I can still vividly remember the first time I read the words “microfinance” in the book The End of Poverty: Economic Possibilities for Our Time by the economist Jeffrey Sachs. It was like I had this beautiful moment where I discovered the convergence of everything I wanted to do at the time: travel to new exciting parts of the world, apply my degree of finance in a practical manner, and do some good in the world by contributing to poverty alleviation efforts. I spent the next few hours researching the history, concept, challenges and opportunities that related to microfinance. I was falling in love and under a euphoric rush booked a flight to Cape Town, South Africa that evening.
In hindsight I may have not fully thought out what I was getting into, but if you think about things too long you end up never doing them. Purchasing that plane ticket was the best decision I’ve ever made and ultimately set my life on an entirely new trajectory I never expected. It was a very private and intimate moment and I will remember it forever.
Anyways, I broadly define microfinance as the provision of financial services to the financially-active poor in a country. Specifically, and what I have the most experience in is microcredit. Microcredit is the provision of capital for the creation or expansion of an income-generating activity. This income-generating activity is (at least in theory) the golden ticket out of poverty.
The underlying concept that made me purchase that plane ticket to South Africa was entrepreneurship as a form of economic growth. Microfinance seemed like a market-driven approach that empowered people to create a better life for themselves – all they needed was access to credit.
I then spent nearly two years of my life actively working in the guts of a machine that gave people access to credit. I had some great philosophically debates with my friend Adam Stelle during this time and he was a great sounding board to express how I felt at times.
One instance in particularly really made me question what I was doing.
I was on a field vist with a loan officer who wanted me to come as a scary “white lawyer from the city” (a decision I regret to this day). We were driving out in the townships of Khayelitsha visiting clients who were behind on their loan payments. I was standing in a poorly assembled and dimly lit shack made of corrugated iron and wood. I am looking at a 45 year old man sitting on a plastic 5 gallon bucket, he has patches of a beard on his face and his shirt unbuttoned displaying his skinny chest. He is explaining how sorry and embarrassed he is for not being able to repay the loan he borrowed. He had a recent death in his family (which required an expensive trip back to the Eastern Cape) and was out of work. I regret how shameful I must have made him feel when he said in a stern, yet sorrowful voice “I have no money.” I believed him and remember thinking “this man needs access to a smarter form of saving and cash flow management, not a loan.”
I ultimately no longer believed in what I was doing and decided to move back home.
I have no empirical evidence to support my beliefs (only my first hand experiences and observations), but I felt that microcredit was fueling intense competition between the microenterprises that existed in the “informal economy” of South Africa. Some examples of microenterprises include spaza shops (retail consumer goods), sheebens (informal-taverns), and other informal selling of retail goods near taxi-rinks or food markets. Most of the time, all of these microenterprises were selling the same thing, at the same price and in very close proximity to each other.
I also never fully bought into the concept of creating ”microentrepreneurs” through various “microfranchise” opportunities. I consider an entrepreneur to be someone who is pursuing their passion in a financially sustainable manner – not a distribution point for a larger (usually foreign owned) company’s products and/or services. By this self-declared definition, people who engage in microfranchise opportunities are not really entrepreneurs, but employees of a larger corporation. I believe that people should engage in activities that make them happy, not simply pay them.
During my time in South Africa I also noticed the expansion and promotion of more retail credit that encouraged consumerism. Late payments and fees are the most lucrative profit centers for banks and financial institutions. Keeping people (or a population) in debt is the best way to ensure profits and make a few people at the top lending institutions very rich. I thought this expansion of cheap credit to people who couldn’t afford it to buy things they did not need sounded like a bad idea. I believe that people need to save for the things they want, not buy them on credit.
I also experienced a shift within an organization that began focusing less on impact and more on financial self-sustainability. The organization was becoming less accountable to the people they were trying to help, and more accountable to funders and other stakeholders. This short-term focus on profits to sustain an organization can give way to irresponsible financial practices, such as excessive risk-taking, over-indebtedness of clients, pushing of poorly designed financial products, and no one taking the time to make sure a client really understands what they will be responsible for paying back.
The time I spent living and working in South Africa was a very influential period of my life and I learned many things. The most important of which is that not everyone is an entrepreneur and capitalism can tarnish good intentions.