Confessions of a Microfinance Heretic | Blog

I criticised this former Minister for Foreign Affairs in Italy for comments which, in my opinion, were foolish. He became irritated and is now trying to deny it in bite-sized chunks on Twitter (@GiulioTerzi).

In a nutshell, I question his wisdom in suggesting replacing unemployment benefit with unemployment loans. Read the exact, original quote below from his own website:

Microfinance is one of the instruments for “addressing inertia and social fragility, which is essential in safeguarding the quality of democracies” in order to prevent “material distress from encouraging populist deviation and citizen regression”. Minister Giulio Terzi thus explained the anti-crisis role of microcredit and microfinance, as he spoke at the second edition of the “Microfinance and European Union policies Forum” organized by the National Microcredit Agency.

[So, a fairly standard defence of microfinance and its (as yet unproved) miraculous properties. But here’s the second paragraph, I’ve put Terzi’s offending quotes in bold.]

“People with ideas and projects they cannot realise as a result of not having access to credit need concrete answers; those who have lost their jobs and are having a hard time finding another; immigrants who risk social exclusion”, Terzi explained, underscoring how microfinance “expands business opportunities as it encouraged citizens’ participation in economic life”. Moreover, it “can also help contain public spending by contributing to the reduction of social buffers, the cost of which rises in times of recession”.

Terzi’s mistakes arise mainly in this second paragraph, which is what he is now trying to deny. First, who are the people this newfound microfinance is aimed at? He clearly states it is the unemployed, amongst others.

Second mistake: he confidently states that microfinance “expands business opportunities” – where is the evidence for this? If this were the case, why have so few studies of microfinance found it has any impact on poverty reduction? He suggests microfinance will get the unemployed to participate in society once again. Lovely, this is what everyone wants to hear, particularly from a vote-seeking politician (before he quit).

So, I think it is fair to conclude, on the basis of logic alone, that Terzi is suggesting here that microfinance can help to get unemployed people back to work. So, now look at his final statement: “[microfinance] can also help contain public spending by contributing to the reduction of social buffers, the cost of which rises in times of recession”

Now, this is likely the bit Terzi regrets most. Microfinance has an additional advantage beyond those listed (getting the vulnerable and entrepreneurial back into society) – it can reduce public spending, particularly that which rises in times of recession. Are there more entrepreneurs in times of recession, or more immigrants? There are certainly more unemployed people, and these drain public spending via their reliance upon the mother of social buffers – unemployment benefit. What other social buffer could be reduced by getting unemployed people back to work, albeit via microfinance, besides unemployment benefit?

In order to reduce the cost of social buffers, microfinance to unemployed people cannot be in addition to unemployment benefit, but instead of. Give money to the unemployed – sure, but make it a loan instead of a donation. This is where I most vehemently disagree with Terzi.

The beneficiary, as stated in this final statement, is the government, not the poor. That the poor benefit from microfinance is a de facto truth taken for granted by Terzi. But the government itself can benefit via reduced public spending. Less need to have social buffers. Less benefits. Less need to raise tax. Less need to borrow on the capital markets. More money for the government to spend on other things – Bunga Bunga parties perhaps?

That microfinance in Europe has a pretty poor track record is discussed in a separate blog. In a nutshell, it has been an unprecedented disaster managed by a handful of mostly ineffective MFIs barely capable of completing a survey, is grossly inefficient, suffers eye-watering default rates, has led to minimal job creation, is aimed mostly at people on welfare, much of it is used for consumption rather than any productive use, and offered to people who are not even necessarily excluded from the mainstream banking sector.

