> Posted by Danielle Donza
Four days after taking on David Roodman in DC, Dr. Milford Bateman travelled north where the Boston Microfinance Club invited him to debate Dr. Guy Stuart, an independent consultant and Senior Advisor at Microfinance Opportunities. The point that resonated most with me was this question: Maybe consumer goods aren’t such a bad thing.
Milford made the argument that many microfinance loans are being used for consumption, say a TV, which immediately made me cringe. Consumption often has a bad name as an unproductive use of funds.
But then Guy jumped in and unpacked consumption for us. Yes, there is consumption in the form of alcohol, cigarettes and gambling, and we can all agree that is not a desirable use of microfinance loans. Yet, Guy, who has done countless financial diaries with microfinance clients, points out that money is fungible. So, if a client uses some of loan to buy a consumer good, such as a TV, and uses some of the loan to improve her business, as long as she is able to pay off the loan with interest, then who’s to say consumption is such a bad thing? That TV has now provided the client with 1. A source of information/education, 2. Status in the community, 3. An asset, and 4. Improved quality of life.
The moderator, Professor Kim Wilson of the Fletcher School, concurred that we need to stop putting moral judgment on clients’ use of funds. If clients think it is important to buy a TV to watch Bollywood films, well, then, that is an improvement in their quality of life and not something the microfinance industry should deem wrong, especially as we huddle around our own TVs at night to watch American Idol.
Image credit: Milford
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February 8, 2012 at 11:49 am
Sergio Guzmán
Dear Danielle, thanks for your interesting blog. I too cringe when I hear about consumer loans but ultimately I agree, who are we to tell clients what to do and what not to do with their money.
However, I do believe that we must be a careful to distinguish between consumer loans and loans for productive assets. A TV for instance might be a consumer loan if used in one’s home, but if a client purchases a TV for their business so more patrons can watch soccer games and therefore increase consumption in the establishment, it can actually be a revenue-generating activity.
Of course, drawing the line somewhere, anywhere, is difficult. Especially because ultimately it is the client who has control of where they spend the money they borrow.
February 8, 2012 at 3:38 pm
Danielle Donza
Thank you for your comment Sergio. You make an excellent point, and the distinction between using funds for consumer goods and productive assets can often be a fuzzy line. The same could be said for other items such a refrigerator or moped, which could be used as productive assets for businesses, or could be used more for “consumption” or “convenience” purposes. Therefore, I think it is important to destigmatize the word consumption and recognize that buying consumer goods doesn’t always equate to an unproductive use of funds.
February 8, 2012 at 6:05 pm
Milford Bateman
Hi Danielle
Just to be clear, in case I was not clear enough at the debate, I don’t have a moral problem with consumption spending. My reservations are that,
1). it will cost a lot in interest payment to service a microloan to buy a TV or something similar, so we need to discuss this issue too, but generally we don’t. But what are the poor giving up to service an expensive microloan to buy their TV? Do the poor have sufficient income to service these microloans or will they end up deep debt? Will the understandable desire to have some pleasure in a generally otherwise difficult life not mean the poor are actually made worse off over the longer-run? These are important questions to ask if we are REALLY concerned with sustainably improving the lives of the poor.
2). There are much much better ways to facilitate the purchase of a TV than going to your local microfinance provider typically charging 30-50% interest rates (in Mexico up to 195% as in the case of Compartamos). Going to your local credit union (or starting one) would be a much better bet, but this option is almost never raised by the development industry for a number of obvious reasons, including ideological ones (credit unions are about using our collective capabilities, not individual ones).
3), Microfinance got its start by being all about promoting income-generating micro-businesses, which is assumed (wrongly, in my opinion, but thats another issue) to be a productive use of financial resources. If it mainly no longer does this, as most of us now accept, then please lets stop talking about microfinance/microcredit as development or poverty reduction policy, and lets talk about what real development policies are, how to implement them, etc, etc. Microfinance has morphed into a form of pay-day lending-lite, with MFIs simply servicing the poor and helping them buy whatever they want with the principal aim of making as large a profit as possible. Lets recognise microfinance for what it now is.
Milford
February 9, 2012 at 12:16 pm
Holly Padgett
Danielle:
Great post! I think it raises a lot of important questions about what responsibility the lender/MFI has to the person getting the loan. To me, it seems that to an extent MFIs do have a duty to their clients to make sure loans are being used in the best way possible. Then again, I agree with you that we really have to be careful to not judge people based on their idea of a “good quality of life”.
Milford:
I would be interested in knowing what you think the “real development policies” are. Have you done any writing on these that you can direct me too?
February 9, 2012 at 12:20 pm
Julie Shea
Danielle: Thanks for your insightful post. I too attended the event last Thursday, and found the question of consumer loans to be an interesting one. As follow up to Milford’s points, I wanted to raise the following ideas/questions:
1. While this is an interesting point, it still passes judgment on what people decide to spend their money on. Following this logic, the way to development is telling people what they can and can’t spend money on (rather than treating them as rational beings that can determine how they value goods and purchasing accordingly). Also, Danielle was specifically referring to cases in which people do pay back and don’t become over indebted.
2. If TVs are made available to people, and they can obtain them at a price they are willing to pay (or with a loan whose conditions they agree to), they are going to do just that. In the absence of MFIs, they would go to moneylenders (if they valued the good at the price/conditions the moneylender was offering). In terms of collective versus individual capabilities – isn’t the microfinance movement based on the power of the group and group loans?
3. I’m not convinced that you can base an argument against microfinance on the fact that it hasn’t turned out precisely as people expected. One thing history has shown us is that development interventions often don’t turn out exactly as people expect them to. That microfinance advocates are so dedicated to improving the way in which they serve the poor (even if that means shifting course) is merely a sign of an industry that is open and transparent.
February 9, 2012 at 8:01 pm
Daniel Rozas
Danielle — this is a really excellent post, and gets at some fundamental issues in microfinance. Personally, I have very real concerns about socially-motivated MFIs doing consumer lending. High-interest loans is not the way to pay for rapidly depreciating assets that have no particular urgency and do not bring income or increase productivity. In that category I’d certainly place TVs (except in the case of a bar owner and the like, per Sergio’s point), fancy clothes, wedding celebrations, and so on. The economics simply don’t work. In essence you’re paying a very high price (interest) out of no other reason than impatience. There’s a way to pay for such items — through savings and layaway plans. Not credit. It pays for us to learn a bit from our thrifty elders, who know a thing or two about deferred gratification (something I wrote about a while back: http://financialaccess.org/node/3773)
That doesn’t mean I would not advocate for MFIs to police how borrowers spend their loan proceeds. That’s a fool’s errand that encourages borrowers to lie — a decidedly bad thing in a relationship based on trust. Nevertheless, MFIs should make an effort to generally be aware of how their loans are spent, and when those consumer numbers start rising, MFIs need to respond — modify eligibility criteria and loan terms, modify marketing materials, promote appropriate savings products, and so on.
All that said, we need to be clear that not all consumer lending is alike. Far too often, spending on urgent health care, education, and housing gets lumped under “consumer” (i.e. not “microenterprise”). Certainly, a basic motorbike, food, and fuel would be treated as consumer items. But all of these meet the criteria of critical survival needs (food, fuel, urgent health care), or are long-term assets (house) or productive assets (motorbike). For such items, credit is very often the economically optimal solution.
Consumer loans open up quite a Pandora’s box, but what we find inside may not be quite what we expected. It pays to rethink consumer credit.