Beyond microfinancing


This relatively short article (2000 words) is a simple contribution, detailing some ideas that I discussed in the past in various countries, and recently also to support two pro bono initiatives in US.

The purpose? Share with all of them the same idea- as the value of a development idea is not in creating “the project”, but in executing.

And each execution of an idea, in my humble opinion and experience, has to be tailored to the specific environment where it is applied.

A side-effect of creating development based on micro-financing is that, in the end, it is a fractal economy, as each part could then re-create the same system, without any control or oversight.

You can skip to a specific section, if you prefer.

But I would suggest to read all the article.

Anyway: each section is exactly 250 word long (title included).

The sections:

To think, read just the “conclusions” section.

To implement, read each section, think about your own plan… and then, read my next articles about microfinancing (search for “dev2009”).

The next article will be just 1000 words long, and contain the following sections:
– why culture matters
– coaching, you said?
– creating a market
– an action plan

I plan also to publish a mindmap online: the announce will be on my twitter profile

The conclusions?

Microfinancing requires two layers:

  • an institutional, international layer, to avoid creating a micro-corporate financial neo-colonialism,
  • a market layer,that requires operators able to tailor their offer to each specific market.

Working with the institutions, NGOs, and private foundations, operators will identify the appropriate way to use microfinancing both as an economic activity and a development initiative, resulting in the development of a self-sustaining economic growth.

The risk? That instead of transferring abroad just “maquilladora”, some developing countries will use their newly acquired entrepreneurial skills and economic development social fabric to jumpstart new technologies, bypassing the industrial phase they lack the infrastructure and resources to invest in.

But it is already visible: when mobile phone deliver a communication service and access to markets to villages that never had a landline or TV, they can identify where it makes sense to go and sell their produce,

This is potentially disruptive for the existing market structure, as wholesalers and middlemen will need to compete not only locally with each other, but also with other markets where the villagers could decide to sell their products.

A simple, innocent financial tool could also generate an horizontal social development, that so far was created only in the industrial sector, usually to complement the supply chain (i.e. the “district” approach used in Europe, US, China, etc).

And being a financial link, nothing restrains a village from identifying across the world other villages with the same characteristics, and create “virtual branches”, without even travelling.

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The landscape of microfinance

If you pick up any newspaper or magazine covering economic issues, every month you will find articles about microfinancing.

The idea of microfinancing was to expand the globalization benefits available to developing countries, by changing the way funding is accessible.

The “micro” referred to both the size of the loan and its destination: usually, entrepreneurs or single mothers in developing countries starting a family-owned businesses.

Figures do not lie.

And the picture that is projected, despite the 2006 Nobel peace prize to the Grameen Bank founder, is closer to the old way of managing financial relationships with developing countries, creating what was described already in 1990 in a Museum in Germany as the “spiral of debt”.

Do you think that interest rates above 50% represent an “aid to the development of entrepreneurship”?

You do not need a Ph.D. in mathematical sciences to figure out how long it will take, before the interest exceeds the capital.

If you microfinance new shops or other family businesses, with a low margin, as subject to the pricing of the original supplier, you create a different kind of indentured servitude.

Akin to the one suffered by people who pay shady figures to emigrate illegally, and are debt forever.

Microfinancing was a big promise, but became a big business.

As the professional fence-sitters at “The Economist” wrote in 2008, a safe bet for 2009 was supposed to be microfinancing, with a 95/99% rate of paid loans.

It could be said: a déja-vu.

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Lessons from the past

After WWII, when many developing countries fought, won, received independence, a first issue of the day was the lack of a local social infrastructure for self-administration.

The Old World empires were kept together also by creating disincentives to develop a local ruling class- divide et impera.

An empire (be it private or public) survives thanks to its bureaucracy.

Eventually, each local “branch” (i.e. colony) starts applying rules that are set by the centre, within the centre, for the centre.

Yes, I am paraphrasing the U.S. Constitution- but it is the real point: efficiency and oversight.

When the empires were removed, often most of the key “connectors” in the bureaucracy went away, and no knowledge was left on how to create a bureaucracy.

But the old structures and rules were still in place.

While states went filling the vacuum, somebody more “entrepreneurial” found this power vacuum as a way to obtain a new position- like Mobutu Sese Seko.

And of course corrupting a dictator or few power centres is more efficient than corrupting hundreds of officials.

It is a cynical remark, but do you see any other reason for some infrastructural projects built with “aid”, when it was known from the beginning that there would have been no resources available to maintain and use the infrastructure- or even to train the technicians needed?

Yes, it was more complex, and this is an over-simplification.

But I am focusing only on the background that created the need for microfinancing.

