Mainstreaming Microfinance: How Lending to the Poor Began, Grew, and came of Age in Bolivia by Elizabeth Rhyne, Kumarian Press, 2001

Review written by Richard Rosenberg

Beth Rhyne's book on Bolivian microfinance is an event to be celebrated. I can't produce a fair review of it that doesn't sound more like advertising copy than critique. Just as Stuart Rutherford's The Poor and Their Money was the best description of finance from the vantage of the poor customer, Rhyne's Bolivia book is the best treatment I have ever seen of the national development of successful microfinance, both institutions and industry.

At first blush, Bolivian microfinance, with its 350,000 active loans, looks like small stuff in comparison with the Asian scene, for instance in Bangladesh where outstanding microloans number 8-9 million. But when population size and density are factored in, microfinance's market penetration seems about as impressive in Bolivia as it does in Bangladesh. Large portions of the microcredit market in both countries are now saturated, indeed oversupplied.

In her introduction, Rhyne promises that the reader will be interested in the Bolivian story because (1) it offers important lessons on how good microfinance institutions (MFIs) and a microfinance industry are built, (2) it provides a textbook example of the "financial systems" approach to microfinance with all its strengths and weaknesses, and (3) it illustrates for other countries the problems they will have to deal with when a competitive microfinance industry emerges. The rest of the book makes good on this promise. One discovers not only powerful analysis but also an engaging narrative. (I took Rhyne's book and two good novels on my latest transatlantic flight. I never got around to the novels.)

After situating the Bolivian approach in the context of microfinance worldwide, Rhyne emulates Homer by beginning her story in medias res, with a look at Bolivian microfinance in 1999. With graphic sketches of customers, towns, and institutions, along with a judicious sprinkling of statistics, she delivers a richly-textured portrait of the state of the movement. While she makes no secret of her sympathy with the financial systems approach to microfinance and her admiration for the Bolivian MFIs, Rhyne is scrupulously fair in laying out not only the bright side, including breadth of outreach, relative independence from donors, improving efficiency and lower costs to clients as a result of the competition among a variety of sustainable institutions, but also the less successful aspects of Bolivian microfinance, such as its limited success so far in reaching very poor and rural clients, overindebtness of clients produced by irresponsible competition, and the vulnerability of the MFIs in the face of an economic depression (today, more than a year after Rhyne collected her data, it is still not entirely clear which institutions will survive and which will not).

Rhyne then faces backward to tell how and why Bolivian microfinance got where it is. In 1985 radical financial reforms finally stopped Bolivia's economic free fall and controlled its astronomical inflation. But the devastated formal economy could employ only a minority of the country's labor force. Rhyne shows how the ensuing economic liberalization made microfinance possible, and argues that by supporting the growth of the informal sector, the MFIs mitigated the pains of the adjustment process and gave the government more breathing room to implement its new economic policies.

The heart of the book is the human tale of the individuals and groups who built Bolivia's MFIs. Prodem, the first NGO to achieve scale and sustainability, and the parent of BancoSol, grew out of a fascinating partnership between an international NGO (ACCION), a board that included some of Bolivia's most powerful business barons, and an operating team of leftist activists led by the amazing Pancho Otero (whose sister, incidentally is now president of ACCION International and two of whose cousins built competing MFIs). Caja los Andes, which recently won the InterAmerican Development Bank's award for the best MFI in its hemisphere, was built and run by the German consulting group IPC for six years before management was placed squarely in Bolivian hands; this approach may not have been a model of political correctness, but it produced a very good Bolivian MFI. Also included are MFIs like FIE that avoided foreign involvement as a matter of principle, others like ProMujer that dedicated themselves to poorer customers, and Prodem's second incarnation as an innovative rural lender after it spun off its urban operations to BancoSol.

Rhyne then tells the story of the NGOs that transformed into licensed banks or finance companies, as well as the commercially-motivated consumer lenders who entered the market, pushed loans promiscuously with little regard for the client's repayment capacity, lost amounts of money that are amazing for a market as small as Bolivia, and left behind a legacy of defaulted clients and rising delinquency in the traditional MFIs. By unholy coincidence, this situation was complicated by a general depression whose end is not yet in sight, trade policies particularly inimical to microentrepreneurs, and a credit information bureau that had not yet begun to function effectively as a brake on multiple indebtedness and repeat defaults. It's a pity Rhyne can't tell us the outcome of this turn in the story, but who knows how long she would have had to wait to do so?

Along the way, Rhyne uses her broad international experience in drawing strong general inferences out of the particulars of the Bolivian story-for instance, the immense power of a great MFI's demonstration effect, the problems of corporate culture that transforming NGOs face, or an oft-disregarded recipe for building good MFIs.

Rhyne makes thorough use of the existing literature, as is evident in the extensive notes and bibliography. But much of the story she tells has not been documented before. I lived and worked in Bolivia from 1990-1994, and can testify the she has gotten almost everything about those four years right, so I assume that the rest of her account is equally accurate.

Rhyne does not prescribe the Bolivian approach for everyone. In particular she recognizes that there are situations where it is neither attractive nor sensible for MFIs to tie themselves into a country's weak "financial mainstream." (Could she have Bangladesh in mind?)

