Microfinance and the Swadeshi Movement

With the Microfinance movement tottering due to an unhealthy combination of greed and lack of political will, Gandhiji’s birthday is a good time to take a pause and look at the mess we have created, and the possible way forward.  Rural India, especially needs a good dose of the Gandhian movement today – at a time when inflation has reached an all-time high, rampant urbanization is destroying the ecosystem of our sustenance model, and the Government does not seem to have any cogent plan to resolve either issue.

For Gandhi, the spirit and soul of India rested in the Village communities.  He said “the true India is to be found not in its cities, but in its seven hundred thousand villages”. The spirit of the Swadeshi movement was embodied in his slogan “Production by the masses, not mass production”.   In effect, Swadeshi was to be the corner stone of economic independence – not just for the village communities, but for the entire country.  Somewhere between Self-Help Groups and For-Profit Microfinance companies we seem to have lost this very important message.  What should have become a community of self-reliant people developing a sustainable and growing ecosystem has been hijacked for narrow and pecuniary interests; successful not-for-profit organizations that built a sustainable scalable model lost their way when they converted themselves to for-profit bodies, while the rest of the “social” organizations still leave us wondering whether private enterprise is after all delivering more social good.  In between all this the hapless victim seems to be the microfinance customer.

Even as early as 1999, CGAP had realized the need to introduce an appraisal guide (http://bit.ly/qReGrR) to enable Funders evaluate the performance of Microfinance Institutions on the two counts of Financial Performance and Social Performance.  A key aspect of this is the evaluation of internal processes and orientation towards social performance.  Since then, there have been many tools designed to evaluate the Social Performance aspect of Microfinance Institutions.  It would not be very difficult for the government to mandate social performance audits as part of a regulatory process.  The sustainability of the microfinance institution could also be evaluated from the strength of their internal processes.

I am tempted to believe that a Swadeshi-like model for microfinance would perhaps result in sustainable growth where the true benefactor would be the microfinance client.  For this to happen, the microfinance institution would transform itself into a facilitator of the ecosystem, and not merely remain a provider of credit.  In today’s setting, an urban microfinance group is taught skills such as soft-toy making, agarbathi manufacturing and other similar activities.  However, in most cases, while the NGO involved steps in to provide training, there is no guarantee of a market for such goods.  The gullible client takes a loan to buy the materials required to make the soft  toy, but is ultimately unable to sell it.  It is not very different in the villages, where instead of soft toys, they end up making baskets.

The Swadeshi movement advocated the creation of goods and services that would be consumed internally, and only then export the surplus.  In a sense, every village would be a producer-consumer, with the village community deciding on what goods could be imported, and how much would be exported.  In today’s context, a network of communities could very easily produce goods and services that were complementary and would boost the overall productivity of the villages.  Such a network would be able to realize a better price for their goods, without having to depend on middlemen.  The role of the microfinance institution needs to transform into the facilitator of such a network, where, apart from playing the traditional role of providing access to finance, they could implement best practices, engage agricultural scientists for enhancing crop yields, and ensure training that would really benefit the farmers.  The community could also learn from each other, where lessons learned or innovations in one sector or village can be transplanted in other areas.  The MFI would be a knowledge manager – capturing and sharing knowledge across communities. 

Does this mean that MFIs are necessarily not-for-profit organizations?  It just requires the microfinance institution to look at a larger role and move beyond the role of providing credit only.  They will need to step up and ensure that social performance is top on their agenda – financial performance will automatically follow.  When a need is converted into a demand, then we are bound to see a market at the bottom of the pyramid.    Instead today, we see an exploitation of the BoP, under the mistaken assumption that there is a demand. 

One hopes that Gandhiji’s message does not remain just in the history books or meaningless hyperbole of political speeches, but is transformed into useful action taking into account today’s reality.  I am sure that his messages are applicable in today’s context just as much as they were more than half-a-century ago.  Jai Hind.