However, unemployment benefit is not a trivial expense to the beleaguered Italian government:

Terzi became Minister for Foreign Affairs in November 2011 (unemployment was 8.5%) and quit in March 2013 (by which point it had risen to 11.5%) following severe criticism for his handling of the shooting of two (presumably vulnerable) Indian fishermen at the hands of Italian soldiers. This latter point is worth exploring a little for an obscure similarity with Terzi’s current predicament, and to get a feel for whom we’re dealing with here:

The Enrica Lexie Incident occurred on 15 February 2012 when Italian soldiers belonging to a Vessel Protection Detachment (VPD) team deployed on a privately-owned oil tanker MT Enrica Lexie opened fire on a tuna fishing boat and killed two Indian fishermen…. The Italian Defence Ministry’s initial attempt to portray the incident as a successful anti-piracy operation and the continual refusals by the Italian Government to publicly acknowledge that the two Indian fishermen were shot by the Italian Navy VPD team on the Enrica Lexie, caused public outrage in India and extinguished any hope of a rapid and discrete diplomatic settlement with India…. Provocative press statements released to the Italian media and incessant tweeting on Twitter by the Italian Foreign Minister Giulio Terzi stoked controversies and became a major impediment to finding a quick solution…. Italian Foreign Minister Giulio Terzi faced severe criticism in the Italian media for his ineffective diplomacy…. Terzi announced that he was opposed to the return of the marines to New Delhi, contradicting his earlier statements which affirmed the decision to return of the marines to India was taken collectively by the Italian government…. Mario Monti also revealed that former Italian foreign minister Giulio Terzi repeatedly hampered efforts to settle the dispute with India in a quiet manner by perpetuating controversies through hawkish statements posted on Twitter.

This incident cost Terzi his job, but it appears his fondness of using Twitter, not entirely appropriately, was partly responsible. Read the whole Wikipedia account for more details, but to put it mildly, he doesn’t come across favourably. And now he’s back on Twitter.

So, I reiterate my opening stance. Terzi is wrong in this regard. He speaks without the slightest shred of evidence to support his claims, whether this be with regard to Indian fisherman being shot, or unemployed Italians being offered loans. He has minimal knowledge of microfinance, but is an avid supporter. In fact, in this regard, he is fairly typical of most microfinance supporters. He is attempting to appease everyone by helping the vulnerable while reducing the cost to the government of helping the vulnerable. I am personally relieved he no longer has ministerial duties, I hope the Italians learn from his mistakes, and let’s hope that he avoids microfinance henceforth.

Microfinance is a potentially useful tool to a sub-set of poor and vulnerable people, if used wisely. It rarely is used wisely, and it certainly should not be considered a cost-saving alternative to welfare payments.

So, Terzi – you are denying saying these things, in bite-sized chunks on Twitter. I publicly challenge you. Let’s speak, on record, and we will publish the entire conversation on this blog. Your performance over the killing of innocent fishermen is public record, let’s now get your views of microfinance into the public domain.

Despite the endless awards granted within the microfinance sector, there is not yet one for the silliest publication of the year. Were such a prestigious honour exist, I would propose the recent “Overview of the Microcredit Sector in the European Union 2010-2011” as a serious contender. I cannot recall the last time I ploughed through a 100-page document so brimming with gibberish. It’s mildly amusing though, if you are on a long flight and you’ve seen the decent movies and are sitting next to a particularly dull person. I asked an awkward question at a recent microfinance conference in Norway regarding the wisdom of so-called Italian minister Giulio Terzi’s suggestion to replace unemployment benefit with unemployment loans, explored in this post, and was handed this farcical document. Fortunately Terzi subsequently quit and is no longer making a mockery of the last semblances of the Italian welfare state.

The document is silly on so many counts it is hard to know where to begin. It is badly written, long-winded, and fails to address the key issue – is microfinance in Europe actually working? The premise is that microcredit is not just for poor folk in poor countries, but useful for employment creation in Europe. But there is not one single shred of evidence presented of a single job being created. Despite the endless trivial graphs, there is not a single statistic of “xxxx jobs created”. It’s the same trick the mainstream microfinance sector makes – we made loans therefore people have benefitted. Not necessarily.

That the document was funded at all is surprising, but I enjoyed the opening disclaimer: “The information [] does not necessarily reflect the position or opinion of the European Commission”. Phew, at least one person in the EU must have read this before publication. Even the table of contents is worrying, with a mere 2 pages (of the 100) dedicated to “Social performance”.

