Adding controversy to small scale microfinance in Oaxaca

This is the first in a series of four blog posts from my recent study trip to Mexico, with the Stanford GSB. Here’re some facts and tid-bits on the trip which provide a bit of an overall flavor:

§  The people: 35 Stanford GSBers and their partners, hailing from 14 different countries –backgrounds as diverse and unique as Air Force Officers, Social Entrepreneurs, Finance Ministerial Analysts, Film Makers, Start-up Starters, Seismologists, Sports Analysts, Chemistry Teachers, Family Businessmen … and of course … bankers & consultants

§  The places: 3 different cities over 10 days, including Oaxaca, Monterrey and Mexico City – each with a very different and unique character

§  The experiences: Discussing Mexico’s challenges in meetings with business and public sector leaders; watching Mexican soap operas being filmed, including meeting the most charismatic man in the world (not to be confused with the most interesting man in the world, whom we also met); exploring ancient monuments; eating good food and drinking giant margaritas; and of course, shouting and cheering like mariachis.

Having spent a year working in microfinance in Kenya, I was very excited to see microfinance in action in Mexico. Banco Compartamos puts Mexico on the global microfinance map – it is extremely successful and highly controversial, both of which make it such an interesting case-in-point. In fact, it was a case study in our Ethics Class – and while I support Banco Compartamos, overall, my class section was quite divided, even after a rich and spirited discussion. 

Unfortunately, due to a last minute scheduling change we couldn’t take this debate to the very founders of Compartamos. But we ended up seeing another microfinance organization in Oaxaca. I will not name names – I wish to protect their name because I wish to generate controversy at the same time – I need my controversy fix. It’s a small organization which takes tourists on guided tours to microfinance borrowers, and solicits tour fees and additional donations as capital to make loans to the same microfinance borrowers. There are two tiers of loans – smaller loans of less than US$ 100 are interest free, and any larger loans of up to US$ 1,000 are priced at 15% APR, which is still rather inexpensive. They currently have 250 active borrowers, across 5 villages around an hour away from Oaxaca, and are staffed by 2 full-timers, and an additional 15 or so part-time volunteers, who serve primarily as tour guides and translators. As you can tell from these facts, their size is pretty small, and such an operationally intensive volunteer staffed organization is probably not very scalable. Their borrowers are engaged in small businesses – cottage manufacturing of everything from traditional rugs, to chocolate; and small scale retail and trade.

A microfinance borrower grinding fresh coco beans or cho quatle, as the Aztecs called them

Overall, I had a very positive impression of the organization, and their borrowers seemed to be doing well. Two in particular were notably inspirational. One had a rug store, which she expanded into a café and snack bar. This is an ordinary, uneducated lady from a very small town but microfinance capital made her dare to dream bigger and bigger – and indeed she had a highly entrepreneurial vision to run a much larger business – a large full service restaurant for tourists who visit the village, by adding an additional floor to her store. The second lady was a widow who lived on top of a hill, away from the tourist town-center. She spent her adult life supporting her entire family including her husband who was an alcoholic. Her husband never had a stable job due to his addiction, and also his alcohol habit was a huge drain on the family budget. He passed away a few months ago. It was clear that microfinance made this incredibly strong lady support her family, not only due to the interest free working capital she used to make traditional rugs and purses, but also due to the influx of customers coming in on tours, who would otherwise not visit her, since her place was tucked away from the main tourist town-center.

Enough of the positives – now let’s get on with the controversies …

i) What are the ethics of “Poverty tours” or perhaps to frame it extremely negatively “Poverty pornography”? On the one hand, I really enjoyed meeting these ladies and getting to see their lives – my fellow trip participants perhaps found this to be an even more unique and enjoyable experience, because for many of them it was their very first such experience. It helped us obtain a real and informed view, which we need to develop as thoughtful and impactful donors and suppliers of charitable money. On the other hand there is something deeply unsettling about the entire set-up – having to do with the dignity of the borrowers; the guilt generated in the lenders; means versus ends sort of considerations; and getting a superficial, highly staged view versus a real and candid one. Staging in this particular instance might not be a huge deal – I get the sense that our experience was fairly authentic and representative, although I cannot make this claim with full certainty. The bigger issue though is in generalizing or universalizing this practice – charities and charitable causes routinely stretch the truth in their marketing practices to attract donors. The entire development sector for the longest time understood the population of Kibera, the largest slum in Nairobi, Kenya, where many “Poverty tours” are on offer, to be four times what it actually is. And because the ends justify the means in the minds of some, or because of the entire “guilt” factor, outcomes in philanthropy are sub-optimal. 

ii) Why such a big subsidy, and what are the trade-offs? At zero interest, and even at 15% APR, it is clear that these borrowers are benefiting from a substantial subsidy or “transfer of wealth”. Their real market-based alternatives e.g. borrowing from Compartamos, would price the loans at between 50% and 90% APR, which adds a significant amount to their cost of capital, and seriously changes the economics of their underlying businesses. In my view it is worth asking why they need money at such cheaper rates. Would their underlying businesses not be sustainable otherwise? And if so, what needs to change, in order to make them truly sustainable? What if the microfinance organization was to leave or fall-apart tomorrow? Would these women have to go back to square one?

I can of course see the argument on the flip side – the microfinance model seems somewhat sustainable, with the key ingredients, namely tourists and volunteers likely to be in plentiful supply for the indefinite future. And even if it were all to fall apart, giving some subsidies while the subsidies last, might be better than giving none at all. But still – I believe in teaching someone to fish, not giving the fish away. And while this model is not clearly in one camp or the other, there is a strong element of giving fish away which makes me uncomfortable.

Enough on microfinance … next post’s on Pedro Rocha, an inspirational public sector leader in Mexico.