“To teach, or not to teach” is increasingly the question in the nascent but rapidly expanding microfinance industry. Each microfinance bank must decide whether it wants to offer free business training/education/consulting to its borrowers. While the exact business model varies by bank and by region, microfinance banks generally make small, unsecured loans to poor people to enable them to start (or expand) their own businesses. The capitalistic undertones, empowerment of the underserved individuals, and solid financial results have made microfinance a darling of the development community in recent years. Industry leaders have been split, however, on the importance of providing free business training along with each loan.
As a practitioner in the industry (I work at a private equity fund that purchases and manages microfinance banks around the world), I have spent not a small amount of time spinning my proverbial wheels on this question. My initial reaction, as an unfettered, starry-eyed believer in the power of education, is that education is good and the more the better. But upon further reflection and study, I have found this proclivity challenged.
First, I should clarify what I mean by “business training” and “education”. All (good) microfinance loan officers do a fair amount of hands-on training as part of the credit approval and monitoring process. This tends to include covering basic accounting/bookkeeping and assessing the borrower’s business concept. Additionally, and perhaps more importantly, where the bank’s lending model is focused on groups (one large loan given to a group of 6-12 people who have joint liability for the total sum and meet once every week or two), the group serves as a valuable sounding board and learning tool for each of its members. The business training that is being debated is in addition to this; it aims to give potential entrepreneurs ideas about what types of businesses they could start and/or directs existing ones about how they can grow or change.
While on the surface, this seems like a great idea, it also suggests a certain hubris or arrogance on our part. Who are we to tell a small-scale entrepreneur in Cambodia what he or she should make, sell, plant, or distribute? It raises the question of what that capitalistic spirit we love so much really means – is it something inherent in each of us or does it have to be taught? The inventiveness and brilliance exhibited by many of the entrepreneurs, without any help from “us” other than enabling through passive capital, is a humbling thing. Who knows the local markets and local customers better than the locals themselves?
Many of the behemoths in the industry, from Mohammud Yunnus of Grameen, to Vickram Akula of SKS in India, to Compartamos in Mexico, have resisted the lure of suggesting what their clients should do with their loans. What if the idea provided fails and the client defaults? Is the client really to blame if it came from the bank’s own educator?
Furthermore, providing free education is a considerable expense that a bank could be putting towards underwriting more loans or reducing the interest rates it charges its customers. At its core, a bank’s core competence should be analyzing and pricing credit; I believe it provides its most precious, long-term public good by being the best allocator of capital it can be.
I’m not implying that education isn’t critically important; I believe the development of education systems in lesser-developed countries is key to their ultimate success. But I don’t think that a bank should be the educator. I was dismayed by a recent NY Times article titled, “Lending Talent, and Money, on a Micro Scale,” which if you read it will leave you with a warm and fuzzy feeling about how great “we” are at educating the poor. Are there cases where business education has helped? Absolutely; just be wary of the self-affirming mindset that we know best.
Jun. 30, 2009 at 3:19 pm
A thoughtful and ultimately convincing piece.
Jun. 30, 2009 at 3:35 pm
Very insightful, I really enjoyed it.
Jun. 30, 2009 at 4:18 pm
Caroline, I agree that education seems like a bad idea when it essentially takes the formr of “DO THIS HERE, BECAUSE THIS IS HOW WE DO IT IN THE STATES, AND I ASSUME THERE MUST BE THE SAME OPPORTUNITIES HERE.” This approach seems to crowd-out useful ideas, as it is more of a best practice diffusion approach than one that necessarily nurtures creative ideas. Its like the young writer who abandons a great ideas because the publisher says that kind of work doesn’t sell.
But might there be other types of education that could be valuable, and thus of a value comparable to “underwriting more loans or reducing the interest rates it charges its customers.” Maybe not, but if so, I would love hear what form you think this would take. IF you were to educate, what would be of the greatest value?
Jun. 30, 2009 at 4:20 pm
An emerging dilemma for sure…I definitely enjoyed the posed question and exploration of the issue!