Despite employment creation being the stated (albeit un-demonstrated) goal, apparently ethnic minorities and clients below the poverty line were “targeted”, although much of the capital was spent on consumption, as usual. I suppose buying a new TV does generate employment, in China. The usual focus on women was plugged, with the fairer sex mopping up 38% of all loans, up from 27% last year apparently. In an enlightening moment in the introductory waffle the authors clarify: “Social inclusion lending… focuses on lending to self-employed individuals that are excluded from banking services, due to the socio-economic status of being socially excluded…” So, not only are they already self-employed (i.e. hardly job creation), but in order to qualify as a socially excluded person you have to be, er, socially excluded. Thanks for clearing that up.

In the key findings the authors frankly admit that “the availability of data for clients’ outreach and social performance is still limited among the MFIs covered in Europe…. the emphasis of the MFIs mission statements is on job creation… is followed to a lesser extent in the sector.” Confused?

A recurring theme in the paper is that no one actually knows what is going on, including the MFIs interviewed. One of my favourite aspects was on the interview response rate and the so-called Code of Conduct. Only 154 of the 376 MFIs contacted even bothered responding to the survey, and of those that bothered, only 72% knew there was a Code of Conduct. In an astonishing confession found in the appendix (tables 17 & 18), one third of Albanian MFIs and 100% of those in Austria were aware of the Code, and yet 100% of both countries said they were NOT intending to follow it! Likewise, in Belgium and Croatia, half of all respondents said they would NOT be following it. Compare this to the Smart Campaign in vanilla microfinance, where everyone and their dog signs up, and then does nothing about it. I possibly have more respect for an MFI that flatly refuses to adopt a silly code than one that signs-up for pure window-dressing. Obviously it would be better to have a sensible code, but such a code might jeopardise profit and offer genuine protection to the poor – unacceptable in the beloved sector.

This recent survey was a little more representative than previous surveys, as they decided, wisely, to include Europe’s largest MF country – Bosnia, which was ignored entirely in previous surveys. Spain generally comes second, on account of the country barely existing economically – ideal breeding ground for microcredit. The European total broke through the €1bn mark in 2011, alas. This was marginally over 200.000 loans. When they bother to filter out for business-specific loans, perhaps not surprisingly, Germany rises to the top of the pile. Trust the Germans to actually do something productive.

The authors also managed to “forget” the rather awkward fact that microfinance in Bosnia is an unprecedented disaster and one of the main crises to have blighted the sector, right up there with Andhra Pradesh and Nicaragua. See OFSE Working Paper 36, entitled: “The contribution of the microfinance model to Bosnia’s post-war reconstruction and development: how to destroy an economy and society without really trying”. Needless to say this article is a little less optimistic about the impact of microfinance on poor Bosnians.

The average interest rates charged in Europe range from 4% in France to 35% in Serbia, with an average of 11%. Spare a thought for the Latinos and Africans coughing up interest rates perhaps 10x, or even 50x such European rates in the name of poverty reduction. As with Kiva loans in the US – micro-entrepreneurs in rich countries pay a fraction of what the poor in developing countries are expected to pay. Why? Because lending to unemployed gringos and French people at 200% is politically dangerous, but to Mexicans it’s acceptable? Perhaps the PAR (bad loans) of these European MFIs is astonishingly low, enabling the MFIs to charge lower rates? Er, the average PAR30 is 12%, and 6% was simply written-off in the year. This would be considered a total emergency in any “normal” MFI, tinkering on bankruptcy. In the EU it’s fine.

Average loans sizes (deflated by GDP per head) are highest in Lithuania for some reason, and lowest in the UK. But beyond such modest metrics, the report produces reams of utterly useless tables and statistics, like the number of MFIs that only offer credit, per country, or when they were incorporated, or the share of full-time loan officers. I’m not sure who would be remotely interested in such statistics. There are no cross-tabulations, and explanations are generally trivial, so it really is hard to understand why they bothered presenting such data other than to justify two years of work gathering such useless data and producing a report to hand out for free at conferences (to promptly be recycled, one hopes, to at least prevent the erosion of Europe’s few remaining forests).

