Bernardo M. Villegas
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Financial Inclusion for the Poor (Part II)

          In his Opinion column written for FINEX, Executive Vice President Ben D. Lagua of the Development Bank of the Philippines poses a question whose answer will be of great interest to DTI Secretary Ramon Lopez who has a special interest in the promotion of small and medium-scale enterprises which he considers to be the backbone of the business sector.  The answer should also be of interest to a good number of NGOs that are involved in microcredit financing for micro enterprises.  When the objective is to create jobs, Mr. Lagua asks what is more effective?  Is it lending to the very small businesses or micro enterprises, or lending to the slightly larger business or small and medium enterprises (SMEs).  He cites David Roodman who has asserted that “on current evidence, the best estimate of the average impact of microcredit on the poverty of clients is zero.”

         This may come as a surprise to those who have tried their best, with all the good intentions, to replicate in the Philippines the Grameen Bank model introduced by Nobel laureate Mohammad Yunus in Bangladesh.  Unfortunately, this model which excited the international development community some thirty years ago, culminating in the awarding of the Nobel Peace Prize to Dr. Muhammad Yunus, has been discredited for making some unrealistic assumptions behind the microcredit solution as a panacea for a range of development ills.  Probably the most devastating critique was made by Mildford Bateman, Visiting Professor of Economics in Juraj Dobrila University of Pula, Croatia, in an article originally published in The Conversation.  In very colorful language, Bateman described the rise and fall of the microcredit movement as going from “Zorro to Zombie.”

         Especially from the viewpoint of the poverty situation in the Philippines, one of the worst in East Asia, one reason for the failure of the Grameen Bank model and its many microcredit clones is its “fixation on promoting self-help, individual entrepreneurship and market forces as the only way that the poor would escape poverty.”  The good intentions of Dr. Yunus and company fell into the trap of the “absolute autonomy of market forces” and became blind to the indispensable role of the State in fighting poverty.  In the Philippines today, under the Administration of President Duterte, there is no way financial inclusion can succeed unless the Government builds farm-to-market roads, irrigation systems, post-harvest facilities and all the support infrastructures needed by the farmers and fisher folks who constitute 75 percent of the poor.  There is no way financial inclusion can be achieved unless the State spends more on improving the quality of public education, health services and public utilities (especially potable water) in the rural areas.  As Mr. Bateman wrote, with the help of the neo-liberal establishments in the West (World Bank, USAID) the microcredit movement quickly elevated the supposed poverty reducing power of self-help and individual entrepreneurship to almost miracle status.  To escape poverty, the poor no longer needed state intervention and other forms of “collective capability” such as trade unions, public ownership and strong regulation.  No matter how disillusioned we may be with corrupt and inefficient Governments, we cannot escape the truth that the State is an indispensable institution in any society to address poverty and other social problems.

         This disdain for state intervention caused some policy advisers from these neo-liberal institutions to convince the microcredit institutions to convert themselves into for-profit organizations with a social mission. The microcredit model was thus extensively commercialized, privatized and liberalized.  The catalyst for the rapid collapse of the microcredit model was the Initial Public Offering (IPO) of Mexico’s largest microcredit bank, Banco Compartamos.  As Bateman wrote: “This event exposed something quite shocking—a spectacular level of profiteering by senior managers and outside investors, yet no evidence of any reduction of poverty among its poor clients.  This scandal proved to be the tip of the iceberg.  It soon became clear that the microcredit model had effectively been taken over by greedy ‘social entrepreneurs’, aggressive private banks and hard-nosed investors.”  Enter the “absolute autonomy of market forces,” using the words of Pope Francis.   (To be continued.)