Does the Standard Microcredit Model Work Without Growth?

One of the central questions of microcredit—the question that shut the poor out of access to credit for so long—is “why would the poor repay?” As Esther Duflo and Abhijit Banerjee pointed out in my recent interview with them. This is still a substantial mystery that has not been fully answered. To quote Banerjee, “These are desperate people with lots of financial demands. People in the family are sick, people lose jobs, the daughter needs to get married…but 90 percent repay. What is going on?”

One of the proposed, partial answers to the question is that microcredit has provided a reliable and growing source of financing. In other words, if you repay, you are virtually guaranteed to get another, larger loan.

As David Roodman and I were (virtually) discussing the scenarios in which the crisis in Andhra Pradesh could cause damage to the industry worldwide (see my postDavid’s post on his blog, and my comment on his post), it occurred to me that, to date, the miraculous microcredit business model seems to only have experienced growth. As we all know, business models that look fantastic during rapid growth often turn out to be incapable of surviving in times of slow growth, much less recessions and shrinking markets.

Jonathan Morduch has noted that one of the world’s largest microfinance institutions, ASA of Bangladesh, has been shrinking in terms of members and numbers of loans outstanding for the last few years (though it is lending more in total as average loan size grows). BRAC in Bangladesh also appears to have decided to limit growth.

Which leads to the question: Are there any examples of an MFI shrinking, both in terms of number of borrowers and total amount lent, without experiencing repayment problems? Similarly, is there any country where the growth of microfinance has slowed substantially and or shrunk without experiencing repayment problems? Does the microcredit business model still work if borrowers can no longer count on a steady stream of fresh loans? Given the pattern of crises we’ve seen in a number of countries often attributed to “growing too fast,” that’s a question that should be top of mind for microfinance leaders around the world. 

Timothy Ogden is an executive partner at Sona Partners, the editor in chief of Philanthropy Action, and co-author of Toyota Under Fire. He also blogs at HBR and SSIR.