The social performance chapter (if that is the right word – it’s basically two pages) suggests 72% of respondents thought job creation was critical for their mission. And yet the survey people forgot to ask such penetrating questions as “how many jobs did you create?”. The reason for the modest coverage of this topic is stated in section 5.2: “to analyse [impact] in a reliable way, the clients have to be asked directly for such information, or specific methods, like randomized evaluations, have to be used [but were not]… Therefore, this survey edition has not included any self-assessment questions about the social impact of the MFIs activities” (emphasis added). Great – they ignored impact deliberately.

Indeed, page 44 ends with another astonishing confession: “47% of the business microloans were issued to bankable customers” – i.e. they weren’t even financially excluded. So why bother?

22% of loans were disbursed to people already on welfare, although the report doesn’t discuss to which extent loans are replacing welfare, presumably a critical point. However, the ratio rises in Belgium, where 100% of microfinance recipients are on welfare, 83% in France, and 56% in Spain.

The financial performance section gets off to a dubious start. Astonishingly, of the sub-set that bothered to reply to the survey, over a quarter were unable to report their non-performing portfolio rate – possibly the single most scrutinized microfinance statistic. For those that did manage to calculate this fiendishly tricky statistic, Moldova led the pack with a PAR30 of only 2%, while Ireland reached an impressive 35%, i.e. more than 1 in 3 loans were in default. France boasts 28% and the UK was 27%. In “normal” microfinance any number over 5% is considered worrying, and over 10% is a crisis threatening the future of the institution and rendering funding almost impossible. In Europe this is not a factor, to the extent that 27% of respondents didn’t even bother tracking the ratio. One MFI had written off 34% of its portfolio, but the report doesn’t say which.

“Only around every fifth MFI surveyed provided information regarding their amount of refinancing loans”, i.e. 80% of those who bothered answering the survey had no idea or didn’t want to disclose it.

I wondered why the financial performance section was so much bigger than the social performance section, and the answer is provided on page 49: “this [survey] was the first to include requests for basic financial performance data”. The mind boggles as to how utterly redundant the previous surveys must have been. Only 1 in 3 respondents had any idea of their portfolio yield, i.e. the gross operating margin, but the good news is that the highest gross margin category is growing rapidly! Good for the MFIs, that is, not so great if you’re the unemployed Spaniard coughing up the interest. 1 in 4 of those surveyed knew their debt to equity ratio. 3 in 4 presumably had never considered such a complex calculation. A mere 30% knew their operating expense ratio, so there’s clearly scope for improvement here.

Is it not humiliating, as a manager of an MFI, to be asked such basic questions and simply tick the box “I have no idea how to answer this question”?

Then we have another particularly silly chapter – “Trends in the Sector” (a whopping 2 pages). It bangs on about job creation to begin with, then discusses the Code of Superior Operations or whatever it’s called, which most seem pretty indifferent about, but then there is some optimism:

“At the level of the demand for microfinance the rising number of unemployed people, especially in the Southern European countries, should allow MFIs to grow their operations”. Always look on the bright side:

more unemployment + less welfare = more microfinance

This section goes on to state “the general public support for microfinance provision is expected to decline in the coming years, due to budget restriction and high deficits at national and regional levels”. Er, I can think of some other reasons why public support might wane – it’s a stupid idea that has demonstrated absolutely zero positive impact and there is a global backlash against indebting poor vulnerable people regardless of whether they are from Senegal or Spain. Do the authors read the newspapers?

The report then presents some extremely light country summaries, and doesn’t bother with a conclusion at all, presumably because it is pretty blatantly obvious what the conclusion is for the 1% or readers of the report that make it to page 84. However, don’t stop here – the appendix is quite funny.

Conclusion

This is a nonsense report. Microfinance in Europe is clearly operated by utter incompetents incapable or unwilling to fill out a simple survey. The mild insights regarding performance and results suggest the vast majority of European microfinance institutions are chronically inefficient, have extremely poor quality portfolios, are not lending to the stated target groups, are entirely bankrupt and kept alive by subsidies from asinine governments or donors who still retain some glimmer of hope in microfinance. But let’s not forget the harrowing words of the former Italian minister for foreign affairs, Giulio Terzi di Sant’Agata:

“[Microfinance] can also help contain public spending by contributing to the reduction of social buffers, the cost of which rises in times of recession”.

