Original article in Dinero Magazine by Salamon Raydan:
In 2006 Mohammad Yunnus won the Nobel Peace Prize for his proposal to create a “Bank of the Poor.” However, at the end of 2018, the economist acknowledged that his work has not had the impact he expected.
In an interview with the portal Quartz, he shared: “After 42 years, our work continues to be on the margins, microcredit is still a matter for NGOs, a footnote for the financial sector.” I met Professor Yunnus many years ago in Spain at a conference on microcredit, to which the CODESPA Foundation invited me. After his talk, I had the audacity to suggest that I thought that saving – instead of credit – was the fundamental need of the most vulnerable families. I hoped he would make an effort to promote savings as a key element in the reduction of poverty.
However, micro-credit was the “star of the dance” and neither the professor nor the supporters around him questioned the fashion trend.
For nearly my entire career, I have advocated that “microcredit is a historical error”; a costly mistake, which led to billions of dollars promoting credit over the past 40 years. The true impact and opportunity is to promote savings.
Many studies have concluded that microcredit has had little or no effect on poverty reduction, and now Yunnus himself openly recognizes the marginal nature of its impact.
In order to amend this historic mess, the Nobel Prize winner now proposes “a financial system for the rich and another for the poor.” However, I think the origin of the problem remains the same: to believe that credit is the fundamental financial need of poor families.
Sometimes I tried to explain the error by saying that when Yunnus offered credit to the people of Jobra (Bangladesh, where he started his program), if he would have walked a few more blocks, he would had found that the people were already using a universally common savings and credit mechanism in vulnerable communities. To put it symbolically, “Yunnus stayed on credit and did not walk towards saving.”
These mechanisms are known by many names: Tandas in Mexico, Susuo or Tontines in some African and European countries, Pasanakus in Bolivia, Juntas in Paraguay, SAN in the Caribbean, Mutuelles in France, Chit Funds in Asia, etc. In the academic world they are known as Rotating Credit and Savings Associations ROSCAs.
If we had directed just a fraction of the investment in microcredit towards generating efficient savings mechanisms, I firmly believe our impact on poverty would have been much greater.
Yunnus makes another lamentable and costly mistake in his proposal: he approaches banking as an inclusion strategy. In the article that we quote, Yunnus says that “the word inclusion is suspicious” because it refers to the practice of incorporating the poor into traditional banks and that has been a mistake, since you can’t use the same rich people’s banks for the poor.
Confusing banking with inclusion remains a very common mistake, especially among academics and technocrats. To financially include people, it is not necessary to have them use a bank.
In our book “The Other Microfinance” published in 2011, we proposed a different and complementary strategy to expand financial services to the poorest, not based on banking, but on a much simpler idea: improve the existing informal financial mechanisms.
Some studies in Latin America show that, despite the years of banking and the billions of dollars spent, most people still use the informal associative mechanisms to access savings and credit. Not all informal mechanisms are “perverse” and exploit users. In Latin America, for example, only 3% of loans come from so-called “lenders” (loan-sharks), while more than 12% of the population uses informal associative savings and credit mechanisms. As we pointed out in “The Other Microfinance”, many of these informal associative mechanisms are poorly designed and risky, but if we improve them, they can be a very powerful strategy for inclusion and financial education.
The effort of banking has been long and costly, and although there have been advances, this has been marginal, as Yunnus recognizes.
Financial inclusion (which is not the same as banking) should be a progressive strategy, which involves recognizing and understanding the cultural and emotional elements of the excluded population. In this process, different strategies must be used. One of them must be to improve, formalize and expand the informal financial practices that respond to the real needs of that excluded population. Part of the popularity of these existing approaches is that they respect and value important cultural and emotional elements such as local association, personal decision making, and community building.