Comfortably Poor

Imagine a group of people that had milked the poorest of the poor women on the planet of 4 million dollars in five years. Imagine also that this group had intercepted five million dollars in aid money intended to help bring these women out of poverty. Imagine that they spent spent on personal salaries. They also required many of the women in poor villages to pay them just to get the money their friends and relatives abroad had sent them. Images of “Baby Doc” Duvalier, Idi Amin or some other heinous thug probably come to mind. The images of a smiling loving catholic priest and a woman who is regularly referred to as a saint are about the last things that would come to mind. Yet this is exactly what has happened with the Fonkose Microfinance Bank in Haiti.

The Fonkose bank is not some pariah in the microfinance world—it is one of their shining stars. It is award winning and lifted up as an example for others follow. It is one of the best Microfinance has to offer . It gained “street credibility” when one of its founders murdered by thugs who objected to the good works of the foundation. It probably does not get any better than Foncoze in the microfinance world. They have 120,000 depositors and nearly 44,000 current loan recipients who have an average loan of $210. The interest they pay on that loan is $46 per year—a nominal rate of 22% per year. The daily wage in Haiti is 70-80 gourdes or about $2.00. Thus the women are paying about 20 days per year of labor in debt financing.

As a notable aside, Fonkose lost 1.5 million dollars in 2006 on an operating budget of 4.2 million dollars. They lost $800,000 in 2005. They overcome these losses by increasing the client base and with foreign donations. The losses appear to be related to the client base. As they expand further their losses will likely mount? The underlying economics are not good. The economics sustainability of the model is built on a ponzi scheme. That is, the organization will expand until the fertile fields of new customers run dry. The organization’s income is only sustained by a rapidly increasing client base and external donations. Once that expansion of the client base slows down, the bank will collapse.

This all be worth it if they were—in the end– lifting these women out of poverty at an amazing rate. Yet their own assessment showed that:

“The data do not show any pattern of a change in extreme poverty rates across the credit cycles: there is no clear relationship between poverty likelihood and length of time clients have been participating in the Fonkoze program.” Fuller 2006.

These are really good people with the best of intentions. Yet after 10 years they have no stories of real wealth generated. They have no women-run operations with 200 happy employees. Their success stories are a few shanti stores in the villages. There is the mother who can now afford the school fees. While wonderful stories, they are no road out of poverty.

So how do really good people end up heading down a seemingly endless path of greater and greater burdens on those they sought to help? It starts with a really nice story about a Bangladeshi Professor named Mohamed Yunis who received the Nobel Peace Prize for his work on spreading the grameen bank concept of small scale finance throughout the world. It was wonderful. Women sitting in a circle joining hands to throw of the yokes of their economic and social oppressors. The story was intoxicating. The women would all pitch in 100 dollars to create a 3000 pot. They would borrow in turn from the pot to start new businesses. They would pay back the loan with interest and the pot would grow and grow. Eventually there would be enough to buy a sewing machine or a tractor…and then another tractor and so forth and so on. But the simple Grameen system of Prof. Yunis was not yanking the poor up by their bootstraps, it was helping out a little bit a corner store here and jewelry shop there, but the basic conditions in the villages had not changed in a decade. Yet the concept of grameen banks has reached a sacred status in the world of development funding.

Thus the newer better Grameen was born and its name is microfinance. More instruments, better assets, and more bankable customers. Fabulous. There is the picture of smiling woman who has taken a few small loans and I now building a new house, sending her children to school, and running a successful business all from the few small loans made by the micro financial institution. Fantastic, but scratch the surface a little and the metal is rotten and the gold flake is iron pyrite. The house was built with funds from a government development scheme, the school is run by a church, and the small business has family contacts and earns little more than the minimum wage. Scratch a little deeper and the scene becomes even uglier. The loans come at high interest, have massive overheads, and the interest income is going into heavy salaries—not the pockets of the “client/partners”.

So why am I writing this after spending nearly a decade thinking that microfinance is a pretty good idea? Let me call it Elzabeth’s complaint. During a recent discussion on self help banks, a student in a peace and justice in India course kept arguing that Grameen banks simply did not make sense. The proponents of the banks continued to argue how the women put in their own money and then paid back those loans with interest—on the order of 24%. That the amounts these banks were worth would climb quickly from the starting amount to 30,000 or so in just 18-24 months. That these women were being lifted out of poverty by these wonderful money pumps. The student, who is a little Pollyannaish by nature, would not be dissuaded. She kept insisting that if incomes were not raised by the bank, then it was simply the women’s own money that was now being accounted for in a different locations—it had moved from the envelope under the mattress to the grameen bank—no real wealth had been generated.

Then the speaker showed a picture of a small computer assembly business that was being staffed by one of the women’s groups involved in the grameen bank. The follow up question was, “Did the grameen bank actually set up the computer assembly business on their own?” The answer was “no”. It was set up by an NGO staff member who had gotten a loan to start the business in the women’s name. He has set up the training and was currently managing the books, contracts, and marketing.

She is one of those new American women who thinks she can do it all by herself. So the idea that she would need 20-30 other women, a coordinator, an NGO and a government employee (probably male), to help her invest was truly not a part of her worldview. Was it her objection to the apparent patriarchy in Grameen banks or was she just correct in that the women would be better off investing in the bank where interest paid would be external to her and to her community? In these situations it is common to turn up the volume on the argument, but it is probably better to do the math (it is pretty easy math on the My Dear Aunt Sally level).

So I begin with a mythical village woman—let’s call her Thangam Laxshmi. Laxshmi joins the bank and invests 100 rupees. Each year she borrows the hundred rupees back and pays it off in full. So the bank has 124 Laxshmi rupees at the end of year 1. She continues to do the same every year for a decade. Her investment looks a little like this:

So Laxshmi is the perfect little Grameen banker (diminution intended). Her initial investment has paid off handsomely. Or has it? From an income standpoint she paid 100 in year one and 24 per year after that. If she could afford the 100 and then the 24 per year thereafter from current income level, then she could afford to invest 100 in year one and 24 per year thereafter. What would it look like if she put that in a commercial bank at interest.

At the end of a decade Laxshmi would have been better off by a factor of 2 in twenty years by a factor of three. And this is under the case where the grameen clients get to keep all of the loan repayment. When the NGO running the microfinance institution is taking any share, but particularly the lion’s, she will be far worse off. So Elizabeth’s complaint is a good one. People earning two dollars a day simply cannot afford to borrow money at interest to start a business that pays them two dollars a day or less.

Postscript: My apologies to the fine people at Fonkoze who appear to have hearts of gold for using them as an example. It could have been any other microfinance institution. I chose them because they are one of the best both in mission and morality.

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