This is not merely a silly idea, it is an explicit effort to replace welfare with debt to vulnerable people in order to reduce government budgets bursting at the seams following years of crappy economic management. As with the rest of microfinance, and many aspects of European policy in general, whether a policy actually works or not is simply not relevant. It’s a nice idea that some people cling to. If you can make a buck out of it, or slash your welfare costs to free up money for other activities, all the better. Rather than laugh at such jesters, we should be deeply worried – these people are so removed from reality, and yet wield power. Fear them.

According to Wikipedia “Terzi resigned from office on 26 March 2013 in the wake of severe criticism in Italy for his handling of the diplomatic dispute between Italy and India over the 2012 Italian shooting in the Arabian sea.”

Phew. That’s one less to worry about. Let’s hope he leaves the microfinance sector entirely, he is clearly not qualified in this regard.

So, European poor folk unite! Don’t take out silly loans from quasi bank institutions apparently to start up a business but invariably to spent in a bar. Demand governments actually create jobs and engage in a sensible industrial policy rather that littering the streets of Madrid and Milan with immigrants selling trinkets on street corners and re-labelled “micro-entrepreneurs”. In a well functioning economy with well functioning banks microfinance shouldn’t be necessary. It was invented to fill the gaps of such market failures. If the likes of Terzi could focus their attention on fixing their financial sectors and generating growth rather than attempting to replicate a Bangladeshi model (that doesn’t work that well either) in their countries the European experiment would likely be in slightly better shape. The only glimmer of hope is that the EU recognizes the ridicule of these people and ceases all funding to such bodies. But I still have one niggling question for them:

Why do European MFIs charge such staggeringly lower interest rates to the European poor compared to the poor in developing countries? This is nothing more than a massive PR exercise to give the appearance that some governments are doing something remotely useful to help stimulate their economies, generate jobs and target vulnerable groups. But it’s a failure, no one is convinced, and the sooner they stop this nonsense the better.

This review was originally published on Microfinance Focus, and subsequently on microDINERO.

David Stoll’s new book, “El Norte or Bust!” is a magnificent read. Rarely have I learned so much, in such a wide range of topics, from such an accessible book in so short a period. I fear it may not reach the audience due to the subject matter, caught somewhere between the topics of migration, microfinance, historic narrative and critique of development. This would be a pity as it is an important work.

Stoll is an anthropologist. This is apparent in both his personal style of writing, his deep knowledge of the region of Guatemala where much of the book is based, and the notable absence of graphs and econometrics. The reader is provided with a concise history of Guatemala since the conquest, the civil war, the influx of aid agencies, the waves of mostly illegal migration north, and the recent financial crisis. Rather than a dull list of past events, this filled many gaps in my understanding of Central American history. Stoll manages to piece this together in a broad overview of the social, economic and political situation of the Guatemalan highlands, and is careful to explain the impact upon the region. The legacy of the civil war; the arrival of evangelical Christianity to the region; the ancient customs practiced by the indigenous population; the role of the CIA in the overthrow of Arbenz; quite why volcanoes retain a magical place in the beliefs of the people; and the on-going role of Mayan shamans – it’s all there. He explores the obsession of NGOs and aid agencies with this region of Guatemala, and in a witty summary of this influx Stoll writes, “The meek have yet to inherit the earth, but it is pretty clear who has inherited Nebaj”.

The book examines three main areas: (illegal) migration to the United States; the role of microfinance institutions (MFIs) in the communities; and the impact upon the people of Nebaj. Spanning two decades of experience in the region, Stoll writes with convincing authority. While the accounts are largely anecdotal rather than statistical, the picture clearly emerges:

“It is a fateful convergence between immigrants attracted to American consumption levels, employers hungry for cheap labor, and visionaries who argue that bankers can help the poor by giving them credit”.

