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Moral Hazard with Ducks
MFIs around the globe are being asked to provide "more than credit" to their clients. Funders and industry skeptics, more than ever, question the value in just providing banking services to the poor. I'm not writing here to weigh in on the veracity of that critique. However, today I got some insight into the difficulty MFIs face in mixing mentoring with credit.
I sat down with the General Manager of an amazing MFI here in Phnom Penh. I posed the question in the form of a challenge.
"Do you provide mentoring to the poor, or *just* banking services?" I asked.
He looked slightly troubled in replying that they do not discriminate between business activities and do not advise about the success or failure of a particular business venture.
A few years ago, they used to encourage borrowers to pursue certain business niches when there was a perceived opportunity. In one village, a credit officer advised a woman to get into the duck raising business, a particularly profitable one at the time. Duck is quite a specialty in Cambodia. The woman used her entire loan to purchase ducklings. A few months later, the ducks got sick and quickly died. Out of luck, the woman had little chance to repay. At the advice of the credit officer, she gambled away one of her only chances to lift herself out of poverty.
The credit officer was devastated, the woman protested, and the MFI forgave her loan repayment. Since that time, they have stayed out of the mentoring business and leave that to a separate NGO in the region. The story illustrates one of the dangers in providing both advice and credit tied to that advice. Not to say that MFIs shouldn't be mentors, but I thought the story illustrated a tension I hadn't pondered before.
I sat down with the General Manager of an amazing MFI here in Phnom Penh. I posed the question in the form of a challenge.
"Do you provide mentoring to the poor, or *just* banking services?" I asked.
He looked slightly troubled in replying that they do not discriminate between business activities and do not advise about the success or failure of a particular business venture.
A few years ago, they used to encourage borrowers to pursue certain business niches when there was a perceived opportunity. In one village, a credit officer advised a woman to get into the duck raising business, a particularly profitable one at the time. Duck is quite a specialty in Cambodia. The woman used her entire loan to purchase ducklings. A few months later, the ducks got sick and quickly died. Out of luck, the woman had little chance to repay. At the advice of the credit officer, she gambled away one of her only chances to lift herself out of poverty.
The credit officer was devastated, the woman protested, and the MFI forgave her loan repayment. Since that time, they have stayed out of the mentoring business and leave that to a separate NGO in the region. The story illustrates one of the dangers in providing both advice and credit tied to that advice. Not to say that MFIs shouldn't be mentors, but I thought the story illustrated a tension I hadn't pondered before.
Grameen bank
Hi Matt...Greetings !! .. A very interesting post. I recollect reading something similar in Banker to the poor. At Grameen bank their credit officers are trained to handle requests from entrepreneurs who ask for business ideas. The credit officer's reply goes somewhat like this:
Grameen bank does not have any business ideas. If Grameen bank had business ideas, we would have ourselves started the business. We have money to lend and if you have a business idea, we can lend you money.