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The economic infrastructure

The net result? Through inefficiency, bribing, corruption, many euphemistically defined “developing” countries assumed debt to pay goods and services that they did not need, or could not use, or to adopt heavy industries producing something that their market could not absorb.

I am never been a “free market loyalist”- I think that the “invisible hand” advocated by Adam Smith is way too often not applying its “hand healing” powers to the market.

But all our check and balances, including those that the IMF and its siblings for a long time imposed on developing countries asking for their support, require a working market economy, and a middle-class that is able to consume goods.

If you lack the basic infrastructure, like roads, or maintenance crews, how do you think that somebody would ever consider buying a car?

And if electricity runs few hours a day, why should you buy a refrigerator?

My friendly fence-sitters who now hail to the developing countries moving onto mobile phones and skipping fixed line communication forget one small issue: landlines require an infrastructure to deploy, support, maintain the landlines, and a reliable and constant supply of electricity.

The financial industry was in no better shape: if you have bouts of hyperinflation, what is the point of having a banking account?

A recent article on Zimbabwe reported that a retiree went to collect his pension funds: the trillions he had are now, in a new US-dollar based economy, worth… few US cents.

So, why microfinancing?

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Financial neo-colonialism

You will not be surprised by the title that I chose for this section.

If you are… it means that you skipped the previous sections.

I have to be frank: for almost a decade, every year I read the IMF World Outlook.

And some other material, such as the CIA World Factbook, and the Bilan du Monde.

It was… interesting, in a twisted way.

But certainly illuminating. And it reminded me an article from the Harvard Business Review.

In the section “The Formalization Edge” of his 1994 Article “The Fall And Rise Of Strategic Planning” H. Mintzberg wrote: “We human beings seem predisposed to formalize our behavior. But we must be careful not to go over the formalization edge”

As H. Mintzberg said in the same article (it is just 9 pages, please do read it: it is still unfortunately true), whatever organization creates a structured approach falls in love with it.

An irrational love, I would say, as instead of collecting information from reality, and then looking in the toolbox which tools should be used, usually the tools are the driver for the selection of the information needed to decide… which further tools are needed.

With the end result that any information that does not fit the selected tool is discarded, as irrelevant.

Even worse: when the usual monitoring phase is carried out, only the signals that fit the framework are considered, as if reality were just a temporary nuisance interfering with a carefully laid out plan.

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A new toolset

Microfinancing is now the “trendy” solution, but often it is eerie to read some articles of institutions structured and geared to manage and monitor long-term, large-scale projects trying to take over microfinancing.

My perception is: after WTO fatigue with the recent rounds, with an increasingly vocal dissent not from professional protesters, but from governments, the WTO risks to become more and more like the MAI (Mutual Agreement on Investment).

If you do not know what I am referring to: it is an old tool, proposed by some international institutions, as a way to regulate international markets.

What’s the catch? Simple: the idea was that, once the MAI had been ratified, unelected officials would have been able to impose sanctions on countries for violating rules created under the MAI.

Some critics say that the WTO is the MAI in a different alphabet soup- actually, the WTO still has the checks and balances that the MAI wanted to dispose of- like parliamentary approvals, and so on.

While the OECD a decade ago created the Guidelines for Multinational Companies, to advise on how to be a good corporate citizen when a MNC set up a branch or work with a developing country, it had limited reach- also because the OECD is still considered a “rich countries club”.

Probably the WTO is the only organization with enough “soft power” to be able to help rule the international financial markets- including the microfinancing jungle.

Jungle? Yes, because no common standards do exist.

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Out of the jungle

I read articles criticizing attempts to mix market economy with local realities, like Acumen fund.

The main line of attack? The lack of a theoretical framework for its activities, what could be called “extreme ad hoc-cracy” (sorry for the neologism).

If you see microfinancing as a tool, you have first to identify its purposes, and the context of your use of the tool: adhoc-cracy rules!

Whenever a tool is provided by a private, for-profit company, it is only natural to assume that the company will try to develop a market, and to control it.

But by definition, microfinancing is tiny (a recent article on “The Economist” reported that Acumen has but 35 USD millions), and therefore it cannot be ignored a potential, future development: the receivers of microfinancing, if the microfinancing entities keep using their ludicrous policies, will eventually develop the skills to bypass them.

It is not rocket science: and also if it were, I am quite confident that the like of Google and the Gates Foundation, or Wolfram, with their technology-orientation, will maybe one day add to their online tools a “microfinancing management” application, allowing any village with access to an Internet connection to create its own virtual institution.

And nothing restrains a successful village from becoming a micro-financier for other villages- worldwide.

It is interesting- but this is akin to creating again the banking system that was available in the village- and town-based economy of my country, but… more than four centuries ago!

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