I am no expert on the intricacies of illegal migration, and Stoll explains the complexities and ironies of the migration decision process eloquently. The coyotes who smuggle desperate migrants across borders and desserts are usually portrayed as unpleasant characters, but Stoll explains in detail how and why they offer this service. Some are clearly guilty of appalling treatment of their clients, but by examining the complex web of people-smugglers, the ways they work together, and their often heroic status in the communities, the reader is left less certain that these apparent vultures are not in fact valuable service-providers. He explains the risks faced by the coyotes, how they finance their operations, and how they compete amongst one another to develop their own variety of branding.

Through extensive interviews, Stoll describes the rationality, or rather the lack of any obvious alternative that leads so many people, predominantly men, to pack their bags and head north. Rather than stop with the overly simplistic conclusion that it is for “money”, he explains the vicious circles the poor find themselves in. Parents with “armfuls” of children are unable to survive on the paltry wages available locally while simultaneously servicing the loans they used to send their first child north. So they send their second, and third, in constant fear of the bank re-possessing the roof over their head. Neither does Stoll romanticize the plight of the poor illegal migrant. While some are indeed heroes, providing valuable remittances to their families in the south, he describes the often negative impact they have in the United States, including towards one another. Men abandon wives and children stuck in Guatemala. Established migrants are often the worst exploiters of new arrivals. The United States policies of immigration are discussed in a non-partisan manner, and the reader is left bewildered as to quite what the correct policy of the United States should be – a fair conclusion given the complexity of the topic, and one which advocates at both extremes of the migration debate should pay close attention to. The good/bad dichotomy is unclear, the only relevant calibration is shades of desperation. While the author offers no simple solutions, his account opened my eyes to the complexity of the debate.

Of particular interest to me was the role of the MFIs (helpfully listed on pages 53-54). With over a decade working in microfinance, including just across the Mexican border from where much of the book is set, I had not fully appreciated the symbiotic relationship between microfinance and illegal migration. By explaining the specific mechanisms of migration in such detail Stoll is able to delve into the financial transactions that underpin the process. “Debt is the subtext of every conversation about going north”.

The over-arching irony is that microfinance may, in part, be fuelling the illegal migration to the United States. Many of his conclusions are familiar to anyone aware of the pitfalls of microfinance – over-indebtedness, confiscation of assets, extortionate interest rates. On page 63 the reader sees the first warning signs that the miracle cure for poverty may have some unintended consequences:

“Factories across Central America are struggling against low-wage competition from China. As for retail commerce, every category has multiplied to the point of saturation. So has motor transport – the streets are clogged with vehicles whose owners are barely making their loan payments. Certain kinds of artisan production such as furniture and textiles provide employment, but not of the kind that satisfies aspiring consumers. Nor can these endeavors absorb the tens of thousands of Ixil youth without enough land to farm. So Nebaj’s most important produce, its principal export, continues to be surplus labor.”

The futility of many micro-enterprises emerges early in the book. Guatemalans are left with only one real choice, to quote The Clash: “Should I stay or should I go?” In a devastatingly concise conclusion Stoll suggests, “Pumping large amounts of credit into a crowded mountain environment with little potential was, in retrospect, not such a good idea”. If only such humility were applied more broadly across the development community.

He describes with alarming statistics the flow of remittances to Guatemala. Banks quickly caught onto this revenue stream, and facilitated such transfers. Soon regular remittances flows could be used as collateral for a loan, to send the next eager local up north. MFIs would refinance the over-priced coyote loans as soon as the remittances began trickling in, not asking too many questions about the ultimate loan purpose. One microfinance client with a single pig paid a small “commission” to the helpful loan officer to be upgraded to “pig-raising enterprise” in order to secure a larger loan. Loan officers were overly keen to lend – indeed incentivized to do so. In Andhra Pradesh this led to suicides, in Guatemala the damage was equally devastating. Inevitably chronic over-indebtedness ensued and crisis was not long to emerge, as anyone familiar with Nicaragua will find of little surprise. “And so microcredit quickly evolved into debts that were no longer micro, because of the ease with which borrowers could pay off initial loans by taking out more loans, and pay off these loans by taking our still more, until the banks stopped handing out money in 2008”.

