Bring Microfinance into Politics

MicrofinanceFocus, 7 July 2011

It seems wherever you turn these days, politics is getting into microfinance. In Andhra Pradesh, the state government exercised its prerogative to kill off an entire industry. Next door in Bangladesh, Prime Minister Hasina decided to hound Yunus out of Grameen Bank, no matter the cost. The No Pago (No Pay) movement in Nicaragua counted on the support of the country’s president. What’s the industry to do in the face of such onslaught?

Weathering the Storm identified state intervention as one of the core risks faced by MFIs. It drew its lessons from the case of PADME in Benin, which was effectively nationalized by the government in 2008. At the time, PADME was in the process of transforming from an NGO to a for-profit entity, and the Benin government had made clear from the start that it was not in favor of such a plan. Despite this, PADME’s management and prospective investors had decided to push ahead, thinking that they would be able to parry the government’s attempts to block the process.

They were wrong.A few months before the transformation was to be consummated, the Benin government ordered the removal of PADME’s management and board, and replaced them with its own people. As cover for its actions, the government cited a trumped-up audit it had commissioned a few months earlier that, among other things, cited the use of fraudulent guarantees for its loans. And what was the evidence to support this charge? – a falsified guaranty document from a single “randomly-selected” client who happened to be the auditor’s sister.

The takeover was a de facto nationalization, and it was done in single day. PADME’s management and future investors were dumbfounded. The sudden action with seemingly no warning took them completely unawares. It shouldn’t have. The signs had been there from the start; the suddenness of the move was simply a reflection of the government’s preferred tactic aimed to minimize PADME’s ability to fight back.

Losing by forfeit in Andhra Pradesh

Events in Andhra Pradesh developed somewhat differently from those in Benin, but the Ordinance issued by the AP government had much the same effect – it caught Indian MFIs completely flat footed. As with PADME, it shouldn’t have.

The underlying reason for the Ordinance was an alleged spike in microdebt-induced suicides in the state.To this day, the sole evidence provided for this was a list of 54 suicides compiled by SERP, a government-affiliated organization charged with implementing the Self-Help Group program. And I have no reason to dispute that microcredit had played a role in many, if not all of the cases in the report. Nevertheless, careful readers of the list will note that many of the entries suggest no causation (ex: “Took loan of 14000 and Swallowed pesticide and died.”) Similarly, does “Killed by husband because of fued about the MFI loans repayment” constitute fault on the part of the MFI? Maybe, maybe not – clearly more evidence is needed.None was ever produced.

The 54 suicides over the course of four months from July-October 2010 represent 1.1% of total suicides in Andhra Pradesh, at a time when the MFIs were reaching 11% of the state’s rural households. Moreover, during the period of rapid growth in MFI activity in the state (2007-09), the suicide rate actually decreased, from 12.1 to 11.4 per 100,000. None of this indicates any kind of microfinance-induced spike.

In fact, there has been no evidence to suggest correlation between microfinance and suicides, any more than there is for other forms of debt (small business loans, consumer lending, informal moneylending).After all, like love and in-laws, debt is a form of stress that will be a contributing factor in some suicides. This is an avoidable fact that is as true in India as it is in any other country. That is not to suggest that MFIs can be absolved of responsibility either. I have written extensively about the sector’s wanton approach to lending, which all but ignored clients’ capacity to repay, and which may well have contributed to increasing the stress-levels of the clients. And heavy-handed collection tactics didn’t help either. Nevertheless, a litany of poor business practices is not sufficient to prove charges of abetting suicide.

But the state government wasn’t looking for proof. Suicides were not the driving the reason for its action. As in the case of Benin, the authorities in Andhra Pradesh had for a long time harbored suspicion of MFIs that were eating into their SHG business. And something in the summer of 2010 gave it the opportunity to act. That something was not a spike in suicides, but the SKS IPO, whose large profits created a strong backlash from an important segment of Indian politics.

The IPO took place in late July. By David Roodman’s account, the first TV stories about suicides appeared on local AP channels in spring 2010, and then intensified again in July/August. At least some of these channels happened to be under the control of local politicians. By the same coincidence, the AP stories began to surface at the very time when the SKS IPO was announced in March 2010, and intensified when the IPO was held in late July.

Given the inherently interesting story in the juxtaposition of the IPO and the suicides, the matter was quickly picked up by the national media. The subsequent firestorm was the equivalent of a flash flood – within two months, it had turned the sector’s reputation on its head, from anti-poverty warriors to bloodsuckers of the poor. And that newly-acquired reputation was critical to providing the AP government political cover for its Ordinance, issued in mid-October.

It is a complex tale with many links, but the suicide stories in the AP media, the timing with the SKS IPO, the list of suicides released to suggest one link in particular – these are all the hallmarks of a masterfully executed political maneuver.