If only to save my self-respect as a reviewer, I had to find minor quibbles with a couple of Rhyne's emphases. She describes some of the drawbacks of the transformation model, but I would like to have seen a fuller development of this issue. Prodem and its Canadian advisor Calmeadow were smart enough to create a separate unit to handle two burdensome years of negotiating a banking license and the entry of new shareholders. Much of this work was handled by a capable Canadian banker. Thus, Prodem's line management was not excessively distracted from the task of running their business. Few other transforming MFIs have been able to do this, with the result that management often has little time for its core business just at a point where that business is likely to be facing serious growing pains. Furthermore, the transforming NGO is forced to develop a whole new range of banking skills that may not interest its original staff very much. Hiring those skills from the outside exacerbates the clash of cultures that Rhyne describes. One hears more than one manager of a transformed MFI say that if s/he had known in advance all the problems of transformation and licensing, the decision about doing it might have been different.

A possible alternative that deserves more exploration than it got in Bolivia is an alliance where the NGO keeps its separate identity and legal form, operates as a manager of microfinance portfolio for an existing bank, and retains full control over the placement and collection of that portfolio as long as it meets repayment and profitability targets that are easy to set and measure. Great MFIs are usually created by people who enjoy operating independently at the top of the pyramid. Such people, as Rhyne notes, are not as open as they might be to alliances. A notable exception is the management of Compartamos in Mexico: even though their newly-licensed finance company is a rousing success, they are aggressively pursuing linkage with a large commercial bank and its branch infrastructure because they "don't want to wait fifteen years to reach [their] original target of serving a million women." ACCION is setting up a similar arrangement with a Haitian bank.

Rhyne's book includes a good discussion of the tensions between profitability and reaching poorer customers. She cites two studies finding that the increase over the years in loan sizes of the Bolivian MFIs was driven more by client growth than by "mission drift." I am not entirely convinced of that conclusion. As Rhyne recognizes, MFIs in a fully competitive environment will no longer be able to cross-subsidize their smaller loans, because competitors who are not cross-subsidizing will be able to snap up the larger customers by offering lower interest rates. Thus, MFIs will inexorably be driven to larger loans that cost little more to deliver but yield much higher income. As competition intensifies in any segment of the market, a drift toward bigger borrowers will become a matter of survival, whatever the MFI's philosophy.

However, this grim analysis assumes that the MFI's fees and interest are charged as a constant percentage of the loan amount, as is the case almost universally. But suppose the MFI calculates its administrative cost per loan (300 bolivianos, for example) and charges this flat amount to every customer regardless of loan size, along with an interest rate in percentage terms that covers its cost of funds and loan losses. With such a pricing structure, big loans are no more profitable than small ones, so the MFI can welcome the small borrower as warmly as the large one. Of course, this pricing structure will produce high effective interest rates for the smallest borrowers, but haven't MFIs been telling the world for years that they need higher interest yields to serve smaller borrowers, and that without those higher yields many customers will simply be excluded from access to formal credit? A few MFIs around the world are beginning to move in this direction, but unfortunately the political backlash from over-indebted borrowers makes it a difficult to experiment with such a pricing structure in Bolivia right now.

Having done with minor quibbles, it's time to return to the big picture. Mainstreaming Microfinance belongs on the very short list of microfinance classics, and not just because of the information and insight conveyed. It has aesthetic appeal as well: I found it a great pleasure to watch a powerful mind distill meaning out of a complicated history in clean, vivid, and graceful prose. Congratulations to Maria Otero of ACCION and Martin Connell of Calmeadow for conceiving the book and recruiting its author, and to Nancy Truitt of the Tinker Foundation for having funded it.

Don't miss this book, whether your interest is microfinance, or the broader issues of development finance, or the grand themes of economic development.

Mainstreaming Microfinance is available at $25.95 (paperback) and $60.00 (hardcover) directly from publisher:
Kumarian Press,
1294 Blue Hills Avenue, Bloomfield CT
06002, USA
Telephone orders +1 (800) 289-2664 Fax +1 (860) 243-2867
Email GBenthamKPBooks@aol.com
Website http://www.kpbooks.com/details.asp?title=Mainstreaming+Microfinance

Notes:

1. Bangladesh: Bangladesh has over 130 million people, while Bolivia has only 8 million, of whom a substantial part live in rural areas so remote or thinly-settled that sustainable microfinance is not feasible. By contrast, in many parts of rural Bangladesh, there are more potential microborrowers per square kilometer than there are in the middle of La Paz

2. Astronomical: "Hyper-" seems too pale an adjective for inflation that peaked at an annualized rate of 24,000 percent.

3. New economic policies: One ironic aspect of Bolivia's neo-liberal adjustment is the fact that the three governments who implemented it were led by parties of radical leftist origin, both of which title themselves as a "Revolutionary Movement."

4. Oft-disregarded recipe: Rhyne's recipe includes outstanding and if possible experienced management; governance by people who are not only influential but also committed because their money or their reputations are at risk; and finally a strong source of technical know-how, because common sense is not enough to produce good microfinance.