Stoll persuasively argues that this entire façade began to take on uncanny similarities to a pyramid scheme, but thanks to his explanations of the driving forces behind what may appear superficially to be an irrational decision, he describes how such vicious circles emerged. Desperate to reap the benefits of illegal migration, families were pushed further and further into debt, with MFIs all too willing to provide the fuel.

Perhaps the most sobering aspect of the book is the impact this merry-go-round had on the local community. There are countless tales of families losing their houses or land as loans went sour and their collateral was at stake, pushing them further into poverty. The influx of remittances led to rapid inflation making it nigh on impossible for the youth to acquire increasingly scarce land or a roof over their head without also heading north to the Promised Land. Wealth disparities actually widened in many villages between those with remittance flows and those without. The few returning migrants flush with cash were unwilling to work for local salaries, and merely served to persuade others to take the journey north, often before they themselves chose to return to their dish-washing jobs paying 10 times their Guatemalan earning potential.

Paradoxically this led to an increase in the legendary “evil moneylenders”, the great boogie-man of the microfinance sector. Those with spare cash, or access to comparatively cheaper microfinance loans, would lend to those without access to credit at rates of 10% per month. Indeed, lending to migrants preparing to depart northwards may have been about the only productive micro-enterprise possible in Nabaj, largely devoid of alternative viable business opportunities. The microfinance community usually presents itself as a replacement to the moneylender. Stoll demonstrates the relationship between microfinance and moneylenders may in fact be symbiotic. And just as I thought the situation could get no worse the reader is presented with harrowing accounts of suicides and kidnappings triggered by remittances or the halo of deprivation surrounding them.

The hopelessness of the situation is perhaps nowhere better described than in an interview the author did in 2004, anticipating the inevitable impact with haunting accuracy:

“… the bulk of the poor in Ixil country (that is, below-subsistence farmers) are so unlikely to mount productive enterprises, of the kind that can pay back loans, that they would be better off with food security strategy.”

The warning signs were perhaps visible even at this early stage, just as the development community was ramping up its love affair with microfinance, and Nobel Prizes were being prepared. How did we miss this?

To conclude, this is worth reading on many levels, and should appeal to a wide range of audiences. I would urge microfinance practitioners to study this carefully – the warning signs that Stoll describes are worryingly visible in a number of countries currently. Migration experts may not fully appreciate the link to microfinance in their studies, and will find this sobering. Broader development experts will appreciate the meticulous manner in which Stoll describes the inter-connectedness of the various players, and how seemingly bright ideas can have tragic consequences. We need to think very carefully before wading into these communities with the latest fad in development thinking. And anthropologists will find the style accessible, engaging and holistic in approach.

I am pressed to think of shortcomings of the book, but the relentless reliance upon anecdotal evidence did sometimes leave me wondering how hard statistics would support the claims. The focus upon one region of one country is on-going, and there is little description of other areas of Guatemala, let alone the rest of Latin America. The book offers few solutions to the mess, and in a dramatic moment Stoll appears to suggest that it may be wise to actually ban remittances (page 222), which raised an eyebrow. At times it is heavy reading, and the array of characters in the book is extensive to the point of confusion. A glossary of the players as an appendix would be helpful. I fear the book had insufficient detail on the individual MFIs to generate the attention it deserves within the microfinance community, who will be sorely tempted to dismiss this as “non-empirical”.

But, critique aside, this was a superb and informative read. It is well written, sobering and yet amusing in places. It is written by a man of obvious passion for his subject-matter, and this passion is contagious. Well done, Mr. Stoll.

Hardcover: 296 pages
Publisher: Rowman & Littlefield Publishers (December 2012)
Language: English
ISBN-10: 1442220686
ISBN-13: 978-1442220683

Just read this utter nonsense emerging from the European Union:

Microfinance is one of the instruments for “addressing inertia and social fragility, which is essential in safeguarding the quality of democracies” in order to prevent “material distress from encouraging populist deviation and citizen regression”. Minister Giulio Terzi thus explained the anti-crisis role of microcredit and microfinance, as he spoke at the second edition of the “Microfinance and European Union policies Forum” organized by the National Microcredit Agency.