And what was the MFIs’ action in response? There was none. Faced with the media onslaught, MFIs stuck their heads in the sand. In the case of Spandana, the largest MFI in the state, the act was literal – it shut off all communication with media, including bringing down its website for three crucial weeks in October.What textbook on crisis management were they following? Yet they were not the only ones. To charges that it had caused several of the suicides, all SKS was able to offer up was a short response stating that none of the suicide borrowers were in default. Apparently, SKS thought that fending off questions about the firing of its CEO should take priority – a case of colossally bad judgment. And these were the two leading MFIs in India.

Through their non-response, Indian MFIs committed the first sin of political gamesmanship – they allowed themselves to be defined entirely by their opponents. The sole voice heard from the MFIs came from a few brave appearances by Vijay Mahajan and a small coterie of others, and even they failed to provide any real counter-narrative.

Did the MFIs immediately hire a highly reputable, impartial organization to investigate the charges that their loans were causing suicides? No. Was there any attempt to highlight some of the wildly-off-the-mark charges being made by party-owned papers and bring to light the hack job these outfits were engaged in? No. And what about the positive side of microfinance and individual well-being? Was it really so hard for the MFIs to highlight stories where their services helped provide funds for critically-needed health care, to use just one example?

Even here at Microfinance Focus, we repeatedly asked leading MFIs individually and via their microfinance network to provide support for an investigation into some of the less believable allegations of suicides.There was no response. Likewise, when we got hold of SERP’s list of suicides, we decided to share it with several MFIs, delaying publication for two days to give them time to get their response ready. And what was the response? Silence. The Indian MFIs had no media strategy to speak of, or if they did, it was disastrously misguided.

The Difficulty of Being Yunus

Over in Bangladesh, the nature of government interference shares many similarities with Andhra Pradesh.Like her counterparts in Benin and AP, Prime Minister Hasina waited for the right opportunity to carry out her vendetta against Yunus. And the opportunity manifested itself with the release of a hack documentaryby a Norwegian filmmaker.

Watching from the distance, Yunus and his supporters’ strategy in dealing with Hasina’s attempt to oust him appears correct. They made sure that Hasina faced heavy pressure from the international community and senior US diplomats to drop the campaign against Yunus. It is conceivable that the efforts may have simply forced Hasina to dig her deals in deeper, but one presumes that she was offered some face-saving means to back down.

The fact that Hasina proved willing to undermine investor confidence in Bangladesh in order to carry out a personal vendetta against Yunus speaks volumes about her lack of fitness as a head of state. But Hasina is who Hasina is. The roots of her vendetta go back to 2007, when Yunus sought to launch his own political party. It goes without saying that Bangladesh could use new faces in its politics, and Yunus is a good place to start. And unlike many others, including his counterparts in India, Yunus had enough political savvy to know that his political venture would arouse the ire of the government.

The question is why, given this knowledge, Yunus nevertheless chose to remain at the helm of Grameen Bank? Why did he not turn the reigns over to someone else, and delve into politics as an independent individual? Only Yunus himself knows the answer.

Onward into Politics

It would seem contradictory to recommend greater engagement in politics after suggesting that microfinance and politics should be kept apart. But the contradiction is only on the surface. Political engagement comes in many forms. Backing one political force while antagonizing another is not good policy for business enterprises, as Yunus was recently reminded. But playing ostrich while one’s sector is drawn and quartered in the media is also not the answer.

Microfinance has grown up. It is too large an industry and touches too many people to have its public relations departments headed by second tier executives who get second tier treatment from the media and the politicians they are charged with lobbying. Then again, the vast majority of MFIs – including large ones – don’t even have a public relations office to speak of.

Large MFIs should be on first-name basis with journalists in every major publication, whether on a local or national level. They should be known and seen regularly by senior politicians of all major parties. They should have their eyes trained on the political landscape to see obstacles ahead, and have ears pressed to the ground to pick up stirrings of discontent below. Most importantly, they should heed the warnings that they pick up.

The managers and investors in PADME paid dearly for their hubris. Transformation may have been an important business objective, but it certainly wasn’t worth the cost of nationalization. A more accommodating approach with government officials, perhaps an offer of a board seat or an equity stake, could well have proven a better path.

In Andhra Pradesh, not only should the MFIs have reacted to the media war once it was out in the open, but they should have had the political savvy to avert the conflict beforehand. And if pressure from AP government turned out to be unavoidable, then the MFIs should have pre-empted the state government by seeking out national regulations. After all, such regulations could have been crafted with the MFIs at the table as opposed to on the dock, as proved to be the case in the end. The sector had four years since the politically-inspired Krishna crisis to get this done.

As for Yunus, it would have helped if he had remembered the first rule of microfinance and politics: don’t mix the two. If Yunus had separated himself from Grameen, he would have helped insulate the institution from Hasina’s wrath. Instead, the father of microfinance seems to have forgotten that parents are supposed to let their children go when they grow up. By failing to do so, he tied Grameen’s fate to his own.

It is time for MFIs to recognize that political reality may at times be at odds with their own objectives. When that happens, they may have several responses – accommodation, recalibration, or assertive opposition, depending on context. Those who choose right will prosper, those who choose wrong will suffer, but those who choose to ignore political reality altogether will earn their comeuppance.

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