the big shift has been from “micro credit” to “microfinance.”
Harper: The addition of micro-insurance is probably the major single thing in the last ten years, and BASIX has been one leader in that. Looking back I would say we started the wrong way round…. We should have started with savings, and then we should have gone to insurance, then to loans.
Livelihoods is still very much in its early stages, but there are some quite remarkable things being done.
There’s a lot being done in technology. There are some quite remarkable applications of hand held devices and so on which can increase security and reduce costs…. Perhaps if you look at the full cost of the equipment, particularly at the software and the training, they are not yet economic. But they soon will be.
I think it’s fair to say, which I would have not have said ten years ago, that even in a desperately low-cost, skilled labour economy like India, you could not be running something like Cashpor or SHARE if you had manual accounting. I don’t think it would be possible to do it.
Q: What are the big challenges you think microfinance will be facing in the next decade?
Harper: If we’re speaking of MFIs, as opposed to microfinance, then I hope the major challenge will be the entry of banks. Let’s hope they peacefully remove lots of MFIs from the scene. So that’s a major competitive challenge for MFIs.
For microfinance in general, there are both horizontal and vertical challenges. The main horizontal challenge is to get microfinancial services— mainly savings and insurance, but also remittances and loans—to the vast untouched parts of the country and get out of this grotesque over concentration on the least needy parts of the country—not that there aren’t needy people there. The vertical challenge is to get people beyond the Rs. 5,000 or even Rs. 10,000 loan … and cope with the greater risks that are involved in lending to men, who are more likely if they succeed to go on to form businesses that employ lots of other people who do not want to be selfemployed or run their own businesses.
In short, I think the challenges to microfinance are to make the less poor much less poor, and to reach the hundreds of millions of people who aren’t being reached at all.
Q: To reach these unserved areas will take new MFIs and approaches. What would you say to someone starting his own MFI?
Harper: I would say, don’t try to go into this on your own. Look for partnerships, collaborations, and alliances. For products, think out of the box and don’t think of just starting with loans; focus on insurance and think of legal and secure ways of helping people to save. Don’t necessarily try to build your staff with highly trained and expensive people; try to think of ways of motivating and managing people with much lower qualifications who are much more available and need employment. Focus in a rather narrow area, don’t worry too much about covariant risk, and see if you can really make a difference at a block or city ward level. Don’t think you’ve got to follow the BASIX example of spreading yourself all over India.
Q: Are there other countries we can look to from which we can draw some useful lessons?
Harper: Indonesia is one place to look at. BASIX learned a lot from BRI, particularly in the context of starting our own bank. And some countries in Africa are finding interesting ways of regulating MFIs which enable them to provide a full range of services without compromising the safety of their clients’ money.
… India should look to Bangladesh particularly for some of the research and experiments that are being done by BRAC and others on really reaching the poorest people. I think it’s pretty clear that ‘plain vanilla’ microfinance is not much good for those who are really ‘at the bottom of the pyramid’….
South Africa has other lessons, demonstrating the links between classic consumer finance and microfinance. Lending someone money to buy a motorbike or a refrigerator which may be a tool for business is also microfinance. And of course in IT applications, and the use of ATMs.
In Ghana, lots of interesting things have been done by linking with informal savings collectors… to banks, and formalizing those links for the benefit of banks and their clients.
India can also learn from the mistakes of others. I think one of the reasons for the relative stagnation in Bangladesh is the focus on Grameen method. The Grameen method is very good at helping people far down the poverty scale but it’s not so good at real individual ‘empowerment’, it’s not so good at reaching men, and it’s not so good at enabling people to ‘graduate’. India has something which is beginning to look like a ladder. It probably doesn’t have the bottom rung as they do in Bangladesh, for people who are too poor to benefit from even standard Grameen groups, but India has vary fast-growing standard Grameen groups , and it has SHGs, and then joint liability groups, and it has a massive branch banking network offering individual accounts to people who need and are ready for them..
But people used to say—and I also used to say— that Indians should learn from elsewhere. And I’m hearing lots of people from elsewhere saying now that they can learn from India… which is great.
The Microfinance Gateway would like to thank the Centre for Micro Finance (CMF) at the Institute for Financial Management and Research (IFMR) for collaborating to make this interview available.