“People with ideas and projects they cannot realise as a result of not having access to credit need concrete answers; those who have lost their jobs and are having a hard time finding another; immigrants who risk social exclusion”, Terzi explained, underscoring how microfinance “expands business opportunities as it encouraged citizens’ participation in economic life”. Moreover, it “can also help contain public spending by contributing to the reduction of social buffers, the cost of which rises in times of recession”.

Italy is one of three EU countries, along with France and Romania, that have adopted microcredit and microfinance laws”, while the foreign ministry and the national microcredit agency have developed synergies at international level to promote microfinance through “public and private partnerships” and are also watching the youth of the Arab Spring countries, where microcredit “can play a role that generates preventive diplomacy and support for fragile democratic transitions”, Terzi concluded.

I have no idea what planet this guy is on. If I was producing a comical piece of deliberate gibberish I would have been hard-pressed to generate quite as much nonsense in so short a space. Microfinance generating business opportunities? Sure, this is what the electorate wants to hear. Particularly in the case of immigration, the electorate may be a little more forgiving if these folk are going to arrive and set up the next Apple on the back of a $100 loan, work hard, generate jobs, pay taxes and help restore Italy to the dizzying heights of the Roman Empire. What’s the evidence from 30 years of microfinance in the developing world? The vast majority of microfinance is spent on consumption and there is no impact on poverty. A point that Terzi has managed to entirely overlook. The fact that those few microfinance clients that do actually invest in some income-generating business tend to be trinket vendors, as Bateman so concisely puts it, is another detail that Terzi has ignored. Do we want millions of unemployed people across Europe squatting on street corners selling tomatoes?

Presumably Terzi has become enamoured with the romanticized images of colourfully dressed African women perched behind sewing machines or indigenous Bolivian women leading goats along mountain paths. Now we are to have herders clogging the streets of Paris as a solution to unemployment? Micro sweat-shops will spring up in the slums of Naples to compete head on with the Asian textile industry.

As for “safeguarding the quality of democracies”, Terzi is presumably entirely unaware of the microfinance crises that have had catastrophic impact upon countries such as Pakistan, Nicaragua, Morocco, India, Bolivia and Bosnia. The latter, at least, Mr. Terzi may have heard of given it’s proximity to Italy.

Here we are in 2013 with the Minister of Foreign Affairs, of Italy of all countries, telling us that what we need to get out of the current mess is more debt to more people. I initially thought this was a joke, but in fact this jester is completely serious, despite the inane grin on his own Facebook Page. Of course he’s laughing – how can you say this nonsense with a straight face? No doubt he wants the tax-payer to stump up funds for his ridiculous plans. But then, in what must be a rare moment of clarity for Mr. Terzi, he reveals the real answer: this would mean the Italian government could cut back on public spending and welfare (he politely phrases this as “contain public spending by contributing to the reduction of social buffers”). Of course, Italy is totally bankrupt thanks to chronic over-indebtedness and an incompetent government. Terzi is clearly within the latter category, and clearly stuck for answers on how to address the former.

I know, he must have thought, given that no conscious human being on the planet would lend to the Italian government, why not try and dupe these microfinance morons into lending directly to the poor people? That way we don’t have to bother satisfying even the most rudimentary functions of a government, and leave the entire thing to the microfinance sector, and when these poor people default, who cares, it’s not us that have to pick up the tab or face another ratings downgrade. Call it a public-private partnership and the electorate will lap it up.

Or was the thought that rushed through his little mind even simpler: Why not simply replace “unemployment benefit” with “unemployment loans”?

Just as one may consider that Terzi could reduce his intellectual integrity no further, he strikes on another genius idea. Maybe microfinance could facilitate “fragile democratic transitions”. This is urgently needed in Italy. Perhaps they could transition from a joke government to an actual functioning government. Bunga Bunga parties is not government, Mr. Terzi, and over-indebting your poor citizens is not development. Do some research next time you open your mouth in public.