Jun. 30, 2009 at 4:36 pm
Peter:
You raise several great points that I didn’t get into given the space constraints of my post. If we were to educate, I think it should be done through not-for-profits that are unaffiliated with banks. As to what they teach, I’m hesitant to comment b/c in all humility, I don’t think I’m the right person to judge that. It depends a lot on the region (e.g., is there agriculture knowledge or training that could be helpful) and the existing education infrastructure. I think teaching business basics and computer skills is “safe” but again, is learning computer skills necessarily worth that individual’s time? Depends on their situation what knowledge is most useful.
Finally, while banks providing education rarely approach it w/ an obvious “I’m going to tell you want to do attitude”… good intentions often lead to it as we’re unable to resist meddling in systems that I think are far more complex than we appreciate.
Jun. 30, 2009 at 7:02 pm
Caroline
Really thoughtful post, thank you. I am absolutely on board with your basic impulse, that is, that we ought to trust, respect, and utilize local knowledge and not”educate” those poor and incapable entrepreneurs with our models and frameworks.
However, I don’t think the real question here is whether it’s the bank’s role to educate borrowers. Instead, we need to determine whether education from banks actually produces better results (stronger businesses, higher repayment rates, less corruption, etc.).
If education causes higher repayment and fosters better businesses, then I would argue that banks would be silly not to educate borrowers (keeping in mind cultural sensitivity and non imperialistic teaching methods) so long as it’s more economically viable to do so.
Thoughts?
Jun. 30, 2009 at 10:12 pm
Dave,
Thanks for your post; I like how you think! To your point, the research on the effectiveness of education by banks has on the whole been inconclusive.
In my post I mentioned the education that already exists as part of the system (loan officers, groups) which I think is the most effective …probably since it’s organic. All of the largest and most successful banks spend time and money on these less formal types of instruction. I believe the reason loan officers take the time to diligence and instruct customers before making loans is that activity is shown to improve credit quality (hard to tell whether this improvement is from the instruction or the weeding out process).
A direct positive link with additional education has been harder to prove. Some studies say it helps, though typically only a small amount which may not warrant the expenditure, effort and risk by the bank, while others say no effect. I’m sympathetic to the researchers b/c there are plenty of difficulties in studying the issue including different bank models, regions, existing levels of education and literacy, and style and content of the additional education. Most researchers pick a specific area and bank, understandably, but the results don’t seem to be generalizable. Different studies, different results.
But to some extent, the market speaks. I think that the large, successful banks would probably have such education systems in place if they helped. Most have tried them at some point in their development but either found them unnecessary for profitability and growth or ineffective (or both?). Thanks for your thoughts and I hope my ramblings are at least somewhat interesting!
Jul. 1, 2009 at 10:56 pm
Hi Caroline
I had a few thoughts that might raise some new questions, add insight, and perhaps both.
I could believe that such a new field as microfinance lacks conclusive research in the specific area of discussion: microfinance firms extending educational services. However, I’m not sure if the market speaks as effectively as we hope sometimes. Mohammud Yunnus started Grameen after recognizing the insufficiencies of the market and after much opposition found microfinance to be a sustainable business model. If the market failed to provide credit to the poor here, then I am more inclined to think the market might also overlook research on this issue.
A professor at the University of Illinois-Urbana Champaign has focused much of his research and teaching on the issue of education in India, and more specifically, consumer literacy as a complement to microfinance ventures. He recognized that a major causal factor for India’s poverty is the staggering illiteracy rates. However, by teaching adults consumer and business skills he found improved standard of living.
The market will most likely not provide the education necessary, but perhaps, banks might find a partnership with educational institutions beneficial.
Jul. 6, 2009 at 5:20 pm
I tend to agree with Caroline, focusing more on specialization as the core reason why MFIs should avoid education programs. This is not to say that education is not needed, but that MFIs are the least equipped to provide superior training and also incur substantial liability if they do so. While business failures and loan defaults are bad, situations get even worse when the bank was the idea generator and coach throughout the venture. Whereas microfinance calls upon bankers and business people to play their particular role in development, we also need educators and administrators to enter these markets providing their unique skills for the benefit of those living in poverty.
Jul. 7, 2009 at 8:05 am
That’s helpful clarification Patrick