Norway throws the baby out with the bathwater

NORAD, the Norwegian equivalent of DFID or USAID, recently announced that it has all but ceased microfinance activities. The Norwegian Microfinance Initiative (NMI) is the only remaining large microfinance investor, although it is partially funded from the Norwegian public purse (Norfund). Stromme Foundation, CARE Norway and Kolibri Capital contribute a further NOK 100m ($20m or so); and Telenor has made forays into microfinance. Some smaller operators exist: see the relatively recent survey entitled “Inventory of Microfinance Activities Supported by Norway” (2011).

Two matters concern me. First, does this establish a precedent of entire countries despairing of microfinance and pulling out altogether? Second, is Norway risking throwing the proverbial baby out with the bathwater? These are major questions, but perhaps I can scratch the surface here.

We are aware of the growing disillusionment with microfinance – there is no need to re-iterate the debate here. The Duvendack report in the UK was hardly complimentary. Roodman’s succinct summary of the overall impact (“zero”) did little to boost credibility. DOEN in Holland have done no new investments in microfinance for years, although the Triodos-DOEN fund ticks over. NOTS reduced its committed capital from €14m to €1m in 2011.

The Norwegians were uniquely and directly embroiled in the recent scandal involving Grameen Bank and Muhammad Yunus. Danish journalist Tom Heinemann splashed the story across the media in his documentary on the subject, so perhaps Norway is particularly sensitive to such adverse media coverage. Heinemann then followed up with a shorter report on huge payouts to the CEO of Accion, one of the early investors in the Mexican Bank, Compartamos, which was discovered charging the poor interest rates up to 195%. The article and accompanying video footage, entitled “Gave Small Loans, Received Big Payments” was unlikely to impress the Norwegian electorate, and NORAD announced their departure from microfinance shortly afterwards.

Other Scandinavian countries may be taking note of Norway’s actions. Sweden and Denmark are both active supporters of microfinance. But perhaps the exiting of public funding for microfinance is actually a sign of success? If private capital is now able to fund the sector, public funds can be better deployed elsewhere. Obviously this line of reasoning avoids the thorny question of whether microfinance works or not. Or whether public funding may be preferable simply because it tends to be less overtly profit-motivated. Also, the distinction between public and private funding is increasingly blurred, as public funds are channelled through MIVs. In the case of NMI  this includes BlueOrchard, Incofin, Symbiotics, Developing World Markets etc. – the usual private sector suspects.

It is hard to read between the lines as to why the Norwegians took this decision, and they have been hesitant to comment on a number of topics related to the Grameen scandals. I tried to contact NORAD for this post, but got no reply. And let’s be realistic, they are unlikely to openly state “we find the entire microfinance sector a waste of time and money with zero supporting evidence that it’s working”, even if that were their opinion. Political correctness will prevail regardless of the internal conversations.

So, speculation of motivations aside, my question is “who’s next”? Remember when Unitus closed all of a sudden in 2010? That sent a small shock through the sector. Pro-Credit distanced itself fairly openly from the microfinance sector. Indeed, Pro-Credit’s comments may have been prophetic and shed some light on Norway’s announcement:

“We fear, however, that the importance attached to microfinance – presented as the cure-all to eliminate poverty – will raise expectations that cannot be fulfilled. If these expectations are disappointed, the public may be disillusioned and lose interest.”

Did Norway simply become disillusioned and lose interest? Ironically the number of criticisms and scandals in microfinance recently may have served to mute the announcement from Norway, most recently the effective take-over of Grameen Bank by the Bangladeshi government. NORAD was a big investor in Grameen Bank stretching back to the 1980s. Now it’s pulled out of the sector altogether. That appears to be big news to me.

USAID, CGAP, Kiva, GFUSA etc. have a well established microfinance following which religiously adheres to the mantra of the miracle cure, but the UK has also expressed some concerns. The All Party Parliamentary Group on Microfinance recently made a call for evidence on regulating the microfinance sector. Indeed, even the private sector microfinance community is shifting away from traditional microfinance, in favour of “all inclusive finance”, or whatever the latest catchphrase is. It appears re-branding away from the embattled bedrock of micro-credit, loans to women to buy goats etc., is underway across the entire sector. Remember when the “P” in CGAP used to stand for “Poorest”, and then changed to “Poor”? Now they prefer to use the broadest of generalisations possible – inclusive finance, debatably reflecting the mother of all mission drifts. Perhaps the Norwegians are simply the first, boldest, most pro-active, most forward-looking folk out there? Again, let’s be honest, it wouldn’t be the first time those Scandinavians have run circles around the rest of us. Bergen has had traffic congestion charging since 1986.

So, Norwegian wisdom aside, who are the casualties in this? There is good and bad microfinance out there, and some of the former will presumably suffer as a result of a lack of public funding. Public funding may be “softer”, and thus directed to more socially motivated microfinance. Relying entirely on the hard-nosed private sector may reduce yet further any genuine glimmer of social focus that remains in the microfinance sector. Return on assets and risk adjusted returns are all fine and good, but start-up MFIs may struggle to raise Norwegian capital. MFIs not seeking profit maximisation but rather to serve an overtly social purpose may struggle. Indeed, could this herald the dawn of a new era, where the distinction between for-profit and socially-motivated MFIs becomes yet wider? The former will raise finance from sources that increasingly resemble any other part of the financial sector. The latter will revert to the traditional NGOs and donor led organisations. Would that necessarily be a bad thing?

Indeed, given that over-indebtedness made it to the number 1 spot in this year’s Banana Skins Report discussing the principle challenges facing the sector, indicative of an excess rather than a scarcity of microfinance (albeit concentrated in certain regions), perhaps a reduction in the availability of capital is precisely what the sector needs? Are the Norwegians simply leading the way in making a wise choice?

The Norwegian announcement raises other interesting questions. Is the “cooperation between the public authorities and private investors in Norway” into NMI, who then direct the funds to a few profit-motivated private sector MIVs, an innovative mechanism to leverage public funds while reaping the efficiency of the private sector. Or is it the height of laziness? We have the interests of the Norwegian tax-payer, private investors, and the poor at stake. The Norwegians entrust this mix of interests to a private sector agent – NMI. What assurance do we have that NMI acts to maximize this complex medley of often conflicting interests, and not simply to maximize their own best interests? Isn’t this a classic case of the principal-agent problem?

Perhaps a more fundamental question is not whether Norwegian tax-payer money should be directed towards microfinance at all, nor whether private-sector MIVs are a viable mechanism for doing so, but rather whether the public sector could better assist MFIs. What other models did they consider? In short – did they throw out the baby with the bathwater in withdrawing from microfinance?

This is all pure speculation prompted by some bureaucrats in Scandinavia. The microfinance sector is in a transitional period and I for one am going to keep a close eye on these northerners. They are more nimble and less encumbered with large development sectors with strong political ties and vested interests, so there may be clues as to what the future holds for the rest of us. Watch this space.

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