MICROBANKING BULLETIN - Microfinance Information Exchange

COMMENTARYSix out of Seven Ain’t Bad (Credit Unions, Continued)Elisabeth RhyneYa gotta love Dave Richardson’s in-your-face articlein the last MicroBanking Bulletin (Issue No. 4). Yagotta love the way those credit union folks carry onlike they’re the ones who really inventedmicrofinance. Trouble is, in many ways, they did.Although I hesitate to endorse anything as religioussounding as doctrine, Dave’s “Seven Doctrines ofSuccess” are as good a summary of the creditunion approach as you’ll find. And he’s right thatthe microfinance “industry” has been very slow torecognize most of those points. It still hasn’t fullydigested some of them. The credit unions havesome strong messages for microfinance in severalof Dave’s doctrines, especially savings, efficiency,financial standards, and diversification of clientele.Microfinance practitioners should find ways to adoptsome of the credit unions’ approaches in theseareas, otherwise their institutions may lack thestaying power to survive when conditions change orcompetition heats up.However, I would like to challenge one of the sevenvirtues, self-governance. Dave, who is normally ahard-nosed realist, becomes all soft and mushywhen it comes to this one. He’s right thatmicrofinance has no perfect solution to ownershipand governance. Each available model is subjectto its own set of weaknesses, and self-governanceis no exception. Self-governing financial societies, especiallysmaller ones, are subject to capture byinfluential or highly motivated members whodirect policies toward their interests. Borrowerdomination led credit unions across the world toadopt anti-saver policies for years, therebylimiting their growth. Capture by a small groupof borrowers has caused many a credit unionsimply to collapse from what in another type offinancial institution would be regarded asinsider lending. Self-governance among multiple smallinstitutions is inefficient. While creatingindependent governing structures at thegrassroots level does seem to be a usefulapproach for developing financial services inareas banks can’t reach, it has turned out to bedifficult, labor intensive, and costly to bring lotsof tiny institutions to the point where they canbe reliable suppliers of quality services. Thereseem to be economies of scale formanagement structures: one managerialstructure with many outlets may be moreefficient than many separate superstructures. When credit unions grow to become majorsuppliers, the essence of self-governancebegins to disappear, making credit unions littledifferent from other types of financialinstitutions. For the clients of large-scale creditunions, being a member involves little morethan paying an initial membership contributionand checking an annual ballot. I suspect thatself-governance figures far below convenience,price, and products in the decision of mostclients on whether to bank with a credit union oranother institution. For large institutions,competent and professional managementmatters more than the particular type ofownership and governance.For these reasons, I’d prefer to think of selfgovernanceas one option in the overallmicrofinance toolkit, appropriate under certaincircumstances, but not the only solution.Why, after all, should there be a special linkbetween self-governance and financial services?As societies modernize, corporate formsincreasingly replace collective and participatoryforms. All the worse for the 21 st century, perhaps.But the move away from such forms is caused bymarket forces driving toward efficiency, and theseare very strong forces, indeed. The defenders ofparticipatory forms of action need to choose theirbattles carefully, searching for areas wherecollective participation and self-governance areworth going to the barricades for. The credit unionsin their fervor may believe that financial services area prime location for this battle to be fought. Iremain agnostic.Former director of USAID’s Office of Microenterprise,Elisabeth Rhyne is now an independent consultant inMozambique and a member of the Editorial Board of theMicroBanking Bulletin. She can be reached aterhyne@worldbank.org.MICROBANKING BULLETIN, SEPTEMBER 2000 17