microfinance & the challenge of socrates web 06 09
DESCRIPTION
This paper summarizes some of the key aspects of Mathwood\'s current research into the impact of illiteracy on access to finance among 850 million rural people who earn less than $1 a day. It makes practical recommendations about how to expand access quickly and easily.TRANSCRIPT
Microfinance and the Challenge of Socrates
Web Version, June 2009
• Microfinance
“Micro”
=
designed to
be useful to,
and
affordable for,
poor people
Members of a Santal (indigenous) ‘self-help group’ in Rajshahi, Bangladesh.
Microfinance 3.0
Targets 850 million rural people who earn less than $1 a day.
Has been building momentum in the past decade, based on village self-reliance.
This wave merges the best practices of the previous waves to create true banks for poor people, building on skills of village and city.
None of the models can yet consistently: earn local trust and protect deposits, respect their own rules (and gov’t rules), meet all basic financial service needs of clients.
The Problem is GovernanceBuilding ‘Village Finance Institutions’ (VFIs) involves the same business principles as credit unions. But there are important differences. Most clients cannot read or write. External development agents are heavily biased by literacy. Economic democracy and business systems are often alien concepts.
These differences have led to governance problems in VFIs world-wide.
Savings Address VulnerabilitySavings needs involve far more than recurring deposits, especially in rural areas. seasonal lump sum deposits to smooth cash flows across the crop year occasional surpluses arising out of successful business activities irregular recurring sums the women want to avoid spending
Women are responsible for savings. they need quality savings accounts to secure household financial stability, later they can start capitalizing on opportunities.
Getting Community Finance Right Earning & maintaining trust
(leaders must listen to members and work to meet their needs;
practice accountability, transparency)
Offer safe, flexible savings(poor households manage risks better)
Trust attracts savings(if it doesn’t, go back to building trust)
Healthy CFI uses savings to deliver credit(poor households can manage risks better
and capitalize on more oportunities)
The Rights DimensionPoor people have a right to be able to safely form agreements with each other and external contractors, and to expect those agreements to be kept by all involved (‘shareholder rights’).
Universal Declaration of Human Rights affirms: the right to own property in association with others, and the right to freedom of association.
… and the
Challenge
of Socrates Bust of Socrates attributed
to Lysippos,
the Louvre
Writing & Speech“… to Homer and other writers of poems … and to
Solon and others who have composed writings … to all of them we are to say that if their compositions are based on knowledge of the truth, and they can defend or prove them, when they are put to the test, by spoken arguments, which leave their writings poor in comparison of them, then they are to be called, not only poets, orators, legislators, but are worthy of a higher name …” Socrates, Phaedrus, trans. Benjamin Jowett.
(Italics mine.)
Oral Culture & Trust“Long after a culture has begun to use writing, it may still not give writing high ratings. A present-day literate usually assumes that written records have more force than spoken words as evidence of a long-past state of affairs, especially in court. Earlier cultures that knew literacy but had not so fully interiorized it, have often assumed quite the opposite.” Walter Ong. Orality and Literacy, p. 95
The Source of Trust …… is community.
“For an oral culture
learning or knowing means
close, empathetic,
communal identification
with the known.” Ong, Ibid., p. 45
The media of communication used should match the culture of the institution. Oral media are normally only used at the retail interface.
Electronic
Text
Oral
Ownershipand
accountability
Standards of quality and
service
Flow of Management Information
MIS
& U
ser
Inte
rfa
ce
Village institutions
City institutions
Town institutions
Retail clients
TCE and GovernanceTransaction cost economics (TCE) shows that there are many costs incurred by villagers in the process of building an SHG. These include:search and informationbargaining and decision-makingsupervision and enforcementorganizational maintenanceagencyinternal control
Tools of Oral GovernanceVarious tools are available to reduce these costs for villagers, including:collective memoryaction learningmnemonicsstory, image and formulanumeracy toolspublic displaypictures and symbolsphysical assets (cashbox design …)scribestechnology (mobile phone, computer …)
Example: MnemonicsKey Financial Aggregates Example of Mnemonic Picture
cash in the box cash notesloans outstanding to members a bunch of bananasaccounts receivable cash notes entering boxcashbox and other fixed assets cashbox
member savings clay savings pot like those at homeaccounts payable cash notes leaving boxshares half a dozen eggsretained earnings waterfall with pool below
Use
s of
fu
nds
Sou
rces
of
fund
s
AuditabilityOral records can be audited, but audit
skills are specialized:auditing collective memory may
require querying the group in person,the components of the primary
information system, from symbols and colour-codes to cashbox design, must be clearly understood by the auditors
At network levels information systems
continue to be based on writing.
Bridges to Literacy & NumeracyShould be integrated into the following
documents (among others!) income statements and balance sheets, interim financial reports, financial plans/projections, loan contracts, loan application forms (including repayment
schedules), passbooks, and deposit and withdrawal slips.
Example:
bridging towards
numeracy through
tallies and finger-
counting
NAME
ACCOUNT #
Rs 3 4 2
# Amount
0.5 0
1 14 1
2 8 2
5 30 3
10 20 4
20 20 5
50 50 6
100 200 7
500 8
1,000 9
Total 342
DEPOSIT SLIP
Reality CheckTechnology and Rural Poverty$100 laptops and mobile phones have many benefits, but are not a ‘magic bullet’. Initially, villagers won’t trust technology any more than text. If they are poor and rural, they may speak a language (like Santal) with no internet content. Some oral information management systems are well adapted to technology however. If they work without technology, there’s a good chance they’ll work with it.
Research Enabling
Financially Capable Villages
HypothesisMuch of the institutional fragility in poor villages results from a mismatch between non-literate and modern ways of managing collective information. A diagnostic product (‘Socrates’) can be developed capable of measuring this mismatch in any village in the world, in any context.Based on local diagnostic results, information management tools can be tailored that greatly reduce distrust and self-exclusion by non-literate villagers, while being open to effective external auditing and supervision.
The Shape of SuccessIf the hypothesis is correct, illiterate villagers will be more likely to: join a VFI, participate actively in its affairs, and serve as managers.
The VFI earn and maintain trust. This will mean: more consistently respect its own rules and procedures, attract more savings & more members, remain readily auditable and profitable, transform into a village pool of capital.
“Poor people always pay back their loans. It’s us, the designers of institutions and
rules, who keep creating trouble for them.”
Dr. Muhammad Yunus, founder of Grameen Bank and Nobel Peace Prize laureate.