Home > Uncategorized > Links. Microcredit (no), microsaving (yes) and the informal economy

Links. Microcredit (no), microsaving (yes) and the informal economy

Once upon a time I was, more or less subconscious, of the opinion that in the modern world ´inclusive growth´ was kind of natural.

It isn´t.

It requires quite special circumstances to enable people to lift themselves out of poverty. ´Financial inclusion´ is surely not enough (ahem) and the ILO identifies eight different though interrelated circumstances which have to be positive to enable productivity increases (which we do need) to translate into inclusive growth. About this:

  1. Norbert Haering argues that micro credit is not the solution: `Muhammad Yunus and his Grameen Bank have received the Nobel Peace Prize on the promise of conquering poverty by giving poor people in poor countries access to debt. A whole industry of lending to the poor has developed from this. It is making its leading figures quite rich and is pushing many customers into misery and debt slavery´.
  2. Milford Bateman, in the Jacobin, argues the same thing: ´The catalyst for the dramatic turn against microfinance was the Initial Public Offering (IPO) of Mexico’s largest microcredit bank, Banco Compartamos, in 2007. Here ordinary people learned not of microcredit’s impressive successes in reducing poverty in Mexico — there was and still is absolutely no evidence of this — but of the spectacular level of profiteering

    by senior managers and outside investors. Most working in the microcredit sector were stunned by the sheer avarice of those involved. But “the Compartamos scandal” soon proved to be the tip of the iceberg. When numerous other instances of personal enrichment and unscrupulous behavior surfaced, it became clear that the microcredit model had essentially been taken over by greedy entrepreneurs, aggressive private banks, and hard-nosed investors.´

  3. According to McKinsey, differences in productivity and productivity growth in the Mexican formal and informal sector are indeed mind blowing:´Productivity has grown 5.8% a year in large modern firms but has fallen 6.5% a year in traditional firms. Small traditional firms were 28% as productive as large modern ones in 1999, 8% in 2009. Employees in traditional bakeries are 1/50th as productive as those in largest modern companies´
  4. The Guardian agrees agrees about micro credit, with a case study about South Africa (think also of AIDS): ´With few poor individuals possessing a secure income stream that might ensure full repayment of a microloan – unemployment is now higher than it was under apartheid – many of the poorest individuals have been forced to repay their microloan by selling off their household assets, borrowing from friends and family, as well as simply taking out new microloans to repay old ones. For far too many now “financially included” individuals in South Africa, using microcredit to support current spending has been a disastrous and irreversible pathway into chronic poverty. Going further, of the very small percentage of microcredit that actually does go into supporting income-generating microenterprises (as per the original model), the fact remains that the business activities that emerge are simply not the drivers of sustainable development and poverty reduction. The rafts of new street traders, barrow boys, spaza shops and the like have generated very little, if any, positive impact in South Africa’s poorest local communities
  5. LOCAL microcredit (no: according to an ILO report microsavings) systems do however work, in South Africa: ´Funerals are a major life-cycle expense for poor South African households as in other parts of the world In the Grahamstown township, the study site of this paper, located in the poorest province of South Africa, households sampled spent approximately 15 times their average monthly household income on a funeral. … One common means of funding funerals is through funeral insurance. A myriad of formal and informal insurers compete to sell funeral insurance to low income South Africans. While the workings of formal funeral insurers are well known, those of informal funeral insurers have barely been documented although, in some townships, they cover more people than formal insurers. There are two main types of informal insurance schemes. The first type operates on a for-profit basis. This type of scheme is typically run by the owners of funeral parlours who sell insurance as a means of selling their relatively expensive products to low income households. The funeral parlours administrate their own informal insurance products. The second type of informal insurance scheme is a not-for-profit scheme that shares many of the features of ROSCAs, rotating savings and credit associations
  6. The ILO, too, stresses the problems with the informal sector: ´The majority of workers in the informal economies of Africa, Asia and Latin America can be characterized as the working poor and suffer from multiple vicious cycles of poverty and vulnerability which perpetuate their low skills, low productivity employment, and low income working lives. … When applied to the informal economy, the concept of productivity should be used with consideration …. Of particular concern is that women’s contribution to productivity in the informal economy is being overlooked, largely due to the nature and the near invisibility of their work. For the vast majority of the working poor, more work unless it is more productive work will not lead out of poverty; hence the need to raise productivity levels. Eight main (interrelated) approaches are usually taken to increase productivity in the informal economy, namely improvements in: work practices; market access; human capital; social capital; infrastructure; firms fixed capital; farm/non-farm dynamics; and the enabling policy and institutional environment.´
  1. Jamie Morgan
    December 4, 2015 at 6:53 pm

    As you know there is often a problem of context for micro-finance;


    Best, Jamie

  2. Ctesias62
    December 4, 2015 at 8:29 pm

    With ref to S.Africa if slightly off topic Bbc news 24tv “Hardtalk” (Wed 2 Dec) had a half hour interview with Mr Julius Malema a putative class/race warrior/ insurgent candidate that may be of interest.

  3. milford bateman
    December 5, 2015 at 5:52 am

    There are very fundamental reasons why microcredit has not worked, and has actually, I would argue, undermined local communities in the global south, and many of these misunderstandings of economics and economic development can be traced back to one of the pioneers – Dr Muhammad Yunus.



  4. milford bateman
    December 5, 2015 at 10:32 am

    RE: South Africa – the ILO’s stuff on funeral savings clubs is fine, but they are talking about a very minor part of the story in that country. For a much more detailed summary of the horrendous overall impact the expansion of microcredit has had there since 1994, see this just out article:



  5. merijnknibbe
    December 5, 2015 at 11:23 am

    I´ll return to this and read the article, no time right now. To me, it seems increasingly likely that, always and everywhere, small and medium sized businesses can finance investments using local savings (the internet might be changing the meaning of local), they do not need a global financial system but sound institutions and local trust. Also, economists have problems defining the informal sector: why?

  6. milford bateman
    December 5, 2015 at 11:49 am

    Agree totally – local finance mobilization is often the best method, and most sustainable too. Many important historical experiences of this, and trust is indeed the key in my view too, which is why community-based local financial institutions (financial coops, credit unions, local/regional state development banks, etc) perform very much better developmentally-speaking than for profit private financial institutions. (sorry another ref to some of my work, but its very relevant to your comment!)


    However you define ‘informality’ it is something that is growing exponentially all over the world, not least thanks to the microcredit movement, and the result is very bad indeed – horrendous jobs, exploitation of the weak, reductions in trust, local tax contributions absent, labor standards trashed, no concern shown for the environment, etc, etc. What we do about it is moot, but at some stage we’ll surely have to stop feeding the beast with more and more microcredit.

  7. December 6, 2015 at 12:40 am

    Any comment on the effectiveness of microcredit vs. employment in a firm where both are options for poor communities, say in Pakistan? We like microcredit because it seems empowering but the micro-firms that emerge may have zero effective productivity. We dislike employment that’s obviously exploitative, but firms allow poor people to have at least some productivity in tradable sectors.

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